Fund 'churn' hammers pension returns

Canary WharfBeware of pension fund manager 'churn'. That is, how often a pension manager buys and sells his holdings. Do it too often and it will cost you dear, long term.

New research from SCM Private claims such behaviour will knock 15% off the value of your pension during just two decades. That's big money many of us shouldn't be handing over to already well paid fund managers.

Shameful fees

SCM Private's research looked at around 1,000 UK pension funds. They discovered an average portfolio turnover of 128% per year. In layman's terms, that means a typical fund holding is kept for only nine months, before being sold on again. Worse still, the average return over 15 years was a measly 4.2%. Not much good when RPI inflation is a good 5%.

All that churn, all that selling, when cheap, no-nonsense index trackers could do the same job at far, far less cost. "Levels of transparency within the savings industry are shockingly poor, both in terms of transparency of fees and transparency of investments," says Alan Miller, chief investment officer at SCM Private. "The FSA and fund management trade bodies should force fund managers to reveal to investors the full costs of rampant buying and selling."

Tracker value

We put in a call to the FSA to respond to Miller's plea; they haven't yet but if they do we'll let you know. But one thing the FSA could do is to incentivise fund managers to take longer term positions in stocks. That means shareholders, fund managers and director/management interests are aligned. That has to mean better businesses long term. Everyone wins.

Well, not quite, and not the City of London. The City makes much of its money on transactional fees (hence all the arguing about the Tobin Tax). Too many of its employees want more churn, more volatility. But ordinary people on modest incomes pay for this, every time.

It's worth bearing in mind that many financial institutions themselves invest a lot of their client money in trackers than many retail investors would believe. So if you have some control over where your pension cash is invested, do look at trackers. They make excellent sense.

Even more so given current annuity rates. New retirees now have pension pots up to five times smaller than they would have received 20 years ago, according to recent research from Cass Business School.
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