Tag Archives: andy caddick

How the investment industry will fall on its own sword, and others will take over

Investments are meant to generate a return – but what happened?

Investors want consistent growth on their investments but few in the industry understand how to produce that. Those who don’t face their demise, whereas those who do, stand to take the spoils.

In many professions there is huge chasm between those are inside that profession’s bubble and those who are not. In politics, if an idea is not being circulated in the Westminster bubble it is not considered to exist. In education, if something has not been deemed worthy of putting on an exam syllabus or the mark scheme, then it is not considered worth teaching. The problem is that with such an insular attitude and so many closed minds, these professions alienate themselves from the real world. The consequences of such mean that we have politicians of all parties who are entirely mediocre, and a large number of school leavers who collect a string of A grades and yet remain unemployable.

The reason I mention this is that the finance industry suffers from a similar malaise. Although investors want to make a large consistent return on their investments, the investment industry in the UK has produced returns on investments which have been worse than monkeys, whilst charging enormous fees. The reason why this is allowed to continue is due in part to a certain level of financial illiteracy, whereby people don’t know where to find the best deal. But the main reason is that the industry is such a stale establishment, that nobody has stolen the show and made a product which blows the others to smithereens.

At the other end of the spectrum to the UK’s finance industry, we have the American technology industry. You have Google, Apple, Facebook and a zillion other bedroom start-ups all intensely competing to innovate and make something which disrupts the market. This has led to an industry which is very good a producing outcomes which benefit society. Could you imagine a world without Google? Exactly. But their dominant position could rapidly be stolen if something better came along. In which case NewOnlineCompany’s products would be better and society would have benefited from them.

The problem is that politicians don’t understand that the best solutions come from real people, educators don’t realise the best learning comes from outside the classroom and that few in the finance industry understand that investors want a net return on their investment. Investors want to make a consistent return year after year, yet few investment firms aim to do so. Most of the investment industry has forgotten that they need to make profits on investors’ money – they are merely wedded to ideas like “modern portfolio theory” (MPT) and “diversification”.

The epitome of this approach is that stock market funds are forced to invest 100% of their fund, 100% of the time. So even if you know the economic forecasts are dire, the stock market is overvalued, it’s crashed 10% today and is probably going to fall another 40% – as a fund manager you still have to hold all your investments in a falling asset class. It would make sense to sell out now, and just hold cash, but you are forced to keep all your money in shares. It’s ludicrous!

So this leads us to the question – how do you generate a positive return, year after year? Nobody can ignore the fact that every asset market is cyclical. Whether your money is in property, bonds or the stock market – these have been all been known to fluctuate greatly. But the important point is you need to be proactive in buying and selling investment funds at the right time. In which case you can earn all the upside during a bull market, and be out during the bear markets.

Investment providers, mangers and independent fund advisers who take this approach and focus on generating an absolute return, despite market conditions, are the future. Those who don’t adapt to this model will fail. This is where St James Place, Aviva and many others are going to be consigned to the dustbin of history.

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Posted by on July 11, 2012 in Trading Ideas


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Could the pensions industry be preventing young people from planning for their longevity?

Young people will have to take greater responsibility for their retirement, but pension providers may actually be discouraging them, writes Alex Clifford.

*Winning ifs Young Business Writer of the Year 2012 entry*

To many young people, getting old seems to be one of those impossible things, like an alien spaceship landing in their back gardens. But across the developed world, it is true that the probability of us living into old age is continually increasing. According to a report from the Department for Work and Pensions, one in six of us should expect to live to reach our hundredth birthday. In the face of such statistics it is clear that young generations need to start thinking about the ramifications of longevity.

A demographic crunch is underway in the UK, in 2008 the Office for National Statistics announced that there are now more people of pensionable age than under-16s, for the first time ever. This means that there will be less people of working age to support an ever-growing number of pensioners. To cope with these shifts the UK government will change the definitions of who counts as a pensioner – there are currently plans to increase the pension age to 66 between 2018 and 2020, 67 between 2034 and 2036, and 68 between 2044 and 2046. But does that go far enough? Given that the state pension already costs 10% of the UK government’s total annual budget, will the government be able to afford the state pension to everyone for several decades?

Employers are less likely to fund pensions in the future as well. Defined Benefit (DB) schemes, where employees pay into a pension scheme and receive a guaranteed income in retirement, are closing to younger members. Shell was the last FTSE 100 company to offer a universal DB scheme to its employees, and this closed a matter of weeks ago.

What this means is that the state may have to be less benevolent to future pensioners, whilst employers are also offering less generous schemes. Therefore the cost of pensions is going to fall firmly on the shoulders of the individual.

Although this is already largely the case today, it could be argued that many baby boomers approaching retirement, have had an easy ride. They have benefited from several decades of benign economic conditions – stock market gains on the back of a growing economy, room to climb the corporate ladder and a tripling of house prices. Many baby-boomers face a reasonable retirement with a state pension, Defined Benefit pensions and home equity in the bank.  However tomorrow, where there will be greater constraints on the government purse and less generous pension schemes from employers, the impetus will shift ever-more towards individual responsibility.

So with this maelstrom of gloomy news, it would seem that now is the time for young people to consider pensions. If young people don’t want to be working into their 70s and potentially longer, they should start tucking money away now. Indeed, Einstein is reported to have said “compound interest is the most powerful force in the universe”. If young people can capitalise on several decades of compounding interest on their investments, then they should expect a much earlier retirement than those who don’t.

But there are certainly limitations to this goal. To begin with, do young people really have enough disposable income to pay into a pension? With the desire for many to get onto the housing ladder, pay off student loans and start families, pensions are likely to be further down the list of priorities. And perhaps a more fundamental question is whether pension schemes are the best way of planning for retirement. In the UK, pensions are a relatively poor investment even before managers take hefty annual fees. A report by RSA, an insurance group, noted that the average annual pension of £16,080 is reduced to £9,900 due to management fees and the effect of lost compound interest. The public has little trust in pensions and rightly so, it would seem.

“After more than 20 years within the financial services sector I have yet to find a product that ticks all the boxes when it comes to retirement planning,” says Andy Caddick, Head of European Operations at IFA International, an independent financial advice firm.

“The industry needs to wake up to the fact that there is more than one way to provide retirement income. Pensions might be going the same way as the dinosaurs, and maybe one question we should be asking is: are our pension funds being managed by dinosaurs?”

If retirement products were to be tailored more appropriately to the individual, managed better, and less overpriced, then they would become more attractive and the impending pensions crisis could therefore be avoided. Young people could recognise the real benefits of investing earlier in their lives and plan ahead.  But given the current state of affairs it would seem that only the most financially savvy can take advantage of worthwhile retirement products. Therein lies the problem, nobody wants to invest into something which will only make their fund manager rich.

Whilst it is true that those who plan for their longevity will be better off than those who don’t, the current lack of saving would suggest something much more severe. It is pointing towards the pensions industry itself as responsible for a future pensions crisis – as the industry’s poor returns will have discouraged young people from saving and ultimately paying the costs of their longevity. This would lead to socially and politically unpalatable scenario.

As life expectancy increases, the stakes become higher, and the responsibility shifts more so towards the individual. Now, there is an opportunity in the marketplace for retirement products which will profit from decades of compound growth and low fees. If these products see the light of day, then young people should look forward to a better future.

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Posted by on February 10, 2012 in Previous articles


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