Newspaper article The Evening Standard (London, England)

Hyperactive Hotshots Who Churn Up Our Pension Pots

Newspaper article The Evening Standard (London, England)

Hyperactive Hotshots Who Churn Up Our Pension Pots

Article excerpt

Byline: ANTHONY HILTON

CHRISTINE Farnish, the recentlyappointed Director General of the National Association of Pension Funds, grabbed headlines last week when she said at the Stock Exchange stamp duty conference that the tax cost fund members pound sterling8000 each from their pension pots on average.

But she also disclosed how pension funds buy and sell at a furious pace.

Back in the 1980s it was accepted wisdom that pension funds had long-term liabilities and so had a matching policy of holding shares for the long term.

Then the average was five years. Now it is two.

This should not please either trustees or members of pension funds. The long-term growth rate of equities with all income reinvested was between 5% and 6% over the 20th century. It follows that it pays to be patient and active dealing badly damages performance.

Stamp duty at 0.5%, stockbroking commission and the spread between buying and selling prices mean that each transaction must cost at least 1% in charges. It may not sound much but it dramatically worsens the compound growth rate. So it is best to buy and hold.

No one is quite sure why there has been this marked trend to hyperactivity.

It is, however, doubly absurd that investment managers should be churning pension fund portfolios. Not only should they take a long-term view, but studies show that 80% of the return from shares comes from dividends, not capital growth. Dividends are much more stable over time - there is much less need to job in and out.

Though it is often damaging for the client, churning is easier than it once was. It is now possible to sell large baskets of shares in moments rather than weeks. There has also been a substantial shift away from pension funds employing elderly, staid in-house investment managers. …

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