EDITOR'S LETTERMerryn Somerset Webb
The dangers of herding
If you wanted to invest for the long term right now, what would you do? Would you a) buy as many bonds as you can get your hands on regardless of the yield; or b) go for a diversified portfolio weighted towards the asset classes that have a history of showing the best long-term growth? My guess is that most MoneyWeek readers would go for option b). But MoneyWeek readers clearly haven’t been running the BHS pension fund.
A quick look at the fund’s accounts to the year ending March 2015 tells you that, “with the assistance of an investment consultant”, the trustees agreed on “a new asset allocation benchmark”. The result? 81% of the assets were shovelled into the bond market, arguably one of the most overvalued asset classes ever (although also one that, to give credit where credit is due, had a fabulous 2014/2015). BHS isn’t alone in doing this: all pension funds are working to “de-risk”, and they are all doing it in much the same way (Matthew Partridge writes in this week’s magazine on how we just love to “herd”).
In 2006, pension funds had around 60% of their assets in equities and 28% in bonds. By 2014, it was 35% in equities and 44% in bonds. That isn’t a good strategy (we also give our thoughts on the high-yield corporate bond market) – and it might end very badly, not just for BHS staff, but those covered by other corporate defined-benefit pensions too. In my interview with pensions minister Baroness Ros Altmann, she explains why investing in bonds isn’t necessarily low risk and offers a few suggestions as to how the pension funds might help themselves.
The good news is that the vast majority of us don’t have to worry about the decisions defined-benefit pension scheme trustees do or don’t make: the upside to not having one of these once-gold-plated pensions is that we are in control of our own asset allocation – and that we are more likely to be buying into the equity market right now than betting the farm on the UK gilt market. With that in mind, you might turn to where we look at Jeremy Grantham’s views on the commodity markets (buy miners to leverage a sharp price spike coming in the next few years) and to our cover story, where Charlie Morris, the investment director of the Fleet Street Letter, explains why it is time to get out of growth and into value stocks.
How? John Stepek offers a few good investment trust suggestions, too. But you might also look up some of the other value funds on the market. I’ve started to look at the small funds from boutique manager Oldfield Partners. Its funds aren’t for everyone (minimum investment €100,000!), but it has a firm value bias, concentrated portfolios, relatively reasonable fees… and interesting recent results: its Global ex-US Equity Fund is up 11% this year so far. A sign perhaps that Charlie might be on to something?