As the FT has reported in an email this morning:
Shares in [Meta, the owner of Facebook] plummeted more than 20 per cent in after-hours trading yesterday after Meta said it expected its first-quarter revenues to fall short of Wall Street forecasts because of “increasing competition”, in the latest evidence that it was losing the “attention battle” over users.
It was not an exception though. It also noted that shares in PayPal fell by more than a quarter and Spotify saw its shares fall by 23 per cent in after-hours trade.
There were issues in each case, I admit. But that is not the point. The point is that companies that can see swings in value as sharp as these are not good stores of value, but are being used as such by pension funds.
It also says something else, and that is if entirely foreseeable issues, like competition, can have such a massive impact on the value of these companies then the risk of saving in their shares is not being appropriately priced in these cases.
We pay investment managers small fortunes (and sometimes large ones) to manage risk and what is readily apparent is that they are not doing their jobs properly. Instead, they appear to be following Ponzi schemes since companies like Facebook are built on the undeliverable premise of perpetual growth? In that case, why do states subsidise savings in stock markets through things like pension tax relief quite so heavily just to see the supposed value created disappear in moment?
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interesting typo in para 3 “sued” for “used”…. but I like the former. Maybe it is not a typo!!
One of my regulars I am afraid, I will correct it
Not only tax relief but also compelled to run pension schemes for everyone in your employment through the workplace pensions. I have long been furious that I am forced to participate in this gambling den with my pension schemes. There appears to be no down side for the investment manager but you are warned that the value of your pension can go down as well as up. Well, I don’t agree to that. If my hard earned cash is being directed this way, I would have it that there was no risk to this investment and that it accumulated as a pot for my retirement. I would have it that it is invested in the economy as a whole and paid out as a government pension. But apparently everything must be privatised and run for profit. And the finance industry appears to have this government in their pocket and this government do their bidding. I consider the whole arrangement corrupt. I believe the finance industry have bought this policy and it is enriching them at the expense of us. None of us will have adequate pensions to exist on when we retire because of this. The final salary pension schemes have been closed in most cases and we are only left in the private sector with money purchase schemes which never guarantee the same pension on retirement. What happens if climate change has a severe affect on the value of these companies? What happens if our supremacy over our planet and its resources starts to fail as we loose species after species, our crops fail, our satellites fail from lack of power, we have not made the switch to renewables we need to ……
I am afraid the asset management industry is being “benchmarked” and “consulted” to death.
It’s a long and complex story but the outcome is that all our savings end up invested in the same basket of companies (the “index”) without any regard to the suitability of them as investments. If a company gets big enough it gets into the index and asset managers are forced to buy them.
How we get away from this system is tricky. My first job in finance was with an asset manager and I remember the first piece of advice I was given was “we are not trying to hit the cover off the ball, we just want to avoid getting fired… and collect our fees next year and the one after.” The pressure on everyone to conform is intense and very few will point out that the emperor is naked.
FWIW I do invest in some equities. I choose the companies I buy into carefully, my track record versus the index is dreadful. But, I expect the portfolio to meet my objectives – a steady income in old age. Time will tell.
So what should pension funds be investing their money in instead then?
Meeting the real needs of society
This is a difficult area. The first question is “Should the State have a say in how savings are invested?” I think this is a clear “yes” for three reasons.
(a) Savers need protection from fraudsters. – and this applies to all savings, not just pensions.
…specific to pensions…
(b) Tax advantages offered mean some obligation
(c) Tail risk. Ultimately, the State has to pick up the pieces if things go badly wrong.
So, how much “say”? I am not sure. Instinctively I am against too much State direction of investments but it is key to remember, if you don’t like the rules then don’t save in a pension scheme. What is clear to me is that there is a real need for investment in some areas where over several decades, the market has failed. Here, the State has a duty to do something… and if that means directing savings to specific projects that need doing then it should be considered.
This is key:
[B]ut it is key to remember, if you don’t like the rules then don’t save in a pension scheme.
So, the state can set whatever rules it likes and if people do not like them then they can save elsewhere. It really is that simple
“Savers need protection from fraudsters”.
This is why we need regulation. But regulation in the UK rarely works; whether in banking (Financial Services Authority); Building Regulation (Grenfell); Food (Department of Agriculture and Fisheries); Environment (National Rivers Authority); and so on, and on, and on. At the same time it is a standard media trope that the greatest problem in Britain is with “Red Tape”. Red Tape is acheap term that serves best fraudsters, becuase the use of the obsession is to strip out regulation; which makes life a great deal easier for fraudsters. The Failure happens with such punctilious regularity, like a washing machine on a cycle, that we really ought to ask a simple question: Why? But never do.
Allow me briefly attempt to tease this out a little, because it has all kinds of ramifications. I select one example, but a very perinent and issue long overdue drastic reform. Right now everyone in Government and media is trying to focus attention on Ukraine, and on Russia’s political motives (I will pass here on the problem this gives a badly, politically compromised PM).
It is worth remembering that in 2006 The New York Times titled an article on London ‘A Russian Outpost With More Freedom: Londongrad’, and in it proposed: “By several accounts, London is now home to an estimated 300,000 citizens from the former Soviet Union, a third of them arriving in the last two years. Among them and around them twist hazy connections linking spies and former spies, conspirators, ex-dissidents, rich businessmen — and a few of those from the transcendent class of wealth known in Russia as oligarchs.” In 2019 ABC News titled an article ”Londongrad’: The real-life fight against dirty money flowing into London from foreign countries’, in which it reported: “The National Crime Agency (NCA) estimates that billions of dollars of dirty money are moved through or into Britain each year, according to the UK’s government’s own national risk assessment of money laundering. The NCA itself said: ‘The U.K. is an international financial center, processing trillions of pounds of transactions every year.’
‘Together with the presence of a highly developed professional services industry,’ the agency said, ‘this increases the attractiveness and vulnerability of the UK’s financial system to exploitation by those engaged in money laundering.'” The article goes on to say: “Transparency International, an anti-corruption non-governmental organization, sent ABC News documents that it says identifies an eye-watering £4.4 billion — or $5,654,871,200 — worth of property bought with suspicious money in the U.K.” The article also quotes Richard, from which I have taken this extract: “The UK’s HM Revenue & Customs audit only a few companies a year,’ Murphy said. ‘Their inclination is to ask very few questions of companies that have paid their tax before an application to be struck from the Register of Companies is made, and to make even fewer once the company has been dissolved upon payment of a £10 fee and a voluntary declaration of solvency. Was the trade real? Who cares?’
Then, if the company has dissolved, HMRC is even less likely to ask questions, Murphy added.
‘It’s just too easy to launder this way,’ he said. Bringing money into the U.K. should be hard. As yet it’s not likely to be. And so the laundromat goes round.'”
And so it goes on, and on, and on. Round the world London is, it appears most celebrated now as the ‘Londongrad laundromat’.