You aren’t saving enough. How do I know? Because fund management companies keep telling me so.
My inbox is jammed with press releases from them. “Is saving half your age into your pension enough?” asks one. Answer: No. Current auto-enrolment numbers are “simply not enough”, says another. “One in four women over 50 have less than £5,000 in their pension pot,” screams a third. Oh, and “two-thirds of people aged 50-65 are undersaving for their retirement,” and so on and so on.
You get the picture. It’s tinned soup and staycations all the way for you forever. Pandemic or no pandemic, you are not going down the Nile. Awful, isn’t it? I’m not convinced it is.
There are two things to remember here. The first is that fund management companies grow in two ways: by performing well (so their assets under management grow naturally) and by encouraging you to give them more of your money to manage so their income rises without the pesky problem of having to perform well (all fund managers charge you a percentage of your assets under management).
The upshot of this is that one of the industry’s main marketing strategies has to be the constant release of the kind of statistics that keep you in a state of perpetual anxiety about whether you have or have not saved enough.
The second is that there is a very good chance that you are saving enough, with the caveat that everyone has a different “enough”. In the UK almost everyone in work is auto-enrolled into a pension, with 8 per cent of their salary going in every year.
That might not seem enough to fund management marketeers (nothing will ever seem enough to them, I suspect). But if things go mostly OK in the market — say 4 to 5 per cent average annual growth — that will mean the average person on the average salary ends up with about £200,000-plus in their pot.
It’s not private jet stuff, but add it to your state pension and you have a base income of around £18,000. We are also saving plenty outside our pensions. UK residents put £75bn into 13m adult Isas in the 2019-20 tax year — £7.1bn more than the year before. The number of Lifetime Isas, from which you can withdraw cash for house purchases, more than doubled to 545,000. There is now £620bn in UK Isa accounts.
All this might begin to explain why, despite the best efforts of the industry, only 16 per cent of Generation X (41- to 55-year-olds) say they are concerned about being able to live comfortably in retirement. There’s a similar situation in the US where, despite relentlessly downbeat messages from the pensions industry, 80 per cent of US retirees say they have enough money to “live comfortably”.
Still, assuming you are one way or another saving “enough” or at least what you can, maintaining calm in the face of their marketing is only the beginning of your battle with the industry. The next part is attempting to make sure that the fund managers messing with your head do at least a reasonable job of managing your money once they have wheedled it out of you — and that they don’t take too much of it for themselves along the way.
The question of cost is ongoing. Nearly all fund managers still charge too much nearly all the time (check their margins) and the extent to which they do so really matters. Invest £5,000 a year, get a return of 5 per cent and pay 0.5 per cent in management fees and 30 years later you will have £320,820. You can fiddle with these numbers on the FT calculator here. Make that a 1 per cent fee and you’ll have £291,000.
You could argue that it doesn’t matter what you pay as long as you get outperformance. I’d argue that you can’t know when you commit to pay for a fund what kind of performance you might get so it is a slightly circular argument. Given that cost is the only known variable when you buy, you might as well go for low cost over high cost. Follow that to its logical extreme and you will also think that you might as well just buy passively run funds, which are generally cheaper than active ones.
Look at the US and that view seems vindicated. Over the past five years 75 per cent of large-cap US funds have failed to beat the S&P 500 and last year 60 per cent of them underperformed, even though active managers are supposed to thrive in a crisis. Why?
Over the past decade the top performers in the US have been the tech mega caps, such as Apple, Alphabet and Amazon. Thanks to their size, these are also the top holdings in all passive funds, hence the excellent performance of said passive funds. Active funds that were also (quite rightly) holding these will have underperformed passive funds due to their fees. Active funds not holding them will have underperformed simply because they weren’t holding them. There has been little way to win.
Things have been different in the UK. Over the past five years its mega companies have been a bit droopy, due in the main to their old-fashioned value bias (Shell, BHP and BP all feature in the top 10 in the FTSE 100). So active managers that have not held them — but held, say, mid caps instead — have easily outperformed. According to AJ Bell, 85 per cent have beaten the average tracker over the past 10 years. That’s why advisers often tell investors to go passive in the US and active in the UK. Good advice.
Or at least it was good advice. Something might have changed. Look at the past few months. So far this year 60 per cent of active fund managers have outperformed in the US. Last month, 70 per cent did.
The reason? As the world reopens and inflation is upon us, big tech is no longer outperforming: mid-caps are and so is anything with a value bias. That suggests that on your way to “enough”, you might want to consider a major change to the investing styles within your portfolio.
Go active in the US. If the market is no longer to be led by 10 to 20 huge growth stocks, there will be much more scope for active managers to outperform. And shift a bit more to passive in the UK. If big commodity, financial and pharmaceutical stocks are about to outperform here, there will be less scope for active managers to outperform the index. All change.