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Weekend reading: Fat cats of the land

Weekend reading

Great articles to invest some of your time in.

You can’t keep up with the soaring pay of Britain’s fat cats. By 3am Friday I had only half-finished an article on income inequality, so I posted my photos of the St Paul’s protests and parked my chin-stroking for next week.

But a week is a long time in executive pay bloat.

Later that very day, a new report thudded into our consciousness, weighed down by all the ink needed to print all the zeroes at the end of a FTSE 100 directors’ paycheck.

According to Income Data Services’ latest report – a steal for fat cats at £460 a pop but summarised by the BBC for the rest of us – the pay of directors of FTSE 100 businesses rose 50% over the past year.

This means earnings of almost £2.7 million for the average director of a FTSE 100 company! And these aren’t even the bosses we’re talking about here, just any old director. (Chief execs had to make do with a paltry 43% rise in a year).

As a result of the IDS report, the subject has had another thorough airing, and my little contribution is going to look as significant as the annual salary of a secretary that’s accidentally paid into the bank account of her blue chip boss – i.e. pretty much a rounding error.

So I won’t spoil my damp squib thunder by venting any more outrage now.

Instead, for more insight try Investors Chronicle economics editor Chris Dillow’s blog, where he points out that all the usual reasons for sky-high executive pay don’t cut it, and concludes:

Given all this, you might wonder what the real reason is for bosses’ high pay. Simple. Power. Bosses, generally, might not have the power to create super-efficient high-performing firms, but they do have the power to extract rents from shareholders and workers

Like some City traders, they must, in effect, be bribed not to plunder the firm’s assets.

From the point of view of shareholders, the small theft that is a multi-million  pay-packet is better than the large theft of wilful mismanagement.

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An investor among the anti-capitalists

St Paul’s by way of Tahrir Square

A few days ago I paid a visit to see the St Paul’s campsite protestors who are demanding… well, something.

They don’t know exactly what they want and neither do I. Yet we all believe some changes are required – doubtless very different ones.

I had a pleasant enough time at St Paul’s, and thought the protestors were a genial bunch. It felt far more like the fringes of the Glastonbury Festival than Paris in 1968 – besides the tents and the harmless nutters, I was even met by a fire-tossing juggler.

Perhaps that’s the problem. The US protestors have their clever We Are The 99% slogan, which imperfectly points to financial elites as a symptom (and perhaps a cause) of today’s dysfunction.

In contrast, the St Paul’s mob seemed to be the same crew with the same varying agendas who have been cropping up at these things since I first moshed as a left-leaning student to The Levellers two decades ago.

It didn’t feel like a movement, or even a stalemate – just a bit stale.

Their flag said ‘capitalism is crisis’, and I don’t doubt their (often misguided) convictions. But the wider lack of energy, ideas, or leadership in the response to the SNAFU of the past four years suggests it’s socialism that’s in peril.

To me the camp almost felt like a dumb animal response to a hurt, some sort of festering that reveals a deeper wound, but no sign yet of a precise cause or cure.

As George Carey writes following yesterday’s resignation of Giles Fraser, the Canon Chancellor of St Paul’s and surprise ally of the protestors:

As the story developed, thermal images of empty tents seemed to illustrate the hollow nature of the protest movement. The emerging picture of spoilt middle-class children returning home at night for a shower and a warm bed begged questions about their commitment to their cause. It also seemed to suggest that the cathedral authorities in their initial welcome had been duped.

And what was the cause anyway? “This is what democracy looks like,” claimed Occupy’s opening statement. It explained that it was engaged in a process of public assemblies in a democratic process. But it is making up its demands as it goes along – truly rebels without a cause.

In some senses this is what our society now looks like. We are all protesters, even if we don’t take to the streets. We all have an inchoate sense that something is wrong and we have any number of culprits to blame – from Europe, to immigrants, to the banks, to politicians and media barons. Public distrust of the institutions of a civil society has reached an all-time high as the performance of some bankers, public servants and even recently some sections of our media has sunk to the lowest depths after waves of recent scandal.

This protest is distinctly lacking a Martin Luther King, a Bob Dylan, or even a Billy Bragg. But then so did all the uprisings of the Arab Spring. We seem to be everywhere morphing into a split society of ultra-elites and amorphous also-rans, and perhaps that’s part of the problem, too.

Anyway, here are a few photos of the St Paul’s camp for those who wouldn’t be seen dead near a hippy.

(All photos shot on my lovely new Panasonic TZ10).

St Paul's, from the heavily policed Paternoster Square direction

Clever. Big future in advertising for this student.

They say "is" crisis, I say "in" crisis, but let's not call the whole thing off.

Big Buddha is watching them, too.

Sun-powered salvation. I'm just *guessing* they've done this before.

Most of the walls had messages respectfully taped (rather than graffitied!) onto them. They varied from the sublime to the sub-Socialist Worker.

Real global democracy demanded: A hung parliament highly likely.

I was curious how they kept their tents rooted to the ground.

No London paving was injured in the making of this protest.

Have multi-purpose protest sign, will travel.

A bit like Camden market on a Saturday, without the smell of petunia oil and fried onions.

I'm not going to knock recycling bins. Shame they put so many ideas through them.

I bet this conveniently located branch of Blacks did a great trade in tents with the anti-capitalists. Presumably on the barter system.

...and bin the bankers?

Even the toilets were revolting. (Geddit?)

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How to lifestyle Vanguard LifeStrategy funds

Reader Ham asked a great question last week about the Vanguard LifeStrategy funds. These funds offer an excellent way of buying a diversified market portfolio using index funds, without the faff of managing the portfolio yourself or the expense of paying someone else to do it for you.

Ham wanted to know how easy it is to increase your bond allocation in the LifeStrategy funds as your biological clock ticks towards retirement.

The answer is it’s quite straightforward, if a bit fiddly, and it may well save you a lot of pain in later life.

Nudging your portfolio’s asset allocation towards bonds as you age is a widespread investing practice known as lifestyling. It steadily reduces your exposure to risky equities to reflect how you’ve ever less time left to recover from stock market falls.

By employing lifestyling, you’re less likely to be one of those case studies in the newspapers’ money pages, grimacing beneath the headline: “I lost half my pension 6 months before retirement and must now stack shelves until I’m 102”.

Lifestyling your Vanguard LifeStrategy portfolio

Lifestyling in action

A well-known rule of thumb is to hold an equity allocation equal to your age subtracted from 100, with the remainder held in bonds.

For example, a 40-year-old would hold 60% in equities and 40% in bonds. (Hmm, I just wrote ‘and 40% in bones’, a Freudian slip if ever there was one).

On hitting 41, a passive investing lifestyler would respond by raising his bond allocation to 41% while winding down his equities allocation to 59%. And then perhaps a little party (with hats) and a quick look at Oil of Olay products online.

Keep up the lifestyling and by the time our surprisingly smooth-looking hero reaches 60, his asset allocation will be a less volatile 40% equities and 60% bonds.

Stuck in time

As Monevator reader Ham recognised though, the Vanguard LifeStrategy funds have a static asset allocation – your equities / bond mix is effectively frozen in aspic.

Invest in the Vanguard LifeStrategy 60% Equity Fund at age 40 and you can rely on it to still be rebalancing you back to 40% bonds by the time you’re 60, even though a 60% bond allocation might be more appropriate.

Vanguard in America offers target retirement funds that automatically lifestyle your assets for you. We’re a bit behind the curve as always in the UK.

It is possible however to lifestyle manually for only a little bit more effort.

The trick is that instead of investing in one fund, we must invest in two [swoons with shock].

To continue our example above, our age-defiant investing role model would start out 100% in the Vanguard LifeStrategy 60% Equity Fund but would gradually raise his bond allocation by increasing exposure to the Vanguard LifeStrategy 40% Equity Fund.

This is the lifestyle

Our Vanguard LifeStrategy fund lifestyling strategy works like this:

Age Fund Fund allocation Portfolio equities/bond split
40 LifeStrategy 60% Equity Fund 100% 60:40
LifeStrategy 40% Equity Fund 0%
45 LifeStrategy 60% Equity Fund 75% 55:45
LifeStrategy 40% Equity Fund 25%
50 LifeStrategy 60% Equity Fund 50% 50:50
LifeStrategy 40% Equity Fund 50%
55 LifeStrategy 60% Equity Fund 25% 45:55
LifeStrategy 40% Equity Fund 75%
60 LifeStrategy 60% Equity Fund 0% 40:60
LifeStrategy 40% Equity Fund 100%

All you need do is annually invest an additional 5% of your total portfolio in the Vanguard LifeStrategy 40% Equity Fund to achieve the required 1% lifestyle uplift in your bond allocation per year.

At age 42, 10% of our hero’s portfolio would be in the 40% Equity Fund, at 43 it’s 15% and so on until by age 60 he’s 100% in the bond-biased fund and preparing to spend the lot on experimental stem cell regenerative injections.

Notes on this lifestyling LifeStrategy

  • Include new contributions as well as your current assets when calculating your 5% annual shift.
  • The two funds will grow (or shrink!) at different rates so you’ll also need to rebalance.
  • Vanguard funds are only available through a limited number of outlets.
  • You’ll pay a dealing fee to Alliance Trust every time you buy and sell a fund but get off Scot-free with Bestinvest – except Bestinvest charge higher annual fees! So the best option depends on your trading habits and account needs.
  • Aside from these cost concerns, switching between the two funds in an ISA or SIPP shouldn’t be an issue.

Our lifestyling strategy holds true for any two LifeStrategy Funds that sit on adjacent rungs of Vanguard’s equity / bond allocation ladder. As long as you shift 5% of your assets per year into the next bond-skewed fund along, then you’ll lifestyle your funds on time and reduce your exposure to risk.

Take it steady,

The Accumulator

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Weekend reading

Some good reading from around the Web.

A couple of years ago I wrote about how some statistics suggested that we might be in for a decade of 20% returns from the stock market.

Of course, the FTSE 100 pushed on very swiftly from around 4,000 to touch 6,000. Great, but it also meant that much of those mooted 20% gains were in the bag.

After its recent travails, however, the FTSE All-Share is now down to a forward P/E of 9. A few more months of going nowhere, and that will be an historical P/E of 9, too.

I think this is bargain territory, even if you discount the crummy alternative returns on bonds and cash. Look at those and presume they’re rational (a controversial decision given all the Central Bank intervention in the market!) and I think the FTSE 100 could justifiably trade nearer 10,000.

Now you know why I always sound so bullish!

Happily, I’m not alone. Recent research from Fidelity found that after previous periods when the FTSE All-Share has traded on a P/E of around 9, it has returned on average an annual 11% real return over the next decade.

The Motley Fool wrote up the Fidelity research, including this table:

FTSE All-Share P/E ratio Proportion of Observations Average annual real return over 10 yrs
Less than 5 1% 15%
5-8 10% 12%
8-11 18% 11%
11-14 28% 7%
14-17 16% 4%
17-20 13% 2%
20-23 8% 1%
23-26 3% 0%
26-29 3% -1

Feel free to fret about Europe or the number of old people in the market, or whatever else you consider yourself an expert on to find a reason not to invest.

I personally find the precedents more enlightening, and continue to buy all the shares I can for the long-term.

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