Enabling investment in productive finance - Consultation Response

On 17 January 2022, ShareSoc and UKSA submitted a joint response to the Department for Work & Pensions November 2021 consultation “Enabling investment in productive finance – proposals to remove performance-based fees from the charge cap” where we made these points:

We would like to register our deep concern about the suggestions in this consultation paper.

We are seriously concerned that the DWP has failed to think these proposals through. The Ministerial Foreword says, for example, “In the last few months, the government, alongside industry and regulators, has made significant steps towards addressing the barriers to investment in long-term illiquid investments in the UK. We would prefer the DWP and the regulator to speak also to those who are likely to question the wider consequences for pension savers, such as UKSA and ShareSoc, and not just to those who have a vested interest in the approval of such fee structures.

This whole idea from the DWP sounds to us like something that has been put forward by members of the fund management industry and advisors to pension fund trustees to allow them to improve their own profitability.

We made 3 key points:

Firstly, fee structures in general are notoriously complex and usually disguised, nearly always confusing consumers to the extent that they are unable to assess whether the scheme offers value for money. Indeed, the suspicion often arises that the complexity of fee structures is designed to mislead consumers. Performance fees are even more complex.

Secondly, annual performance fees offer a free option to the manager. Even a strategy driven by dartboard will have some volatility which drives the performance positive or negative. If negative, the manager suffers no direct losses, if positive, the manager takes a fee, so the fee structure has option-like characteristics. We note with serious concern the suggestion that ‘clawback’, which would mitigate the optionality, could be banned.

Even if there is a hurdle, this will merely provide an incentive for the manager to leverage the exposure, leaving pensioners with even greater risk.

The proposed system seems weighted towards incentivising managers to take on greater risk – at no meaningful risk to the manager but at significant risk to investors.

Thirdly, there is no strong evidence that management of any kind can provide superior performance in the long run, as argued in a series of articles by Jonathan Ford in the Financial Times.[1] Furthermore, the recent demise of the Woodford Equity and Income Fund, which has left many private individuals who were saving for their futures seriously out of pocket, is a salutary reminder of both the myth of the star fund manager and the dangers of putting investors’ savings into illiquid assets. This is particularly true when the investors (i.e. the members of a DC pension fund) may have little understanding of the assets in which their money is being invested and no idea of the risks.

[1] See e.g. “Private equity returns are not all they seem”, Financial Times, September 15 2019, arguing that ‘Public Market Equivalent’ figures are not so flattering for private equity. “A large study conducted in 2015 by three academics looked at nearly 800 US buyout funds between 1984 and 2014. They found that before 2006, these funds delivered an excess return of about 3 per cent per annum, net of fees, relative to the S&P 500 index. In subsequent years though, returns have been about the same as on the stock markets. A study of 300 European funds produced similar results.” https://www.ft.com/content/2812c2c6-d634-11e9-a0bd-ab8ec6435630 . See also https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3250315 which finds that funds with performance fees underperform those without.

The consultation paper can be read here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037175/enabling-investment-in-productive-finance.pdf

Our response can be downloaded here Enabling investment in productive finance 2022-01-17 FINAL[1]

Cliff Weight, Policy and Campaigns Director, ShareSoc.

Post Date: January 21, 2022

Group description:	Our group is interested in sustainable investing and our goal is to identify and evaluate businesses that will thrive through innovation and their transition to a ‘One Planet Economy’. By leveraging the skills of group members, we aim to deeply understand these businesses, particularly focusing on how they develop long-term valuable benefits for their customers. Each year, we plan to evaluate around seven businesses to identify opportunities where our valuation exceeds the market price. A successful outcome is defined as achieving a compound annual growth rate (CAGR), including dividends, of 10% over a decade.
Meeting Type/Venue:	Meetings are in-person in a pub near to Waterloo station in London.
Meeting Frequency/Timing:	Meetings are bi-monthly on a Monday from 10:45am to 4:30pm. Members are expected to also pay for their own lunch which secures the group free use of a private room in the pub. The cost is expected to be £35-40 per person, per meeting, in addition to your SIGnet membership fee.

Group description:	SIGnet Taunton is a new group with around 10 keen members at present, with a range of investment styles and experience. We welcome new members.
Meeting Type/Venue:	In person meetings at a golf club near to the centre of Taunton.
Meeting Frequency/Timing:	We meet on the first Monday of every month at a golf club near to the centre of Taunton, 11am until 3pm with a lunch break.

Group description:	An online group for those who are new to investing, or have only been investing for a few years. Including topics such as: – What is a share or a bond, why and how to buy them. – Comparing funds, unit trusts, Investment trusts and exchange traded funds. – Portfolio management and diversification. – ISAs, pensions, SIPPS and how to save tax. – How terms such as PE ratio and dividend yield are used to value a share. – How to use technical analysis or charting.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Monday of the month at 7:00pm.

Group description:	An online group for those who already have some experience in investing. Covering topics such as finding companies to invest in, financial statements and ratios, valuation / margin of safety, analysis of companies and investment trusts and exchange traded funds.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Wednesday of the month at 7:00pm.

Group description:	The Equity Income Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on dividend paying Investment Trusts, though there is also discussion around individual shares.
Meeting Type/Venue:	Meetings are held online.
Meeting Frequency/Timing:	Meetings are held every 6 weeks on a weekday between 7 and 8:30pm.

Enabling investment in productive finance – Consultation Response

One comment

Leave a Comment Click here to cancel reply.

Group description:	A welcoming group open to all types of investors. Typical meeting content is to have a deep dive presentation on a topic selected by the participants and a session on buy/ sell/ key lessons learnt last month.
Meeting Type/Venue:	In person at a friendly pub close to Piccadilly Circus
Meeting Frequency/Timing:	Monthly during the evening on the first Wednesday of the month.

Group description:	All levels of experience welcome. A typical meeting agenda includes: – Macro Environment – Trades: Members review existing positions and identify securities with promising TA entry patterns or setups and with suitable risk/reward. Any security, long, short, futures, options may be considered. The convener takes actual positions in trades and maintains his own detailed ledger, accurately measuring performance of individual securities and cumulative activity. Members are notified by e-mail prior to the entries or exits that are decided upon. Following each meeting an updated copy of the ledger is circulated together with the next meeting agenda. Members may wish to maintain similar ledgers of their own but there is no obligation to do so. – Technical Analysis: Techniques and systems used in trades. Members can request discussion of particular aspects of TA.
Meeting Type/Venue:	Online via Zoom
Meeting Frequency/Timing:	The first Tuesday of every month from 7 to 9pm

Group description:	This group was set up as a forum to discuss companies in detail, each company is introduced by a member and discussion may last one or two hours. Membership is by invitation only.
Meeting Type/Venue:	The group meets at a venue in Waterloo, London.
Meeting Frequency/Timing:	Meeting on Monday mornings at two month intervals.

Group description:	Group focused on active investing, primarily in small / medium cap UK equities.
Meeting Type/Venue:	Regular Zoom meetings interspersed with occasional face to face meetings and social activities in the North West.
Meeting Frequency/Timing:	Monthly on Saturdays at 10am.