86% of pension funds fail investors

Poor performance among pension funds is effectively endemic, according to independent research from campaigning consumer website howmuchdoineedtoretire.co.uk.

The detailed review of 778 funds found when some very basic filters were applied only 14% of the funds made the grade, meaning 86% fell down.

The research looked at every mainstream pension fund available to private/personal investors in the UK, this was then filtered down by excluding any fund below £10 million and/or any fund that did not have at least a 5 year track record.

This was for the purpose of excluding very small boutique funds where performance can be skewed by a small variation in an underlying asset and then having a decent time period (5 years +) to exclude a spectacular year disproportionately affecting the results.

Meaning a total of 778 funds were analysed and had the following performance criteria applied:

The fund had to have achieved 1st or 2nd quartile rankings in at least 3 out of the last 5 years.

Over 5 years and 10 years it had to have above average returns.

The funds had to have volatility equal to or less than the average.

In fact the “86%” figure only applies to the first and second criteria, if the third figure is factored in then only 12% of funds pass the test.

The research shows that not only do funds generally underperform but that most funds then fail even to meet a basic standard of performance against their peer group. This means that investors would undoubtedly be better following a strategy of NOT using funds. Arguably they would be better throwing their money at randomly selected assets or more viably at index trackers of one sort or another.

Critically the research identifies that fund managers are failing (in 86% of cases) to add any value at all. Investors are being charged for consistent and in many cases very real failure by fund managers who are “getting away with” appalling performance by any measurement.

The author of the research Matthew Morris sets it in context: “With some very notable and laudable exceptions the industry is failing. When a pension investor hands their hard earned money to a fund manager to get them a return they must have an expectation that the manager will produce something more than they could achieve by doing the investing themselves, i.e. they are paying for the expertise, and hopefully that the manager will stack up well when they are compared to their peers and competitors, otherwise why bother? One may as well throw some darts at the dartboard and pick investments on that basis.

“Warren Buffet was bang on the money when he said what is happening is that the tide’s gone out and we can see who has been swimming naked. The years 1987-2007 masked the shortfalls in performance that have now become apparent, the boom years meant that most managers were able to produce some form of positive performance even if it was relatively bad and investors either didn’t notice or didn’t care. However, one of the best things that has come out of the troubles over

over the past 18 months is to see how so many funds were in effect closet trackers of one sort or another: but with the problem that they “under-tracked” the benchmark they should be measured against! They have offered no serious management function whatsoever. In other words in virtually every sector from equities in the UK and Overseas through to Property and then to Bonds funds are failing to meet certain basic standards.

“The question that remains is what should pension investors do? Well firstly, not let their money wallow in such funds. Secondly, they should constantly review their positions and sack any fund manager or fund that fails to produce results. Thirdly and most crucially they should apply a process which includes having a strategy which applies certain basic requirements and standards. Fourthly, in mainstream areas it is clear that index tracking makes most sense and in this regard investors should seek out very low cost and effective index trackers probably using a self investment process and allocating their money to ETFs (Exchange Traded Funds) which are often 1% per year cheaper and better performing.”