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Low costs mean high hurdles for retirees

Alan SteelHow easy is it to pick winners? Take last Saturday’s Grand National at Aintree for instance. The horse I backed at 20 to 1 came in last at 20 past 6.  Big improvement on last year when my selection was so late the jockey was wearing pyjamas.

It seems that picking winners is harder in practice than it sounds in theory.  But then again as I’ve learned over the years, most things are.  And favourites win far less than you’d think. 

The National is the ultimate test of horse and jockey.  A course of over four miles with 30 fences, some over 5 feet high.  It’s so hard a test that in previous years only about 25% of starters manage to last the course.  And if your horse doesn’t win and survives there’s always next year. 

Which is more than you can say for those folks approaching retirement trying to pick a winning system to replace their employment earnings.  Not a good idea to decide what to do next by just sticking a pin in the paper is it? Or be attracted just by the colour of a brochure.

Twenty years ago after the Grand National I wrote an article comparing the race to the various hurdles investors nearing retirement faced in their attempts to pick a winning formula in turning their pension savings into a cash/income system to fund retirement for them and their partners.

I concluded it was even more arduous than the horses and jockeys finishing the National.  At least  they could try again the following year.  Retirees getting it wrong don’t get another chance.  

I recall Professor Charles Handy referring to a family holiday in Ireland, getting lost and asking a local worthy how to get to their destination, being informed to keep going for a few miles, then a mile and a half before a hump back bridge to take a left turn.

It was only after continuing their journey he realised he’d now have to go to the bloody bridge, then turn round, come back a mile and a half and turn right.  Financially, you don’t get any such second chance when you reach a wrong conclusion.

In that piece written 20 years ago I accused Equitable Life of rampant mis-selling to their long term customers. At that time they were the financial favourite of tipsters and punters thanks to a reputation for superior performance and low costs.  They reacted badly to my accusations of fiddling their returns and over-charging their customers. 

They tried to sue and failed.  Three years later Equitable fell at “Becher’s Brook” and had to be destroyed.  Sadly, the retirement plans of their customers were destroyed as a result.

Equally sadly,  this obsession with “low costs” predated the Equitable disaster in the shape of Mutual Life Assurance Societies which then fell by the wayside, one after another. Next it was the turn of Split Capital Investment Trusts. Remember them?  “Safe as Volvos”.  Cheap, too.  What could go wrong? Whoops.

Today thanks to hundreds of extra hurdles introduced in pension changes since Gordon Brown in 1997, and more recently George Osborne, we have a savings system (the Novice Stakes) that makes the Aintree racecourse look like a primary school Easter egg contest.  

Five years ago Aintree was made safer and easier.  Can’t say the same about the complex financial choices facing retirees.  They are much harder.  But the low cost obsession continues.  These days it’s “cheap Passives and Index Trackers” or the more recent odds-on favourites… “Absolute Return Funds”.  Oh dear. 

The bookies’ and punters’ choice, and biggest such fund,  has returned only 15% over the last five years after costs.  Meanwhile, the “Red Rum” of the investment industry,  Invesco Perpetual High Income Fund, has delivered the goods for savers for almost 30 years now.  Over most years its winning streak was masterminded by Neil Woodford,  who a couple of years ago moved to his own stable handing the reins over to stablemate jockey Mark Barnett. 

Over the last five years it’s outperformed the aforementioned punters’ favourite fourfold, and beaten by a length or more any FT100 cheap Tracker. Over the last 20 years Woodford has produced almost three times more in clear profits to his backers. (source Lipper stats 12th April 2017, and after all costs, by the way). 

Despite what I’ve said above, I must warn you that despite Woodford and Barnett’s outperformance over all conditions that’s no guarantee of  future performance.   Can’t wait though to see who the winners are five years from now.  Not sure I’d bet against them though.

Alan Steel is chairman of Alan Steel Asset Management

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.

This article appears under the terms of the DB Direct service


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