The Centre for Policy Studies, the influential UK think tank, has said 80% of active funds are irrelevant, and urged pension schemes to adopt passive investment strategies.
Citing F&C Fund Watch data on the UK’s top performing funds over the past three years, the body notes that in the third quarter of 2016, only 28 out of the 1,137 funds produced top quartile returns (2.5%). Of this total, 18 could be expected to outperform due to random chance, meaning only 10 managers – 0.9% – can legitimately claim their success was attributable to skill.
Over the same three-year period, only 161 funds (14.2%) consistently produced above average returns. Statistically, this includes 142 who would achieve this through luck, which leaves 19 funds (0.2%) that performed through skill. In all, 85.8% of the UK’s top performing funds actually underperformed.
The CPS also points to the Melbourne Mercer Global Pension Index, which shows the UK’s pensions landscape continues to slide down global rankings. The Index, which scores each country’s pensions landscape on the adequacy, sustainability and integrity of its publically funded and private pension systems, gives the UK a C+ grade, and ranks the country 11th out of 27.
Overall, UK defined benefit schemes now have the weakest funding position in Europe, with 38% flagged as being in the weakest 20% of their industry peer groups, and UK company schemes are also the most underfunded relative to revenues.
As a result of these findings, the CPS is calling on the UK government to embrace passive investment vehicles, and for the Local Government Pension Scheme’s £85 billion (€100 billion) assets to be moved into index funds and ETFs.
While the think tank notes the Government cannot force private sector schemes to adopt the same approach, in light of the FCA’s recent asset management report, it believes private schemes would be irresponsible not to follow the government’s lead.
If defined benefit and defined contribution schemes switched to passive investment, the CPS believe, it would become quickly apparent that 80% of the fund industry is needless, leaving the remaining 20% to focus on adding value in the unlisted asset arena, such as property, emerging market and small cap funds.
“Evidence continues to mount that active fund management is underpinned by a web of meaningless terminology, pseudo-science and sales patter. For too long, active managers have been allowed to shelter behind their standard disclaimer concerning the long-term nature of investing,” said Michael Johnson of the CPS.
“Ludicrously expensive talent is deployed in the pointless pursuit of continually trying to out-perform one another. Worse, it is a giant negative sum game in which the savers pay the price, their hard won capital being persistently eroded by high recurring charges and fees.”
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