Brexit is an example of feral finance at work. But it is not the only one. Neil Woodford's now failed activities in the funds management ‘industry' is another one. As the Observer has reported:
The implosion of former star stock picker Neil Woodford's investment empire — which has left hundreds of thousands of pensioners and small investors nursing big losses — has plunged rival fund managers into crisis mode as they try to salvage the reputation of an industry that finds itself under the scrutiny of regulators and politicians.
They added:
The fear among stockbrokers is that the demise of Woodford — who once managed £30bn of savings and was referred to as “Britain's answer to Warren Buffet” — was a near-fatal blow to the public's confidence in the star fund manager investment model and could lead people to stop investing for their retirement entirely.
What they entirely miss is the systemic point, which is that people should have no confidence in the fund management model or, come to that, the vast majority of the assets that they are forced to put their pension funds in.
I first wrote about this in 2003 with Colin Hines and Alan Simpson, then a Labour MP. We suggested that there was an alert active form of pension investing that respected that we called ‘the fundamental pension contract'. This idea was developed further in 2010 when I said:
This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.
As I then argued of private pensions:
This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.
Long ago I linked this idea to the Green New Deal. That initiative would reflect that fundamental pension contract: each generation would, if the Green New Deal was to be in operation, be responsible for building the capital that the next generation needs so that those in work can afford to sustain those now in retirement - which is how all pensions are actually paid, whatever the financial form that they might take suggests.
The existing pension arrangements we have are instead a giant Ponzi scheme. Month in, month out, money pours into the stock market from pension contributions because they have nowhere else to go. And the result is the massive disconnect we have seen over the last decade where stock market values have risen when overall there has been poor (or worse) economic performance, at best. That's a financial bubble in the making, created by feral financiers who know that they are selling a myth that there is anything like the value that they claim exists in the assets that they are promoting.
Now Neil Woodford, one of the prime archi3ects of the myth, has crashed.
The rest of the market is worried that they too might be rumbled.
That will happen. The existing business models of the businesses in which pensions are invested, from banks, to airlines, to the extractive industries, to carbon exploiting consumer products, are all unsustainable. They cannot underpin the value people want in old age - because the business in which their pensions are invested are dedicated to producing enough carbon to make sure there will be no planet most of us can live on by the time we reach old age.
That's why we need a Green New Deal.
That's why tax reliefs on pensions need to be reformed to support a Green New Deal.
Feral finance needs to be constrained not just in the political sphere, but in the financial one too.
To say that we need a revolution based on sound politics, sound finance, sound economics and sound ecology is to state the obvious.
And no revolution will ever be so unthreatening. Unless you're a feral financier, of course. And they will fight.
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The irony of your piece is the reason Woodford failed is he went away from investing in big liquid companies and buying the Shares on the secondary market e.g Diagio, Unilever, Reckitts etc (the ponzi scheme stocks you refer to) and instead chose to invest in start up biotech companies where they depended on Woodford for a source of ongoing funding (the kind of companies you want Pensions to invest in)…the issue with Woodford’s failure isn’t the merits of large capitalised stocks vs start ups but that the Unit Trust structure allows investors to redeem at anytime which is why he needed to own liquid stocks..Neil Woodford’s arrogance meant that he played scant regard to corporate governance and that was he downfall, along with the fact many of the biotech start ups he invested in failed miserably. He will be sued i am sure and deserves to lose his personal wealth as a consequence.
He also chose badly
And what this shows is that markets are not able to support such activity
Hence the need for an active state backed investment bank issuing its own bonds
I think you’ll find I have addressed this issue
Ed note: deleted as this is a trolling account
Jayne County says:
“The irony of your piece is the reason Woodford failed is he went away from investing in big liquid companies and buying the Shares on the secondary market e.g Diagio, Unilever, Reckitts etc ”
Hmmm… You don’t think perhaps there’s more money invested in these sort of companies already than they are worth ? Every one of these secondary market companies is probably currently overvalued which is fine for now….but as we well know from recent experience every time a household name goes down it goes down with a heap of debts and insufficient assets to clear them.
If pension funds are piling money into the stock markets faster than companies can make profits to justify their share prices; and the indications are that this is largely the case, how is that going to end ?
The only way that balloon stays inflated is with government rescues. Including the devices like QE which keep surplus money sloshing about the banking sector. If government is going to have to pick up the tab, government might aswell be putting the money to good use in the medium term on social and physical infrastructure projects and be able to guarantee the inter-generational contract.
City of London and other major casino financial centres are sucking the real economy dry. Pensions have been the cash cow of the pillaging industry since Hanson and White made their fortunes. (Probably they were copying an ‘unsung’ trailblazer). The rules of the game keep changing subtly, but the object of the exercise remains the same.
I expect Brexit will produce rich pickings and the game will go on for a while yet. Good luck, Jayne. Stash your ill-gotten gains carefully or the bigger fish will gobble yours in their turn. Where the hell do you put your personal winnings where they’re safe ? And will they still be worth anything ?
I agree with your central point, but it’s also undeniable that there are a few, very few, “stock pickers” who are very successful. Woodford was one of these, until hubris and greed got the better of him, (see Saturday’s FT for a forensic dissection); Anthony Bolton was another until he thought he could make money in an area of which he had no personal expertise – China. Both of these produced stellar returns. There are a few others. Buffet has been very successful at picking companies. Keynes was a very successful investor. It’s certainly true that most active funds really only enrich the managers and have mediocre performance at high cost, hence the rise of Tracker funds.
I also agree that most “investment” isn’t such, but is gambling on second-hand assets. So should the SE be abolished apart from IPO’s?
The FT Money section had an item about more companies wanting to end their final salary schemes. As they pointed out this offloads the risk from the Company onto the workers. What they didn’t point out was that many companies are doing this, not because of the costs as is often claimed, but because over recent decades the share of profits going to workers has inexorably declined while the share going to managers and shareholders has increased. So diverting money from workers pensions gives managers and shareholders more.
This needs to change too.
Your conclusion is right, I am sure
Are there really ANY outstandingly successful “stock pickers” or are they average stock pickers who have by chance landed on the tail of the distribution curve of returns? If there are very few, is their skill real, or just chance? I suspect that much of history belongs to lucky bullshitters, and I suspect that a lot of stock market geniuses fall into the same category
Hi Richard,
Until the status quo changes – which I guess in reality will take a long time – what do you suggest then that people invest in instead to try and have any hope of generating a pot of money to supplement their state pension on retirement?
For example, what do you invest in for someone so critical of the current set up?
Thanks,
Robin
PS I agree in general with your comments.
I do not trust stock markets
Boringly I am doing gilts and earning no return at all
This is not investment advice
Thanks Richard.
I know it’s not investment advice. I was just curious what you did.
Not in renewables? – why not?
Because I can’t find an easy way to do it…
There are numerous ways of investing in renewable energy funds. This is a useful guide.
https://www.finder.com/uk/investing-in-renewables
Bryan Law says:
“There are numerous ways of investing in renewable energy funds. This is a useful guide.”
And would you suggest picking one with a pin whilst blindfolded or relying on a successful stock-picker like…..say Neil Woodford for example….someone with a very successful track record ?
Just imagine instead of introducing pensions freedom legislation the UK introduced green new deal bonds and allowed annuities backed by them. Missed opportunity.
Agreed
Yes – agreed too.