What caught my eye this week.
A decade ago the UK had barely come down from the buzz of the 2012 Olympics. Riding high on the global stage, we attracted bright young things from across a moribund Europe. A start-up culture was catching fire in London that finally offered an alternative to decamping to Silicon Valley.
The UK was not without problems, but it was easy to feel lucky to live here.
Sadly, for every advance in this life there seems to be a counter-reaction.
Within a few years, the US had followed the triumph of electing its first black President by sending to the White House a dangerous blowhard better suited to the side of a box of fried chicken.
Meanwhile, a slim majority of Britons were convinced by a Band of Bullshitters into voting for Brexit – the most bone-headed policy since that Roman Emperor made his horse a consul.
And slowly, surely, the economic consequences of leaving the EU have been coming through.
Not with a bang, but a whimper.
Falling investment, perpetually slower growth, dire politics, and what is starting to look like the return of Britain’s age-old inflation problem.
Cost of Brexit: over £100 billion a year in lost economic output and counting.
All bad enough. But it seems some people now want to throw our pensions onto the bonfire too.
London’s gurning
Stepping back, there’s been lots of talk recently about the plight of the London Stock Exchange.
The LSE seems unable to win big new listings. Most recently chip design giant ARM said it will float in New York – despite direct pleading intervention from successive UK Prime Ministers.
Other London-homed companies are moving their listings. There appears to be a gloomy acceptance that the LSE should give up on having a listed tech sector at all.
In November the London Stock Exchange’s total market capitalization fell behind Paris for the first time since Bloomberg began crunching the numbers in 2003.
We’re also losing much of the less-glamorous but highly functional activities that helped the City boom for 30 years, with euro banking and clearing operations migrating to the EU.
Brexit fans may snicker at London’s plight. But City salaries help support a higher tax base and more generous welfare state than would be possible if London were “taken down a peg or two”.
As I’ve noted before, Britain is relatively poor for an advanced economy, on a per capita basis.
Yet for nearly a decade we’ve been making decisions like we’ve money to burn.
Dad’s barmy
Faced with this slow puncture draining the vitality from our economy, the rational thing to do would be to try to reverse it.
The Windsor Framework for Northern Ireland was a small step. But as Rishi Sunak revealed in championing that region’s advantages in having a foot in Europe, we’d be better off going whole hog. Reversing our hard Brexit and re-entering some combination of the Single Market and the Customs Union could staunch the bleeding. The politics of EU membership may still be impossible, but we need the economics.
Alas we’re not there yet. Brexit benefits may be as thin on the ground as Brexiteers who haven’t yet left office in disgrace, but the UK isn’t a Mad Max wasteland – which is apparently the high bar set for judging the benighted project.
Instead, in what would be a doubling-down in Britain’s lurch into Banana Republic governance, there is talk of corralling British citizen’s pension assets into investing in British companies.
Apparently some people look at Britain’s diminished status since 2016 and scratch their heads.
What on Earth happened to turn global capital against us?
Has the weather been particularly bad? Was it the death of David Bowie?
Wait! What about Brex… traitorous UK pension funds!
From the Financial Times:
The proportion of all UK pension fund assets invested in equities was 26.4% in 2021, down from 55.7% in 2001, according to the OECD. By contrast, Canadian funds had 40.6% in equities and Australian schemes 47%.
“We have trillions of pounds sitting in pension funds that are not being used to invest in companies, drive growth or do a whole range of things that the economic viability of the country depends on,” says Immuncore’s Sir John Bell. “We need to find ways to release this capital.”
Please read the full article: Britain’s ‘capitalism without capital’: the pension funds that shun risk. It gives a good and balanced take on the malaise.
I pulled the quote above simply to illustrate that there are credible voices – inside government and out – who see your pension not as your buttress against an uncertain old age, but as a pot of loot to be raided in order to prop up an ailing British economy.
I’ve heard it suggested in the past few weeks that pension tax reliefs should be apportioned relative to the share of UK assets that a pension fund is invested in.
And that Local Government Pension Schemes should be compelled to invest in British equities, as well as in expensive long-term infrastructure problems.
This is all bonkers.
Bye Britain
The way to encourage investment into UK assets is to make Britain an attractive place to invest. As opposed to giving the world the impression we’re being run by a bunch of senior prefects at a public school for the banter.
As for British pension funds, we should solely want them to invest for our collective financial futures wherever they see the best risk-adjusted returns.
Not where some government diktat demands they put their money. That’s the economic policy of a military junta, not the birthplace of the industrial revolution.
Perhaps UK pension funds should own more equities. We saw with the LDI crisis during the Mini Budget (yet another showcase for global Britain) that index-linked gilts at all costs is no panacea.
But equally, not owning UK shares was absolutely the right move over the past two decades. British pension fund managers who shunned the UK stock market did their charges a favour. They dodged a market that went nowhere for 16 years, before the Brexit vote tanked the currency to boot.
Now, I happen to think British shares may do better going forward.
That’s not because Britain is about to boom thanks to our bureaucratic borders and crown stamps on pint glasses. More than 75% of FTSE 100 earnings are generated overseas.
Rather, UK shares still look unloved – that is, cheap – and successive mid-sized British companies are being taken over by overseas competitors, helped by a still-weak Sterling.
(No, I don’t recall seeing that in the 2016 literature either. Ho hum.)
At the same time, a more normalised regime for interest rates and inflation would be a better backdrop for the more defensive style companies that remain on the shrinking UK stock market, which could help returns too.
Our pensions are not their playthings
Barry and his mates down the golf club are welcome to invest their own ISA and SIPP money in UK companies if they want to.
No doubt they’ll be buying a round of G&Ts whenever a quality British company they own is acquired by an overseas predator by night, while fuming at breakfast over another story about Britain selling off the family silver in The Telegraph.
Blimps gonna blimp. But they can keep their hands off our life savings, thank you very much.
Have a great weekend.
From Monevator
“How I got mixed up in this FIRE business” – Monevator
When investing is boring – Monevator
From the archive-ator: Never ever respond to a cold call – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
UK food prices rising at the fastest rate for 45 years – BBC
Britain’s middle classes feel the pinch in cost of living crisis [Search result] – FT
BoE said to be considering reform of bank deposit guarantee scheme – Reuters
Losing the plot: huge rent rises for council-owned allotments – Guardian
Half a million landlords to leave sector as Boomers retire – Telegraph via Yahoo Finance
Record numbers of Britons making mortgage overpayments – This Is Money
Latest figures on how much you need for a comfortable retirement – Guardian
Coming soon: QR-style barcodes – Axios
London Stock Exchange set to offer Bitcoin futures and options – Reuters
How China dominates the electric vehicle market – Semafor
Products and services
11 tips to save on the cost of your subscriptions – Which
UK investors swell money market funds [Search result] – FT
Swap old clothes for vouchers from H&M, John Lewis, and M&S – Be Clever With Your Cash
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
HSBC, Natwest, and RBS all offering £200 bank account switching bonuses – This Is Money
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Here’s how much your appliances will cost to run from April – Which
Homes for people who want to downsize in style, in pictures – Guardian
Comment and opinion
The 60/40 portfolio is alive and well – Disciplined Funds
Testing flexible withdrawal strategies – Morningstar
Lump sum investing versus cost averaging – Vanguard
Planning my exit – Humble Dollar
Six tips for tackling investor under-confidence – Best Interest
Thinking fast and slopes – Dror Poleg
Accounting for home ownership in retirement [US CPI but relevant] – ERN
The mansion next door – Accidentally Retired
What if you’re not on the same financial page as your spouse? – White Coat Investor
The golden rule of investing [Gold vs low-vol stocks, research] – SSRN
How well do Monte Carlo models really forecast retirement success? [Nerdy] – Kitces
Naughty corner: Active antics
A provocative perspective on healthcare from a fund manager [Podcast] – FFtFP
So you want to launch a hedge fund? – Net Interest
Finance as entertainment – Jared Dillian
The real lessons of Warren Buffett – Real Returns
Doing nothing beat the S&P 500 over the past three decades – Morningstar
Secure Trust Bank looks shaky as a dividend stalwart – UK Dividend Stocks
Kindle book bargains
The Nowhere Office: Reinventing Work and the Workplace by Julie Hobsbawm – £0.99 on Kindle
Cooking on a Bootstrap by Jack Monroe – £0.99 on Kindle
Money: A User’s Guide by Laura Whateley – £0.99 on Kindle
The Missing Cryptoqueen by Jamie Bartlett – £0.99 on Kindle
Environmental factors
Tidal power’s fickle future – Hakai
Keep your garden green and get a tax cut, suggest scientists – Guardian
(Musical) robot overlord roundup
AI-generated Drake and The Weeknd song goes viral – BBC
Is AI-generated music legal? – Semafor
AIsis, the band fronted by an AI Liam Gallagher – Guardian
Fourteen reasons why AI pop won’t eat itself [Search result] – FT
Bonus: winner refuses award after revealing AI creation – BBC
Off our beat
Journey into sleep [Nice graphics] – Reuters
You can do it. No, really, you can – Klement on Investing
Why do mirrors flip left-and-right but not up-and-down? – Big Think
Dominic Raab forgot rule one: don’t be a massive arse – Marina Hyde
A few things learned over here that apply over there – Morgan Housel
Why do young people think jazz is romantic? – The Honest Broker
Henfluenced – Culture Study [via Abnormal Returns]
What God, consciousness, and physics have in common – Scientific American via Pocket
How to remove a fish hook from your finger [Not a metaphor] – The Art of Manliness
And finally…
“Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary.”
– Steven E. Landsburg, The Armchair Economist
Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
Yes, couldn’t agree more. Thanks for all the links.
So, just to be clear TI, you don’t like Brexit.
Quote: “And that public sector pension schemes should be compelled to invest in British equities, as well as in expensive long-term infrastructure problems.”
Public sector pensions aren’t invested in anything. They are paid out from general government spending, not a fund. There is no public sector pension pot. It’s all pretend.
@green_as_grass — It is a bit of both.
See: Local Government Pension Schemes:
https://commonslibrary.parliament.uk/research-briefings/cbp-7309/
p.s. The chap talking about forcing investment in British assets was specifically talking about LGPS. Perhaps I’ll amend the copy to be clearer.
@Griff — Brexit doesn’t get good (/more accurately less rubbish) just because of the passing of time. And unfortunately, unlike say the winner of the Eurovision Song Contest, its consequences don’t just go away when the calendar turns over.
The consequences are myriad, and this latest talk of forcing UK pensions to prop up British assets is just the latest.
So I’ll still be mentioning Brexit in a decade I’m sure.
I look forward to the future Telegraph, Mail, and Express et al headlines calling for the abolition of the ‘mismanaged’ and ‘gold plated’ Local Government Pension Scheme once the government has finished its Maxwell job.
On a slightly less polemical note, I’m not sure what the fuss is over how the remaining funded DB schemes invest given they must be a pretty small part of the UK institutional Investor landscape these days.
@TI – On “Journey into sleep”
You and I have favourably referred here previously to Why We Sleep – Matthew Walker (2017), and I can recommend two more titles (both of which books I also have) namely The Circadian Code – Dr Satchin Panda (2018), and Life Time – Russell Foster (2022).
No connection with authors/publishers etc.
Re: “Perhaps UK pension funds should own more equities. We saw with the LDI crisis during the Mini Budget (yet another showcase for global Britain) that index-linked gilts at all costs is no panacea.”
IIRC LDI per se is not and never was the issue. The real issue was the use of leverage to seemingly make good the under-funding of said DB schemes. As an approach, liability matching is sound (in theory at least) provided you have sufficient assets. However, when you are short of assets and resort to leverage what could possibly go wrong?
The link between nationalising pensions and Brexit is pretty tenuous. The trend of reduced importance of the LSE started a long time ago. If anything, the FTSE has been punching above it’s weight for years. 4% of listed commodities globally on the the back of an economy that represents 2% of world economic activity, but perhaps not as unbalanced as the US at 15.7% of world income versus 60% of listed capital.
Was Trump “dangerous”? I don’t see it. It is this administration fighting a proxy war with Russia.
@CT, while private sector DB schemes are shrinking, there is still £1.66 trillion in them (at end 2022), which is a fair amount of cash. And the government also wants occupational DC schemes to go the same way, another £100bn and growing.
I absolutely agree with the blog premise, which is that to get uk pension schemes and other investors to buy uk equities, we need to make the uk market more attractive, not twist the arms of any particular investors. Brexit is in my opinion one cause of the issues at the moment, but more general mismanagement of the economy and the resulting uncertainty contributes,
@Fremantle — You write:
To clarify if needed, the link between Brexit and this pension talk for me is political.
If you’d told me 10 years ago that a UK government/electorate that had grown up in the legacy of Thatcher would start forcing its citizens to ring-fence a portion of their pensions for UK investment I’d have laughed in your face.
But I can’t laugh about anything like that post-Brexit; even more so given that despite the complete dearth of a single economic benefit (rather £100bn a year knocked off) some of its supporters still defend Brexit on economic grounds. Clearly delusional.
(One can think what one likes about the politics, though I believe the sovereignty gains, while technically inarguable, are nebulous).
It’s similar to why my co-blogger no longer trusts holding only UK gilts for the fixed portion of a portfolio. Still low risks, but new (political) risks that once would not have seemed credible.
As for UK equities, for the record they did de-rate sharply and precisely because of Brexit.
For instance, see the graph from Schroders entitled: “UK Market P/E Relative to Rest of the World”:
https://www.franklintempleton.co.uk/articles/blogs/uk-equities-where-next
For viewers at home, you’ll see that starting in 2016 the UK market P/E multiple fell to a >35% discount by the start of 2022, before bouncing slightly.
Absolutely Brexit wasn’t the whole story (the US market was steadily becoming bigger and more overvalued) but for part of the move it was undoubtedly a good chunk of the story.
@Al Cam — If you have to meet future liabilities with near-negative yielding assets via either dogma or mandate, leverage would seem to be perhaps unavoidable to bridge the gap?
Better to see that the prices of assets in 2021 or even early 2022 was not the same as when they began down this journey in 1999 or whenever, and dial back on the super pricey stuff and buy some of the cheaper stuff I’d say.
But most financial institutions (and regulators) seem wedded to taking a good idea as far as it can go and then bit further to break it…
Incidentally the FT article I linked to in the piece pulls it all back to the Maxwell pension scandal and its aftermath. Unintended consequences etc.
@TI (#13):
Re: “But most financial institutions (and regulators) seem wedded to taking a good idea as far as it can go and then bit further to break it…”
Or maybe those fat juicy fees paid for miracle cures are just irresistible. Snake oil is nothing new; IMO however, the problem is not with the snake!!
Obama making war all over Middle East. Biden making war with Russia. But sure, Trump was the “dangerous” one. Blowhard? Ok, maybe so.
@A @Alex — I agree the situation in Russia is deeply sub-optimal but (a) Russia started it and Biden had to deal with it and (b) I would argue that Trump’s antics (e.g. suggested the US might pull out of NATO) emboldened Putin.
I agree Trump wasn’t able to do as much as his bluster suggested; the US checks and balances (and the fact that a load of his promises were fatuous baloney — e.g. the wall) saw to that. But it was his erosion of social norms and conventions that was dangerous.
His supporters stormed the White House after he disavowed the US election result as rigged. (Nonsense Fox has just paid a $700m settlement for going along with). If you don’t think that’s dangerous we’re never going to agree.
As a Brexiteer I’m more than pleased with the outcome so far:
I voted for less immigration and we just had the highest on record, those dinghies just don’t relent!.
I voted to take back control and we gave control to a moron who managed to increase everyone’s mortgage in the shortest tenure in history.
I voted to have 350m a week extra for the NHS and now I have to wait 3 weeks for a GP appointment. And that’s thanks to the extra taxes I now pay.
Now you traitorous remoaners aren’t willing to put your pension money on the line for your country?? You are such sore losers!
/s
Gotta dial back your TDS there TI.
Trump is marmite. Same as many policitians. So what else is new.
Look at what he did, slightly more dispasionately (compared to what he said on twitter to wind people up). And look at things he was ridiculed for at the time, but which are now playing out in a Right Brothers “Bush was right…” way. In no particular order:
Trump: COVID started in / leaked from, a lab in Wuhan.
Rest of world then: OMG! WTF! NOOB! FOO! etc etc.
Now: https://www.msn.com/en-gb/health/health-news/covid-lab-leak-possible-and-logical-says-top-chinese-health-official/ar-AA1a6VJP
Trump: Germany, you’re too dependant on Russian gas. That’s not ideal.
Germany (+ rest of world): *Giggling like schoolgirls* OMG DOOD!!
Now: Well …
Trump: Gonna build a wall between USA and Mexico (which is on the verge of becoming a failed narco state).
Rest of World: OMG! WTF! ANEURISM! APOPLEXY! NAZI! BERGEN-BELSEN! AUSCHWITZ!! etc etc.
Now: https://www.economist.com/united-states/2022/10/04/the-biden-administration-is-quietly-completing-bits-of-donald-trumps-wall
His two main achievements in office:
1. No new wars during his tenure – something last seen when Carter / Ford / Nixon were in power. And that was some time ago …
2. Peace in the middle east?! https://www.bbc.co.uk/news/world-middle-east-54124996
“As I’ve noted before, Britain is relatively poor for an advanced economy, on a per capita basis.”
I’m not sure I entirely agree with that (although who cares…..?)
https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?most_recent_value_desc=true
If you take a look at the attached, I think we’re relatively in a good spot. Many of the countries above the UK are either (a) small (b) US / Germany (c) oil backed states etc. Similar to France, Japan, well ahead of Italy.
But this doesn’t detract from the underlying theme that
– The best way to improve people’s quality of living is to grow GDP per capita and as no politician has any clue how to or has the willingness to tell the truth, mostly because the general population can’t handle the truth (Colonel Jessop anyone), we continue to talk about small boats, bullying of civil office servants and other drivel such as levelling up and fairness.
– The easiest lever to improve GDP per capita is to rejoin the single market. No one wants to discuss that unfortunate truth. Only a myopic individual cannot recognise that Brexit is economically damaging (barry blimps?!?).
– People are seeing their living standards drop this year. What they don’t realise is how much further living standards could drop on a relative level over the coming decades as the rest of the world equalises. After all why should Mexico have 25% our relative wealth. What’s the UK got that these countries haven’t – major natural resources (nope), young workforce (nope), low pension liabilities (nope), high productivity (nope), very strong attitude to work (nope) etc. Got lots of hereditary advances that are being eroded.
– US, Germany, Ireland have got sufficient dynamism in the economies to continue to pull away from the rest of the pack. If you are young, got some mobile capital, best to move to those locations. Much better standards of living. Great example – Ireland has double our GDP per capita – Guess what they’ve announced last month – an intention that every primary school pupil has a hot meal. How can they afford it? GDP growth of 3 – 4% this year.
– I expect another couple of decades of relatively decline (it’s nothing in the history of a country) followed by a chance we might wake up. I’m fairly certain we’re going to try and get closer to the EU pretty soon (the amusing thing being the Brexiteers haven’t got their lower immigration (1 million entrants last year / 500k net) & we’ll increasingly follow the EU rules without having any influence on setting them (e.g. financial services)).
All of that said…UK equities are not expensive relatively and probably absolutely and I continue to overweight to scratch the active itch.
It is not good for a Hospitaller to become incandescent about anything really. But I remain incandescent about Brexit. I still can’t quite follow how it happened – yes, there were mendacious politicians at work but the British electorate are meant to be able to identify that. In this case they seem to have actively chosen not to – perhaps it was due to excess nostalgia, the problem being that love of Spitfires etc is absolutely fine in itself but is no basis for foreign and economic policy. As for “taking back control”, we (the wider population) seem to have lost control far more than we gained control; we are now being managed by third-rate politicians from a pool of ruling party MPs, the selection process for which consisted of pledging fealty to a huge policy mistake and to a leader apparently unacquainted with the concept of Truth. Anyway, the fallout from the whole affair looks so unpromising that I feel confident we will back inside the EU within a generation.
As for government interfering with what pension funds invest in, that would be unwelcome indeed. What we need I think is genuine attention to growth, not – spare us – through Trussenomics – but through the things that allow growth to occur such as first class travel communications between our best universities.
@Seeking Fire — We’re 27th in the world per capita, with most of that wealth skewed to London and a few university cities. Much of Britain is pretty poor for a developed country, as is indeed chunks of London.
Of course the same could be said of many (nearly all) European countries — inequality isn’t a uniquely British issue, obviously — but crucially their less well-off have the common sense not to vote to make things worse by agitating and then voting to leave the EU, embolden right-wing politicians, cut off EU support/investment, etc.
Per capita figures:
https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?most_recent_value_desc=true
That’s the problem with pensions. They definitely have their advantages particularly if higher rate tax payer but you lose control of your money in a sense. You’re subject to a lot of policy decisions from politicians. I suppose ISAs are similar but not as many restrictions and would think pensions are more ‘low hanging fruit’.
Thanks for the off-the wall jazz/romantic article. Both for the quotable
> The best things in life really are analog
and the thought
> Romance has been rationalized in our lives, much like a factory process. All the unnecessary steps get bypassed.
The Honest Broker’s clocked something I felt but hadn’t crystallised as a though. That’s what’s wrong with a lot of things now. Max Weber’s disenchantment of the world has gone into overdrive. I thought it was only some of us that miss it, but when I read an article that sales of vinyl records are going up I first thought WTF? These are mastered from digital recordings, now.
Seems it is the sense of occasion, the ritual that some of these new vinyl spinners value. Sure, the nobs in the record industry wrecked CD mastering post 2000 with the loudness wars – you just can’t get that sort of compression onto vinyl and have it playable, so the young’uns may just want relief from the dynamic compression, but streaming has largely fixed this now. But there’s no enchantment in playing a Spotify album compared to getting something and putting it on a turntable and all the care you had to do.
Nothing to do with finance or FI/RE, but it brightened my Saturday and made me think, and give an a-ha moment, so thank you!
Brexit will never succeed while interventionist socialist types are busy creating their version of a halfway-house utopia. As working people, pensioners and British companies are now paying for the Govt’s money printing via the highest peacetime tax burden since Henry VIII it does not bode well going forward, Brexit or not! For those so traumatised by the vote not going their way refuge may be sought in Rome, Berlin or ideally Paris!
@Max — You write:
Of course, for most non-moneyed or non-Plan-B equipped people, that’s exactly what is no longer possible thanks to wonderful Brexit.
A triumph! Make the country crapper, and make it very hard for ordinary people to leave. And now start casting your eyes at the pensions of the better-off ones to keep the show going…
Cheers for thoughts all. A quick catch up on some of the comments I missed.
@PC — You’re welcome!
@CT — From memory DB is a bigger share of the total than I would have guessed, though I’d have to research to tell you the figures. Remember there’s a lot of public sector DB pensions still out there as I understand it.
@Factor — Cheers. I seem to have settled into a regular seven and a very little bit hours if I don’t harry myself about when I wake up (which I rarely do) but I can’t quite make it to the promised land of eight hours very often. Hopefully good enough. Certainly I feel it if I don’t sleep (or even if I have to set an alarm for some dread reason.)
@Nebilon — Ah, missed your putting a number on the DB pot earlier. Many thanks for that.
@Dragon — Yes, I agree with you guys that not starting a boots on the ground war is a plus for the Trump administration. Though I would certainly push back on the idea that Biden started/encouraged this one (though I think there is something to the argument that we should have found an off-ramp sooner, and been less ambiguous about Ukraine and Nato). However a reading of history shows societies/empires fall when powerful people are contemptuous of the norms, not when they make a bad tactical decision. It’s a bit of a cliche nowadays, but nevertheless if anyone has not done so I’d suggest reading up on how populism — much of which appeared attractive to be begin with — sowed the seeds for the end of the Roman Republic. (America’s founding fathers had certainly read their history books, which is why they set the country’s institutions up the way they did.)
@The Weasel — Don’t forget all the time we now have to take in the sights at Dover, stuck in a queue for six hours. Makes you proud and teary! 🙂
@Hospitaller — It’s going to be difficult for politicians to pursue a growth strategy now. The electorate has been sold a crock, and will be paying for it for years (as mentioned before Sunak’s £40bn shortfall is pretty much the lost annual tax revenue due to Brexit) so any investment is going to have to come from pain elsewhere rather than spending our surplus harvest, so to speak. The Conservatives have had seven years of their leveling up agenda, and they’ve demonstrably failed to do anything other than make matters worse. Our few big infrastructure projects are going poorly: HS2 is in the balance, and the commencement of nuclear power at Hinkley Point is running on the One More Year principle. Our universities are still going strong, but how much their growth is directed towards indigenous Britons versus profit centre overseas students is debatable. We’ve wasted seven years of political capital on making our country weaker and squabbling to implement a wealth-damaging ‘solution’ that has nothing to address the actual big problems we and other nations face. To be fair the pandemic didn’t help, but I think it’s fair to say our Control-emboldened leaders hardly covered themselves in glory with that. Probably the smart thing to do is emigrate, but my family is here and most of my friends. Ho hum. You’d have to recommend it to a 20-something though.
@Jim — Very true. I avoided pensions for years until the freedoms came in. They were a very sensible reform towards putting people in charge of their own life savings. Let’s hope we don’t go backwards.
@ermine — I agree, it was an insightful piece. The Honest Broker’s site is like a throwback to the old days of blogs and fresh perspectives, before Social Media flattened it all out. As for vinyl, I have a friend with thousands of albums and time spent with him has convinced me there’s *something* to the experience over streaming, let alone CD, though I’m not sure if it’s real or ritual (which is also real…)
Wonderful rant as always-freedoms and pensions-is anything more important than those two items ?
I do worry sometimes that we might lose this blog if Monevator moves to that wonderful place -the Continent-well known historically for its ability to maintain the freedoms and finances of its citizens
Times are getting tougher no doubt of it-the bill has come due for all those good times we were having
Not quite sure what the answer is but blaming symptoms like Brexit,Trump etc certainly won’t be the way out
Unfortunately our current “leaders” do seem to be a parcel of duds but sadly are rather reflective of us all
We Scots are having a particularly torrid time just now in this regard
Usually we seem to be able muddle through these situations and if it’s any consolation my grandchildren-the seed corn-do seem to be rather an impressive bunch-overly proud grandparents?
Battle hardened by Covid and dealing with the current crop of duff adults?
I have for instance 2 x18 year old grandsons partnered off already-with their universities appropriately arranged so as they are together -kids with a plan!
I did express an opinion about “rather young” and was rather forcibly reminded that”you and granny paired off at 17!”-that’s me told
xxd09
“City salaries help support a higher tax base and more generous welfare state” – citation needed!
Welfare in this country is the opposite of generous and has been regressively cut and administered since 2010, before the halcyon olympic days (you’ll remember George Osborne being booed during athletic proceedings). What you’ve said is fine in theory but has not been so in practice for decades, which makes it a moot point, especially when the two parties who can be reasonably expected to form the next government have both made it clear they won’t be increasing benefits any time soon.
Benefits brought us the rolling stones, grayson perry, banksy and the sex pistols. Austerity and benefit cuts have brought us urban decay, laughing gas canisters and food banks.
The SSRN paper extols the virtues of low volatility equity index investing as against plain vanilla equity (lower volatility, but with minimal reduction in return). I note from JustEtf that such vehicles are available here also, but confess I hadn’t come across them before. Any thoughts, please? A future article?
Thanks again for all the links @TI and to everyone for their insightful comments/thoughts – I’m no pension expert but I always come away learning something I didn’t before.
I see the Yorkshire Bylines Brexit Downsides Dossier is now over the 1,000 recorded downsides of Brexit and, um, 24 upsides.
https://yorkshirebylines.co.uk/regular-features/the-davis-downside-dossier/
At some point, hopefully sooner rather than later, even the most deluded of Brexiteers will have to see the reality of the situation and the harm it is causing, even if it is a slow burn and essentially unnecessary.
One possible reason for the increase in bonds in workplace DB pensions is the increasing number that are closed to new money (either existing or new members). Under those circumstances, the fraction of funds needed for liability matching becomes larger. It was interesting that, during the chaos at the end of 2022, some open pension schemes (e.g. USS) were able to fill their boots with inflation linked gilts at the lowest prices seen in a long time with new money and consequently increase their funding ratios.
On another note, I’ve just been reading Dominic Sandbrook’s history of Britain (Seasons in the Sun volume) covering the EU referendum in the 1970s. Interesting that the Conservatives (including a certain future PM) were generally wholehearted supporters of the staying in generally on economic grounds, while those wanting to leave consisted of the far left (e.g. Benn) who wanted to go to a siege economy and the extreme right who were concerned about sovereignty. I expect the same arguments will resurface in two decades time (or whenever).
@TI, @SF, others:
Nice interactive site about national income inequality at:
https://worldpopulationreview.com/country-rankings/gini-coefficient-by-country
@Martin T, the implementation of low vol portfolios leaves a lot to be desired. I have been invested in the US listed min vol ETF USMV since shortly after it launched. Over the last 10 years it has underperformed the the iShares S&P 500 ETF by 1.76% per year, or 35% over the 10 years. At the time of launch iShares produced a paper showing a backtest of the strategy against the S&P 500. Needless to say it looked great at the time! I hold on in the hope that the low vol anomaly will return, but wish I had never bothered with it in the first place.
It is difficult to buy US listed ETFs at present, but iShares do some LSE listed low vol ETFs if you are interested, eg MVOL is a MSCI World min vol ETF. Again, it has underperformed their straight MSCI World ETF by about 1.7% per year over the last 10 years. iShares do US and European low vol ETFs as well.
Low vol ETFs do work in the sense of reducing volatility, but that may come at the cost of lower performance, which has been my experience to date.
About 25 years ago I read a paper which investigated the investment performance of UK pension funds and it was appalling, on a par with UK retail funds. Best thing they could do is go passive.
I have read similar comments from Warren Buffett on US pension funds and suspect they are little better.
I have zero allocation to UK equities in our SIPPs and just 4% across our entire portfolio, in line with the FTSE World Index. I have no desire to change that. Yes, UK equities look cheap compared to US equities, but that was also true 20 years ago…
@Naeclue it’s no surprise the US Min Vol index underperformed the S&P, in a boom decade for megacap growth. The MSCI website has long term data. I believe low vol investing rewards the patient just give it time. 2011 (when USMV began) is a very flattering start date for the S&P 500 / Nasdaq.
Surely the main reason for the change in pension fund behaviour has been the insistence on different accounting standards (referenced in the FT link) from previously. This blog is very used to SWR discussions; effectively pension funds work out their own sophisticated SWRs in deciding how to apportion investments. However if they are then compared with the equivalent SWR for the safest investment class (low interest government bonds) and told they are in deficit by some eye-watering sum then that is a massive disincentive to having a significant proportion in less secure but higher yield equity investments – even though the risk is well controlled due to the very long investment horizon.
I don’t know the basis for the new accounting standard, but it is almost as if it was designed to force businesses to close DB pensions. Though obviously there has to be some sensible regulation of pension funds to prevent Maxwell-style mismanagement.
(Plus, as @Alan S notes, the universe of DB pension funds now includes many closed to new members and thus with a shorter funding horizon for which a lower proportion of equities is appropriate).
@Naeclue thanks for that. In the meantime, I’ve done some digging and discovered a couple of Monevator pieces from 2013/4 on low vol. The lag in performance you cite is significantly greater than the SSRN paper suggests. Seems it may be another fad which promises rather more than it delivers….
Deeply disappointing article as so heavily biased. I was expecting much more balance from this blog. Please bring back Finimus – he is the only writer here were I am actually learning not having biased thrust upon me.
@Jonathan B:
The accounting standards are IMO totally unfathomable; unless of course the unstated objective was/is to eradicate DB schemes.
There is at least one other important matter that is rarely mentioned (and IMO much more nebulous) and that is the strength of the employer covenant.
The pensions regulator must also bear their share of the ‘blame’ – IMO they have been a real driving force behind the largescale adoption of leveraged LDI by DB schemes.
@Naeclue (#34):
Re DB schemes – I agree, but see my comment above re snake oil!
@Tanya — Recently on this very blog Finumus — who includes “Tofu eating Wokerati” in his Twitter byline — noted he had been “radicalized by Brexit.”
Nobody who writes for Monevator thinks Brexit was anything other than a tawdry self-harming solution in search of a legitimate problem. (Even mild-mannered @MrsTA called for us rejoining the EU in her recent missive).
Think you’ll have to find a new website. No hard feelings, I appreciate we can’t please everyone. 🙂
I guess the Brexit is terrible rant was due given we haven’t had one for a few weeks.
@Martin T check for yourself on Portfolio Visualizer. ACWV vs VT. Global Min Vol higher risk-adjusted returns, and today holds cheaper stocks at a time when capweighted stocks have rebounded. Both portfolios were level in September 2022. If the bear market resumes, Min Vol will reassert its lead.
@Max Sharpe, so my decision to invest in min vol was good, but timing bad? 😉
I note that the iShares European min vol ETF has only underperformed the cap weighted MSCI European ETF by 0.3% per year over the last 10 years. More acceptable, but I am not invested in that one!
I do wonder whether the so-called low volatility anomaly was either a result of insufficient data, or came to an end once a lot of people found out about it.
@Naeclue I don’t believe there is much money held in systematic Low Vol equity strategies, compared to Value for example. Pim Van Vliet wrote along the lines of, “The pain of low volatility investing is the boredom”. The evidence of the recent crypto & meme stock mania would suggest that the majority of investors lack the patience for the low vol approach.
The MSCI All Country Min Vol index has a dividend yield of 2.95, versus 2.24 for the global capweight index. Hopefully these boring blue chips will catch a bid if/when the current “buy the dip” wave ends.
Just a few thoughts/observations regarding the TI article and comments:
1, I think from the Brexit wing we need a constructive plan going forward to stimulate growth and also boost the public sector i.e. NHS, Education etc.
2, Regarding the NHS, I’ve visited a close family member in Hospital this week in a generally non-diverse part of the Country. I was amazed by the variety of nations that was represented by the staff. Disappointing that a career in the NHS is not as appealing to Brits, as it once was. However, good to know that we can recruit good staff. This is probably a snapshot of Brexit arguments-as a country we are screwed without the positives of immigration.
3, Regarding Trump. He fell lucky that Putin was quiet during his period in the White House due to Russia hosting the World Cup and China hosting the Winter Olympics. Ukraine was a long-term strategic decision made years ago. I’ll not comment further on the individual!
Regards,
Lee.
@Naeclue @MaxSharpe — I haven’t particularly studied the low-vol anonymity, but off the top of my head could the answer not be that volatility was quietened across the board by ultra-low interest rates, thus suppressing in some way the alpha / source of low-vols returns?
@Lee Briggs — The country will grow again. Factories will be set-up, there will be investment. Brexiteers will trumpet this as “Brexit working”. I would urge everyone to remember the counterfactual; we grew, had investment, factories etc so on before Brexit too. The difference will whether we will have more or less growth with Brexit. Currently best estimates is the economy is about £100bn a year smaller (significant) due to Brexit.
Personally I don’t think they can do anything to make up for the damage they’ve caused, even just economically let alone culturally/socially. The only opportunity was to go very laisse-faire and headlong for growth, truly ripping up regulation and workers rights, and scaling back the welfare state. (I’m not saying they should have done that, I am saying it was a plausible swap in light of our ‘Brexit freedoms’).
We already have people on this thread complaining the state is too stingy despite being about as big as it’s been outside of wartime (while other posters call the current government ‘socialists’ — you really can’t win) which I think accurately reflects the chances of the British public going for that policy… near-zero. We can’t do it by borrowing either; if that was ever on the table Truss’ contradictory Mini Budget and the market reaction swept it off.
So we’ll grow, in a sickly sort of fashion most likely, and everyone will fight over this growth to claim it for their own, as we continue to fall behind where we could have been.
It is economically unavoidable.
Time will tell if it was a price worth paying (‘sovereignty’!) but I have extreme doubts and the first seven years of full-control post-Brexit UK government has been borderline farce.
@Hak — It’s been about ten weeks since the last rant, I think:
https://monevator.com/weekend-reading-brexit-still-crazy-after-all-of-these-years/
I know! Time flies when your country is slowly bleeding out for a vanity project.
@JDW — Interesting collection of pros/cons, cheers for sharing. Of those tiny number of Brexit benefits, a bunch seem to accrue to the EU? And while I’m sure a significant cohort of Leave voters will be delighted to hear that many more asylum applications are being processed as a ‘success’, can’t help think not all of the famously – um – unified Leave demographic will be pleased.
@Al Cam — I can’t make my mind up about inequality, except at the tails. But I think we probably have a shade too much here. Much of it is likely structural, however, at least until something comes along to flatten the playing field for the whole country. (The metaverse? AI? Full self-driving autonomy?)
I thought I would mention that from the point of view of investing pensions in the UK, I think the really interesting stuff happens when a DB pension scheme is converted into a bulk annuity.
At that point, the life insurer gets perhaps a few billion quid of pension capital to play with. That capital needs to generate an income for the pensioners for up to 40 years, but the capital itself doesn’t need to be given back, so it can go into highly illiquid investments, primarily the construction of new real estate.
Legal & General (of which I own a few shares) does about £10 billion of this each year, and some of it goes into very large projects in the UK. Some these include £4bn invested in Oxford, £1bn in Cardiff and £4bn in the West Midlands, all into productive assets like residential, office, retail and science & technology real estate. And there’s a huge amount of other stuff like building homes, solar and wind assets, start-up companies, retirement homes and so on.
This is a very sensible and productive use of capital that should improve the UK economy and therefore, indirectly, the lives of the UK pensioners who also happen to get an income from these assets.
And all of this makes economic sense for L&G, which has strict return targets that underpin its fairly consistent near-20% return on equity, so this isn’t charity.
@John K (#47):
Re: “but the capital itself doesn’t need to be given back”
Interesting observation; I was under the impression that DB schemes were supposed to be the ultimate group expression of die with zero; ie the scheme funds are supposed to dry up just as the last pensioner dies.
Having said that, your observation may explain why DB buy out valuations are usually far greater than their technical provisions. Any thoughts?
“And slowly, surely, the economic consequences of leaving the EU have been coming through…. the return of Britain’s age-old inflation problem.”
Not so! High inflation is a global problem – as witnessed by the Fed aggressively raising rates for the past 12mths in response to high US inflation; inflation in Europe is 9% (and 10% in the UK). Turkey and Egypt have hyper-inflation.
But according to The Investor, this is all due to Brexit ! Spare me the bs – Monevator now reads like the worst type of tabloid.
@3MintTea — Thanks for alerting me to the fact that inflation has been high around the world, which had somehow entirely escaped my knowledge despite my writing about it for the past 18 months.
However Britain does have higher inflation, as cited by all non-Telegraph reading sources, and the question is why.
https://www.reuters.com/world/uk/uk-inflation-rate-falls-101-march-ons-2023-04-19
Britain historically had much ‘stickier’ inflation issues, at least in the decades following WW2, for a variety of mysterious reasons. (Mysterious in the sense nobody can agree on them). Much of economic policy up until the 1990s was directed at salving this issue, which had appeared to be quietened by inflation targeting.
As you note, I’m not a fan of Brexit and I see no reason why making it more expensive and difficult to import and export goods while cutting off a natural supply of labour would help with inflation, but we shall see.
We are arguably more exposed to higher energy prices, too, due to the way that market works, which may hopefully mean inflation comes down a bit faster after all.
@Al Cam: Yes, DB schemes are a “die with zero” system, and that’s exactly what they get with a bulk annuity. The pensioners get their guaranteed income and when they die, they (or their children) get none of the capital.
DB Schemes can choose to run-off their assets to pay their liabilities as members retire, but usually the safer option is to just offload all the liabilities and risk to a life insurer.
Buy out valuations are higher than the technical provisions (the expected future liabilities) because those provisions still include uncertainty and risk, whereas selling to a life insurer removes all risk, and the life insurer needs to charge a higher price to cover that risk and still make a profit.
@John Kingham — Interesting, thanks for sharing. I don’t mind L&G getting into build-to-rent (which as you say they’ve been doing for a while) and within reason I don’t mind the government encouraging (ideally via carrots rather than sticks) institutions to invest in the UK, provided it’s at a step remove from an individual’s asset allocation.
If L&G and others believe investing in UK infrastructure/similar is a helpful part of underwriting their 4% (or whatever it might be) annuity offer then fair enough. As long as the liability for meeting it is on their balance sheet/shareholders, not scheme members, as opposed to pension funds being ordered to ramp up home bias in the accumulation/variable return phase. 🙂
@TI:
There is nothing new in what JK says about Life Insurers investments, see e.g. chapter eight of Ned Cazalet’s 2014 report “When I’m Sixty Four”.
However IMO it is a bit of a stretch to say that “selling to a life insurer removes all risk”. Just because a life insurer failing to pay has not happened so far this does not mean it can never happen!
@Al Cam — Cheers, just new to me! 🙂
@TI:
The referenced Ned Cazalet paper used to be widely available FoC on the web – but I could not find a link for it when I quickly looked last night. If you can get yourself a copy [of all 126 pages] it is well worth a read as IMO it is packed with good stuff.
A favourite quote from the paper that is relevant to this discussion goes as follows:
“Annuities are the actuarial equivalent of Marmite. Some providers do not like the risks attached and/or the prospective rewards, in some cases going as far as to get rid of their in-force annuities to another provider (think Royal London’s disposal to Prudential), while others (such as Aviva, Legal &
General and Just Retirement) have big appetites for retirement income risks.”
One interpretation of NC’s chapter 8 is that some Life Insurers are running riskier portfolios than some DB schemes – and on top of that the Life Insurers charge handsomely for the ‘privilege’ to access them too.
It’s probably a bit too late now, but I’ve just noticed that the link for ‘Keep your garden green and get a tax cut, suggest scientists’ takes you instead to an article about that AI-generated imagine which won a photography competition.
@TBDW — Oh dear, thanks. Have fixed. It’s so hard to wrangle all these links without an error (while getting some sleep on Friday night…) Where is my AI robot sidekick assistant, eh? 😉
@TI:
Found it!
I had posted it on Monevator before:
https://www.royallondon.com/siteassets/site-docs/media-centre/cazalet-consulting-when-im-sixty-four.pdf
Post 58: A slightly belated thanks for the link. It is an interesting report, although there are a few things that are incorrect and one or two omissions. For example,
1) The description of the ‘4% rule’ (page 108) is incorrect.
2) In the comparison of level and inflation linked annuities (pages 71-72), the effect of sequence of inflation (analogous to sequence of returns) has been omitted. For example, for a retirement starting in 1969, with the annuity rates from the report (6% for level and 3.36% for inflation linked) and using UK RPI, the crossover in cash flow occurs after about 7 years, with the NPVs becoming positive aged 81 (level) and 78 (inflation linked) with an “hurdle rate” of 0%, and 101 (level) and 83 (inflation linked) with a “hurdle rate” of 5%.
Of course, the hurdle rate then ignores sequence of returns! In my view, a better (and more straightforward) comparison for the inflation linked case is to compare the annuity rate with the relevant safe withdrawal rate (which, historically, for a 30 year retirement in the UK lay somewhere in the range 2.7% and 3.5% depending on the asset allocation, dataset used, and fees).
@Alan S (#59):
IMO sequence of inflation (SoI) is generally a fairly poorly articulated concept. As I see it, SoI matters if, and only if, the assets are not [fully/perfectly] inflation linked. Thus, I am not sure what adding it to the comparison in Ned’s paper – which essentially says that Annuities [then] were exceptionally bad value for money – would add.
Some quality recent chatter about SoI, attributed to Pfau, is available at: https://www.morningstar.com/articles/1107682/is-inflation-another-form-of-sequencing-risk