Best Performing Irish Pension

[bankrupt]

Everything is possible in theory, but in the real world, most regulation ends up being gamed by someone and governmental inertia usually causes poor and ineffective regulations to remain on the statute books long past their sell-by dates.

That's a defeatist view, although we all like to complain about ineffective regulations on occasion, the fact remains that regulation can be effective (yes, even in the "real world"). If we agree that pension providers should ideally be forced to show how they perform vs. passive index tracking then it's not so hard to imagine that it would be possible to mandate this.

I'd argue that groupthink, meaning adherence to a perceived group consensus as a substitute for gut feeling, instinct and common sense, is rarely if ever a positive phenomenon, especially in investing. If a punter wants to invest in a consensus or index tracking fund, good for them, but I don't want to leave my pension at the mercy of people who park their common sense at their office front door.

I agree with you that blindly following any idea without some level of analysis or skepticism should be avoided. In this particular case there is hard evidence that index tracking generally beats active management over the long term (some out-performers notwithstanding). As someone pointed out above it's effectively impossible for us to choose these out-performers so for the rest of us the logical choice is low-cost index tracking. This is the exact opposite of parking common sense at the front door.

Pension companies should be free to offer higher cost products to those who believe they can do better than the index but ordinary citizens should be guided towards the right product which over the course of a lifetime will be a low-cost passive index-tracker. I don't think this guidance happens at the moment for reasons that presumably have something to do with the high fees that funds are able to charge despite poor performance (in general).

 

[T McGibney]

That's a defeatist view, although we all like to complain about ineffective regulations on occasion, the fact remains that regulation can be effective (yes, even in the "real world").

Defeatist to you, realist to me.

If we agree that pension providers should ideally be forced to show how they perform vs. passive index tracking then it's not so hard to imagine that it would be possible to mandate this.

We don't agree though, and while many things are possible not all are desirable, especially when it comes to red tape.

I agree with you that blindly following any idea without some level of analysis or skepticism should be avoided. In this particular case there is hard evidence that index tracking generally beats active management over the long term (some out-performers notwithstanding). As someone pointed out above it's effectively impossible for us to choose these out-performers so for the rest of us the logical choice is low-cost index tracking. This is the exact opposite of parking common sense at the front door.

Pension companies should be free to offer higher cost products to those who believe they can do better than the index but ordinary citizens should be guided towards the right product which over the course of a lifetime will be a low-cost passive index-tracker. I don't think this guidance happens at the moment for reasons that presumably have something to do with the high fees that funds are able to charge despite poor performance (in general).

You're conflating high charges, active management and below-par performance. Again, I don't buy your doom and gloom, but we're probably starting to go round in circles.

 

[Sarenco]

Is there any reason that it would be a bad idea to mandate that all pension providers have to provide this comparison with their usual historical performance data?

What do you mean by "their usual historical performance data"?

If we agree that pension providers should ideally be forced to show how they perform vs. passive index tracking then it's not so hard to imagine that it would be possible to mandate this

What index do you have in mind?

Take Zurich's performance fund. It has an indicative (but not fixed) equity range of 65%-90%, with the balance in bonds and cash. How do you compare that to an index?

A more practical suggestion would be for the Central Bank to insist on life companies producing an ongoing charges figures for their unit-linked funds, with an assumed AMC.

 

[bankrupt]

You're conflating high charges, active management and below-par performance.

Well yes of course I am! that's entirely the point! Actively managed funds with high charges (relative to passive funds) have below-par performance! This is a matter of record and research.

Again, I don't buy your doom and gloom, but we're probably starting to go round in circles.

It's not "doom and gloom" to suggest that pension funds are charging too much for below par performance. Of course it's better that people invest in a slightly worse performing option than not at all but it's not right that they lose out through no fault of their own.

 

[bankrupt]

What do you mean by "their usual historical performance data"?

What index do you have in mind?

Take Zurich's performance fund. It has an indicative (but not fixed) equity range of 65%-90%, with the balance in bonds and cash. How do you compare that to an index?

A more practical suggestion would be for the Central Bank to insist on life companies producing an ongoing charges figures for their unit-linked funds, with an assumed AMC.

By "usual performance data" I mean the fund reports that we are all used to seeing - usually showing how great they are without reference to any benchmark.

I think it's fair to say that most use the S&P500 as the reference point but I'm sure there are other options and combinations of world indexes as well.

Your point is interesting about how you would compare a mixed fund but perhaps it's not so hard? You could compare the equity portion against an equity index (e.g. SPX) and the bond portion perhaps against 10Y treasuries? If I were to design a regulation that required comparison then maybe I would force the reference to be always against the volatile equity component of the fund which is really where the average investor stands to lose most over time.

The more general point is that as a completely average investor I can expect to beat most active funds (and the research bears this out).

I don't really understand your last point, could you elaborate? Particularly an "assumed AMC"?

 

[Sarenco]

You could compare the equity portion against an equity index (e.g. SPX) and the bond portion perhaps against 10Y treasuries?

Ok, leaving aside the most appropriate index to use for the equity and fixed-income elements of the portfolio, what split do you use between these asset classes in your benchmark? Bear in mind that these funds do not have a fixed split between asset classes - they change all the time.

The more general point is that as a completely average investor I can expect to beat most active funds (and the research bears this out).

Well, all the major pension providers (Zurich, Aviva, etc) now offer index funds so what's the problem?

I don't really understand your last point, could you elaborate? Particularly an "assumed AMC"?

Pension providers offer contracts with different AMCs so you would have to use a standardised AMC (say, at 0.75%) so that providers could publish an ongoing charges figure (which includes costs over and above the AMC) that can be compared across funds.

 

[bankrupt]

Ok, leaving aside the most appropriate index to use for the equity and fixed-income elements of the portfolio, what split do you use between these asset classes in your benchmark? Bear in mind that these funds do not have a fixed split between asset classes - they change all the time.

I don't think it's so complicated as you imagine - you simply have 2 potential investment vehicles and put the same amounts in at the beginning with regular investments thereafter and compare the end result. You could do the same whether it's monkeys throwing darts, bonds, tulip bulbs or crypto and come to the same conclusions.

EDIT to clarify: the point about mixing asset classes is important and I think I glossed over it. Someone who has index tracking as part of their portfolio should normally also hold other assets like bonds, gold, tulips etc. in a proportion relative to their own circumstances (age, risk etc).

Well, all the major pension providers (Zurich, Aviva, etc) now offer index funds so what's the problem?

The problem is that Zurich wants you to buy their relatively expensive actively managed product. If I know no better I will probably choose this instead of a boring passive tracker thinking the experts know best. If enough people choose passive trackers (as seems to be happening in the US thanks to Vanguard) then there is pressure on the charges also.

Pension providers offer contracts with different AMCs so you would have to use a standardised AMC (say, at 0.75%) so that providers could publish an ongoing charges figure (which includes costs over and above the AMC) that can be compared across funds.

But why choose a standardised AMC? surely the providers should be incentivised to minimise this? It seems perverse to try to fix it.

 

[Sarenco]

I don't think it's so complicated as you imagine - you simply have 2 potential investment vehicles and put the same amounts in at the beginning with regular investments thereafter and compare the end result

You're missing the point - the allocations in the mixed fund are not fixed; they change all the time.

You simply cannot compare a dynamic allocation to different asset classes with an index or a blend of indices. It's simply not possible

The problem is that Zurich wants you to buy their relatively expensive actively managed product.

Why is that a problem if they also offer passively managed products? It's up to consumer to decide where they want to invest their money.

It seems perverse to try to fix it.

I'm not trying to fix it.

I'm saying that providers should be required to disclose an OCF for each fund based on a consistent AMC.

Again, providers offer contracts with a whole range of different AMCs, commissions, etc. Unless you chose a single, representative AMC across all providers you simply cannot compare the cost of their products.

 

[bankrupt]

You're missing the point - the allocations in the mixed fund are not fixed; they change all the time.

You simply cannot compare a dynamic allocation to different asset classes with an index or a blend of indices. It's simply not possible

I suppose it may be a little complicated to compare performance for a mixed fund instantaneously but in the longer term it's actually straightforward - simply look at the inputs and the outputs. I absolutely disagree that it's not possible to compare the performance of one portfolio to another and we should not allow ourselves to be confused by the complexities of the financial industry when we look at the long term returns of any asset class.

Why is that a problem if they also offer passively managed products? It's up to consumer to decide where they want to invest their money.

The problem is that people do not understand this properly and the financial industry takes advantage of this lack of understanding. As we are not talking about some niche aspect of society but rather something that is fundamental to us all it is important that the industry acts in the best interests of society as a whole.

I'm not trying to fix it.

I'm saying that providers should be required to disclose an OCF for each fund based on a consistent AMC.

Again, providers offer contracts with a whole range of different AMCs, commissions, etc. Unless you chose a single, representative AMC across all providers you simply cannot compare the cost of their products.

Sorry but I disagree, you can always compare the performance of one financial instrument against another regardless of the internal complexities. Over the long term it's simply a case of money in vs. money out.

 

[Dave Vanian]

Aside from specific asset selection, an active fund manager will also vary the asset split of the fund from time time. So today it might be 70% equities, 10% property, 10% bonds and 10% cash. Tomorrow it might be 65% equities, 15% bonds and so on. That's part of active management.

While I'm all in favour of more accountability and transparency in the Irish funds industry, how would you propose that you would compare such a fund against an index-tracking equivalent?

 

[bankrupt]

Aside from specific asset selection, an active fund manager will also vary the asset split of the fund from time time. So today it might be 70% equities, 10% property, 10% bonds and 10% cash. Tomorrow it might be 65% equities, 15% bonds and so on. That's part of active management.

While I'm all in favour of more accountability and transparency in the Irish funds industry, how would you propose that you would compare such a fund against an index-tracking equivalent?

Would there be any need to do anything more complicated than to compare such a fund's return against an index tracker over a long period?

 

[Sarenco]

I suppose it may be a little complicated to compare performance for a mixed fund instantaneously but in the longer term it's actually straightforward

No, it’s not straightforward to compare a dynamically allocated, mixed-asset, actively managed fund with an index or blend of indices. It’s simply impossible.

I’ve tried to explain why that is the case but you clearly don’t understand what financial indices benchmark.

The problem is that people do not understand this properly and the financial industry takes advantage of this lack of understanding.

Index funds have been widely available since the 1980’s - they are hardly a secret.

Sorry but I disagree, you can always compare the performance of one financial instrument against another regardless of the internal complexities.

You’re not really disagreeing with me - you are simply demonstrating your lack of understanding of the pricing structures of life assurance contracts. I am simply looking for transparency.

 

[bankrupt]

it’s not straightforward to compare a dynamically allocated, mixed-asset, actively managed fund with an index or blend of indices. It’s simply impossible.

OK fair enough, let's assume that it's impossible as you say, then how should we evaluate the performance of such a fund? Against what benchmark?

 

[Dave Vanian]

Would there be any need to do anything more complicated than to compare such a fund's return against an index tracker over a long period?

What index tracker would you compare it to?

Any such comparison would need to be comparing the actively-managed fund to something with a similar asset mix / risk profile. Otherwise it's comparing apples with oranges and is useless.

 

[bankrupt]

Any such comparison would need to be comparing the actively-managed fund to something with a similar asset mix / risk profile. Otherwise it's comparing apples with oranges and is useless.

Then I must ask the same question to you as I asked Sarenco, how can we measure the performance of such a fund? What is a suitable benchmark?

 

[Sarenco]

What is a suitable benchmark?

There isn't one - that's the point.

 

[Dave Vanian]

Then I must ask the same question to you as I asked Sarenco, how can we measure the performance of such a fund? What is a suitable benchmark?

There is already a risk scale that is used in the pensions industry. It groups funds into risk categories from 1 to 7, with 1 being the least risky and 7 being the most risky. The scale is far from perfect in that it uses volatility as a proxy for risk, when risk is far more multi-faceted than that. But it's better than the old "Low / Medium / High" choice I suppose.

You can compare all funds available in Ireland that fall into the same risk category. You'll still end up comparing apples with oranges as two different Risk 5 funds may be entirely different in their composition. There just isn't a benchmark as funds are not all investing in the same assets.

In any event, all that such tables will do is show you past performance.

 

[bankrupt]

There isn't one - that's the point.

I don't want to misunderstand your point here (genuinely, I want to be sure I understand what you are saying correctly) - do you mean to say that it is not possible to make an objective comparison between some types of multi-asset pension funds and another (perhaps simpler) investment vehicle? That for example it is not possible to look at a period of 20 years of regular investment and say which of several investment vehicles offered a better return taking all costs into account? I am sure I am missing your point here and would appreciate more of an explanation.

DaveV also makes the point about not being able to compare different funds but I have the same question - when we consider a long term investment why is it not possible make a comparison? Simply because of the risk classification? Surely we can also assign a similar risk classification to any asset class and compare the returns when taking into account all costs?

In any event, all that such tables will do is show you past performance.

It would certainly be nice to have one that predicted future performance but I don't expect that

 

[Dave Vanian]

Surely we can also assign a similar risk classification to any asset class and compare the returns when taking into account all costs?

This is the difficulty. Risk classification is not nearly as tangible as measuring costs. As I've said, the current standard method uses volatility as a proxy for risk, even though volatility and risk are not the same thing.

To give an example, if a fund manager decided to invest the entire fund in a single share, most of us would agree that would be an extremely high-risk fund. If that share (and therefore the fund) went slowly but steadily up in value over a period of years, the current system for assigning risk from 1 to 7 would give it a low number because the volatility is low. Benchmarking such a fund against another fund with a similar risk rating, e.g. a bond fund would be simply wrong.

And how would you benchmark a fund (like the majority of multi-asset managed funds) that have shifting mix of asset classes within the fund?

 

[Ndiddy]

Wouldn't a comparison to a major market indices just show how well or not a fund did against the market norm? No matter the fund asset allocation, active or passive, comparing to acknowledged market like MSCI would show if that particular funds strategy worked over the long term?