Random Thoughts on The City, Wall St & Capitalism

Are you arrogant, basically talentless, a average to poor investor, like to be taken to lunch a lot by brokers, want to be paid a couple of hundred grand a year for underperforming the benchmark index of your choice. Then why not become a fund manager in the UK . It's sleepy, it's long only, it's easy money.You don't even need to try and hedge currency risk if you can't be bothered or don't understand it.No need for fancy derivatives either, oh yes UCITS III let's you use them. But it's all such such a bore. If you started actually trying to make money for investors when would you have time to play golf, or go out, you'd actually have to do some work.

It's common knowledge most fund active managers in the UK underperform their chosen benchmark by whatever time period you choose. There are some exceptions but they are few and include the likes of Anthony Bolton, John Train , Nils Taube, Hugh Young and others. Even a full list of the out performers wouldn't go to a page of A4. There a thousands of funds and a complete lack of talent.It's scary if you do the numbers.

So how has it got like this?

Well all this is down to two things, firstly UK retail investors are basically financially illiterate (unlike their US counter-parts), secondly institutional money, typically pension funds have trustees who are extremely conservative and who know even less about finance than the retail investor, so they rely on those notoriously influential players the investment consultants. Guess who the Fund Managers need to court?

So why does this matter anyway you may say. Even if you have no direct holdings of OEICS/ICVCs or unit trusts. It should matter to anybody who is in a defined contribution (DC) scheme. Otherwise Known as money purchase.The underperforming fund managers are basically robbing you. Sure the bank you work for is also robbing it's clients, the wheel of capitalism is never ending in its parasitic circularity. Its a dog eat dog eat dog world. So what can you do ? Not much actually - which is strange given that people should be worried how their pensions are performing since they are likely to live longer. You could try to negotiate with the trustees to change their provider or asset allocation, but they are unlikely to take you seriously. That's why they have investment consultants stupid. And you know consultants always add value. You can't really do anything about the trustees.Trustees can be as incompetent as they like, when is the last time you heard of a pension fund or endowment fund trustees get fired for breach of fiduciary duty? Well never.

It's peculiar that the FSA doesn't intervene, but that's like the blind leading the blind off the top of a cliff. Anyway in the upside down world of self-regulation , ever wondered who regulates the regulator?

So what can you do as a retail investor and as a member of a DC pension Scheme?

Retail Investors - The Solution

I have two suggestions

• Firstly if you want an alternative buy an Exchange Traded fund or look into Investment Trusts with good managers.

• Secondly if you still want to invest in an OEIC or unit trust , try this D.I.Y Method which is guaranteed to out perform most UK fund managers whilst giving you peace of mind plus you will earn free money.The D.I.Y recipe. Be your own fund manager

1. Find an old EMPTY card board box, an old cereal packet will do.

2. Decide what you want to invest, let's say £10000. Now take out £525 put the remaining £9475 in the box , close it and put it under your bed.

3.Give the money a random name like ' Global High Potential really good Fund' .Choose a benchmark such as headline inflation minus 4% or maybe 6%. The £525 we shall call this the 'initial charge' . This is the cost of initially entering the fund, normally it would go the fund manager. But in this case you can spend this, buy yourself something nice. Just like the fund manager you have'earned' this for your investment expertise.

4. At the end of the year count your money again - you should be overjoyed - you have just outperformed your benchmark . The value of your investment will only have gone down by the rate of inflation, not -4% as well. Congratulations.Easy wasn't it!. Bear in mind most active fund managers are UNABLE to achieve this.

5.At the beginning of the next year take out 1.25% of the 9475. That's another£118.43 you have 'earned', this is called the annual management fee. Repeat step 5 till you run out of money- when you get to the end, although you will have no money left- because the charges have eaten up all the capital at least you spent it yourself.

Now do you think it's hard? So you see as legitimate scams go, active fund management is the best one going in most cases.

The DC Pension Problem

We've established that you are being legally robbed everyday, but if your'e wondering what you can do if you're a member of a money purchase pensions cheme. Well there is nothing you can really do, think of it like this your retirement plans are in the hands of an unholy trinity, docile trustees, the rather opaque world of investment consultancy and incompetent fund managers, and you're stuck in the middle.

RB