FOR THE first time since the 1950s, UK pension funds now own more government securities (gilts) than they do equities.
Everyone knows that equities are nasty, risky things that can go down with a bump when you least expect it and that you never know where you are with them. In any equity portfolio, there always seems to be a wheel falling off somewhere. Gilts, of course, are copper-bottomed and, therefore, bomb-proof.
That was the mindset until one Mr Ross-Goobey pointed out the folly of it all, ushering in the cult of equity and a decades-long infatuation with this sexy new asset class.
We have to remember that pension funds are managed by jolly clever people paid huge amounts of money to do their best for all the happy punters who depend on them for long and comfortable retirements.
So, we can be sure that if pension funds think they should own more gilts than equities, they must be right. Scratch at the surface, though, and you might feel somewhat less convinced.
Let’s think about how we got here. If we are returning to a set of assumptions that characterised pre-war investment thinking, what was that cult of equity all about? For four decades, equities dominated the investment strategies of pension funds and other long-term institutions and, for almost all of that time, the results were thoroughly gratifying for all concerned.
Perhaps the world has changed; perhaps what was right for all that time is no longer appropriate. We are struggling to climb out of recession and the prospects for sustainable growth are hardly encouraging, yet it would be hard to argue that we are any worse off than in the appalling 1970s.
Demographics have evolved, as this baby-boomer knows only too well; pension fund liabilities have shifted from some far- distant target to something much nearer and more tangible. This does argue for a degree of prudence, but surely those clever people were always prudent?
Sadly not. Some of the roots of where we find ourselves today lie in the mistakes of the past. Having grasped the long-term attractions and generally superior returns offered by equities, pension funds did not just become hooked on them – they overdosed to ludicrous excess.
I retain uncomfortable memories of once being given a verbal thrashing by a consulting actuary for having the temerity to wonder whether 100 per cent allocation to equities was perhaps a little gung-ho.
The famous crash of 1987 rattled a few cages, but it was the technology boom and the subsequent bust that really brought the naysayers out in force. Why, they asked, had pension funds become so dependent on such an unreliable asset class?
Alas, all those clever people had no answer; amid all the rearview analysis of what went wrong, you struggle to find any simple admission that all concerned had, basically, lost the plot.
Bring on those consulting actuaries again; suddenly pension funds had to match assets and liabilities, no matter how appallingly low the future investment returns might be or how out of control the funding costs might get. The “New Madness” was born and just like every other fad or fancy, it has gone to excess.
The clever ones tell us by their actions that it makes more sense to own gilts yielding significantly less than the rate of inflation than it does to own assets that not only yield more but also do relate to underlying, long-term economic growth. As sure as night follows day, gilts will lose shed-loads of capital value once yields start to normalise; I don’t know when, but I know it will happen. And this baby-boomer intends to draw his pension for a good while yet; a lot of inflation will flow under the bridge in that time.
The charge, then, is that all those clever people have not been clever at all; indeed, they have been monumentally short-sighted and stupid. When you read that pension funds own more gilts than equities, consider doing the exact opposite.
• Peter Bickley is a consultant economist