Ritchie on pensions again

But there’s a second reason why this is also guaranteed to fail. As the FT noted yesterday, stock markets are dire at picking out which investments to pick. Just over 10% of all active stock market managers beat the market in 2014 in the USA. Randomly you would expect half to do so. That has not happened since 2009. And that’s before paying for the costs of these managers who get their judgement on which intangible assets to invest in (because that’s what most company shares represent) so spectacularly wrong.

What is more, of the best 25% of fund managers in 2010 almost none remained in the top 25% in 2014. So getting this selection right once is no guarantee at all of doing it again.

In that case investing in intangible assets makes no sense at all for pension purposes.

Hmm.

But requiring pension funds to invest 25% of all their contributions in infrastructure that creates new jobs in exchange for the tax relief they get would not just be good for the economy – which would be beyond dispute as it would give a £20 billion boost each year – but would also be fantastic for the stability of pension fund returns whilst seriously cutting the costs of pension fund management. And it would also respect that fundamental pension contract between generations.

But the City will fight it tooth and nail. Which is why, no doubt, such a radical, and essential, pension reform is not on the political agenda right now. Feeding the myth of the City is more important, of course.

Pension funds do invest in infrastructure projects of course. And they also invest in bonds. And the interesting question is really, well, which of the three investments makes the most to pay those future pensions? The general result is, I believe, that bond funds offer greater security and lower returns than equity funds……which rather blows a hole in the analysis there, doesn’t it?

31 thoughts on “Ritchie on pensions again”

  1. Is there any beginning to this cretin’s expertise? His argument that stock markets are poor at picking winners is to attack active management? The fact that active fund managers underperform the index is not an indictment of stock markets per se.

  2. which would be beyond dispute as it would give a £20 billion boost…

    …in the first year, before everyone stopped contributing and resorted to sticking their money under the mattress.

  3. bloke (not) in spain

    For someone who has so much confidence in the judgement of experts over markets, Murph doesn’t seem to have much confidence in the judgement of experts over markets.
    “Just over 10% of all active stock market managers beat the market in 2014 in the USA. Randomly you would expect half to do so.”
    No. Randomly you’d expect a dart & a copy of the WSJ to achieve that. You’d expect all managers to beat the market. or what are you paying them for?

  4. B(n)is, you are absolutely correct. Basically Ritchie has observed that active fund management doesn’t work too well and his solution is even more active fund management (only this time from politicians)

  5. Would a reasonable summary of RM’s argument be “One lot of experts can’t pick winners, so we should give another lot of experts loads of money to pick winners”?

  6. Amongst other things, does the WGCE actually know what infrastructure is? Isn’t he the sort of person who is enraged by companies building hospitals, schools and roads and then having the temerity to charge for the use thereof?

  7. I was going to craft a reply to this.

    But I spend all day working with people who are specialists in investments and pensions. People working on asset allocation, liability matching, reserving, risk measurement and management. Experienced, highly-qualified people who genuinely know what they are talking about. And since I’m on my Xmas holidays I won’t see them for a few weeks. So why waste my time dealing with an ignorant authoritarian puffed up with his own self-importance who is unable to listen to anyone who may be able to improve his understanding.

    Anyway, I’m shortly off to see It’s A Wonderful Life at the cinema, then afterwards out for a large meal and many drinks with friends, so Ritchie isn’t going to spoil my day.

    Hope everyone here has an enjoyable Christmas and New Year.

  8. “Would a reasonable summary of RM’s argument be “One lot of experts can’t pick winners, so we should give another lot of experts loads of money to pick winners”?”

    More like “a group experienced experts can’t pick winners, so we should give a bunch of political nonentities loads of money to pick winners”

  9. Rob

    What he actually means is “people like me should be in charge of everything”

    Wanker.

    Merry Christmas everybody.

  10. He can’t manage very very basic statistics either.

    Just over 10% of all active stock market managers beat the market in 2014 in the USA. Randomly you would expect half to do so.

    I’ve got a multiple-choice exam here that says you’re wrong.

    Anyway.

    Merry Christmas!

  11. Murphy is of course comparing the fund managhers’ results AFTER expenses with those of the index before expenses. If you compared performance before expenses you would get a vastly different picture.
    There was a mildly interesting article in the Ft a few weeks ago by Merryn Somerset Webb, effectively admitting she had been wrong for slagging off active fund managers (she never admits that shhe has a vested interest in doing so as the editor of a magazine providing advice to DIT investors), where she compared the performance of genuine active investors with index trackers and “closet trackers”. The genuine active investors significantly outperformed the index trackers after expenses. The salesmen for indextrackers and Murphyism like to ignore the legislation-imposed expenses on every fund (independent trustees to hold the investments, two lots of admin costs on every deal, stamp duty when buying shares after a new investor joins the fund, dealing costs when reinvesting money after a takeover or reinvesting dividends – or a when an investor exits, audit costs, daily calculation of unit prices, advertising those prices, office rent, staff to handle investors queries, annual and half-yearly reports to investors etc etc).
    Thirty years ago I worked in a similar environment to GlenDorran. We habitually outperformed the index (I know, I actually did the performance calculation for half-a-dozen years).

  12. @ S2
    Does the question assume zero expenses?
    Even if it does, does it look at dispersions of return? The median is usually lower than the mean, so more than 50% would perform less well than the index in a single year.
    Over multiple years the trend for investors to buy into the better-performing funds means that money-weighted average performance is higher than an unweighted average performance.
    But are you actually expecting Murphy to understand anything and to care about it if he does?

  13. You’re all missing the point.

    When the glorious Murphy State comes into being, massive road building projects will provide for our elderly as it will be old people who are put to work building them.

    Every morning Murphy’s “100 Blogs of the Day” will be read to them as they begin work. they won’t even have to worry about funeral costs as the dead will be bulldozed into the foundations of the road, which will of course either lead nowhere or just go round and round in an ever decreasing spiral, centred on the glorious leader’s home.

  14. I’d have expected Murphy’s line to be something more like:

    – 10% of active managers beat the market
    – So 90% lose money
    – If the market is the average, that implies that the 10% are 9x the size of the 90%
    – So here we have an example of things being skewed towards large business: big investors make money at the expense of small ones
    – Therefore markets don’t work / taxes should be increased / there should be a FTT / more information should be disclosed / …

  15. @Pellinor

    One thing you can be certain of is that at some point in any chain of MurphyLogic there is the phrase “taxes should be increased”.

  16. The Murphy Plan will see an enormous road building plan, but also huge carbon taxes so no one except the Nomenklatura will use them.

  17. “Just over 10% of all active stock market managers beat the market in 2014”

    2014 hasn’t been the easiest year, granted, but as a lay investor I don’t mind too much if a fund has an off-year. It’s the five+ year performance that is of more relevance, as it would be for pension funds (including the one I’m a trustee of).

    Yet isn’t Murph part of the ‘markets are too short-termist’ groupthink?

  18. “Just over 10% of all active stock market managers beat the market in 2014 in the USA. Randomly you would expect half to do so.”

    WTF???

    Comedy gold on so many levels.

  19. So Much for Subtlety

    Emil – “Basically Ritchie has observed that active fund management doesn’t work too well and his solution is even more active fund management (only this time from politicians)”

    You know, that could work. If the government took all our pension money and bought, say, all the orchids in the world, think how the market would soar. Orchids would be worth a fortune. Think how much our pensions would be worth!!

    I mean, what could go wrong?

  20. Richie mate, mortgage your house and put the lot into green investments. Coz they are a great investment, as you say. You’ll make a fortune AND be progressive too!

  21. Hmm, now let’s see.

    Where do we get the people who decide which infrastructure projects pension funds should invest in, in order to achieve a decent return?

    Oh, wait, that’s impossible, because private managers are crap.

    Perhaps if they were paid from a different source, taxpayers money, for instance, then that would magically improve their predictive capabilities?

    Even the Big Dick might struggle with that one, so I suppose the Final Solution is to ensure that all projects create a good return. How do we do that? Why, we subsidise them, of course!

    Simple really, when you know how…

  22. So Much for Subtlety

    john miller – “Perhaps if they were paid from a different source, taxpayers money, for instance, then that would magically improve their predictive capabilities?”

    I think you miss his real problem with capitalism. It is not that the source of the money matters. It is that the markets are really bad at picking people to manage it. You know, smart people, bright people, people who got Firsts in things like Physics or even PPE. Not the truly deserving. Not the real unsung geniuses of modern Britain. Those people could do a much better job because they are not enthralled to the ideas of some dead economist like Milton Keynes. The sort of people who were never popular at school, and to this day are oppressed by their brother-in-law’s new carriage, and who have, perhaps, a third rate degree in something like accounting, but who could do a much better job of things if they were in charge.

  23. SMFS – we should burn all brothers-in-laws new carriages. Perhaps using a dragon.
    Wealth should go to….. the deserving.

    Seriously the funds being managed seem to do all right, can go down as well as up oof course though will tend to go up over time.

  24. So Much for Subtlety

    Martin Davies – “we should burn all brothers-in-laws new carriages. Perhaps using a dragon.”

    It is a bit of a worry really. If anyone is likely to try dragons ….

    “Wealth should go to….. the deserving.”

    I think that is the Shorter Ritchie. Has he anything else to say?

    “Seriously the funds being managed seem to do all right, can go down as well as up oof course though will tend to go up over time.”

    Management fees are criminally high considering what they actually do.

  25. @GlenDorran

    ‘so why waste my time dealing with an ignorant authoritarian puffed-up with his own self-importance’ – arguably the finest succinct description of Murphy I have ever seen.

    To you and all the other habitually excellent contributors on here…
    Have a great Christmas and see you back here for more comedy gold in 2015.

    As for the article itself- is anyone surprised by the ignorance, vitriol, egregious leaps of ‘logic’ and profound ignorance of history/human nature and basic economics?- this is what every post on TRUK consists of – besides which his beloved Greens are likely to plateau at around 12% so he’ll be in the wilderness for a while to come I think…

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