Forget pension fund managers and their expensive fees - pop down to the casino. Even some of the best fund manager financial track records are simply performing at the market average you could achieve by random chance.
This is the entertaining and important hypothesis argued by Toby Ord from the University of Oxford in today’s edition of the academic newspaper ‘The Conversation’. Important because most of the £24bn of our Scottish local government members pension cash is invested in equities, advised by fund managers.
And they don’t come cheap. Last year there was an excellent Radio 4 programme, "How You Pay for the City" that highlighted excessive charges in the UK compared to Holland that means the average comparable Dutch pension will be 50% higher than you would get in the UK. The programme set out the mechanisms fund managers use to maximise their fees at the expense of scheme members and pensioners. It is not just excessive fees by fund managers, but also "churn" (excessive buying and selling of stock); stock lending (they lend out your share certificates for a fee), "Custody Banks" and "transitional management".
Toby Ord’s hypothesis goes like this:
“Suppose I start 16 funds with $1,000 in each and bet the contents of each one on a fair double-or-nothing game. On average, eight will win. We can do this again with three more games and by the end, on average, one fund will win all four of its bets, taking it up to $16,000. By making opposing bets, I can even guarantee it. We can then put it back into an index fund in the stock market, wait for a while, then show investors a fund that radically outperformed the market. If the period is ten years, that would translate to outperforming the market by 32%. This is an apparently impressive result for an unskilled stock-picker, but much less impressive if you know that 15 other funds collapsed behind the scenes.”
“It is unclear that there has ever been (or ever will be) a fund whose past performance has been good evidence for its future success. It all strengthens the growing case for investing in low-cost index tracking funds, even if those costs mean you are guaranteed to perpetually underperform the market.”
In Scotland’s biggest pension funds, local government, we are moving towards a new system of governance that should provide an opportunity for greater transparency and engagement by members. These are the sort of issues that the new pension board members will need to grapple with.