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Beware the herd rushing in

Don’t be fooled by ‘cheap, safe bets’

Alan SteelWhen I started out as an IFA in 1973 only a minority of savers owned shares. These were the days of safe final salary pension schemes and, for most long term investors, with profits savings policies.

Experts in the financial pages decreed that with profits bonuses from mutual insurance societies were unbeatable because they were ‘cheap as chips’ and all surplus profits went to policyholders.

How actuaries calculated these bonuses was impossible to fathom while smoke and mirrors disguised the charges. One company, which had six with profits pension policies maturing in the mid 1970s, realised that if they dipped into their pockets and declared “extra: bonuses , their maturity values would top performance tables and lead to oodles of new business. It did. Other mutuals were forced to compete. As a consequence by the 1990s, actuaries’ cupboards were becoming bare.

The rest is history. One after another the mutuals had to be bailed out. And with profits became without profits remarkably quickly.

Next up was Equitable Life, a mutual with a difference. The darling of media experts from the mid 1980s to the late 1990s, especially after another unsettling stockmarket crash in October 1987, the safe with profits purveyor Equitable Life could do no wrong. Remember those commercials: ‘It’s an Equitable life, Henry’?

Thousands piled into its with profits pension plans. Not only was Equitable a mutual but in addition, we were assured, its investment prowess was outstanding and cheap. Very very cheap, in fact, thanks to the firm not paying commissions to ‘nasty’ third parties.

Remember what happened ? Despite public warnings from yours truly in April 1997 that Equitable was an elaborate con trick, its media exposure attracted increasing volumes of new business until 2000 when it collapsed overnight, destroying the retirement plans of a few hundred thousand families.

Around the same time another “cheap safe bet” –  Split Cap Investment trusts (who thinks up these names?) – were promoted by experts in the uncertain investment world, post-crash.

“Cheap” and “as safe as a Volvo”, said media experts. Fed up with risk? Looking for high secure income?

Well, you know what happened next. The regulator at the time, the Financial Services Authority, estimated investors lost more than £620 million.

So what are the darlings of media experts these days?

Come on down ‘Index Trackers’. They’re cheap, do you know, and backtesting says that average funds don’t beat them.

Who wants average I wonder?

If not them, it’s Absolute Return funds. Nice and safe they say.

Have you looked under the bonnet ? Studied their performance these last five years of investor and regulator worries? Go check for yourself.

There’s an obvious trend here. Do you see it? Cheap, allegedly hard to beat, herd rushing in, just as they did with previous “safe bets” in the last 50 years.

Colin Powell , former US Secretary of State once said….. “Secrets of success are easy…it involves preparation, hard work and learning from failures”.

Couldn’t put it better myself.

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

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