Bad performance from pension fund
Discussion
I've relied on a financial advisor/long standing friend to help with my finances for the past 20 years or so. I have a personal pension plan with a mixture of investment types the vast majority being bonds, the total fund value dropping circa £60K in the last 2 years and £12K in the last two months. After expressing my concern he has suggested "The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket.............." and we are moving some funds away from bonds and into equities. I understand this is quite vague (seems a black art to me!!) but comment from some on here who know what they are talking about would be helpful and give me other opinions........Thanks.
Edited by gra001 on Thursday 2nd January 14:15
Set up a Sipp, mine is with hargreaves lansdown,then you can control/view your investments/funds/shares on line, no trail commission to IFA's either......I did it because I was fed up of the the IFA taking the commission and doing nothing for it ie not switching funds to cash when the market was falling.
Answering the question rather than the merits of advice or self select.
Bonds have an inverse relationship to interest rates in general. As such, with an end to quantattive easing and the likelihood of rate rises at the end of 2014/ start 2015 the outlook for most classes of bonds is not great. I've seen research suggesting 10-15% off capital pricing could be in store. As such I'd be inclined to cut exposures quite a bit.
Equities look reasonably valued on a 5 year view, but at the top of pricing short term. There's likely to be a fair bit of market volatility in the first half of the year. Although rates are poor cash is your friend at present, with tactically going long equity at decent pricing points the real aim. I'd tend to prefer developed markets with decent dividends usually, but emerging markets are looking really good value at present, although better to be a month later than a month early with those blighters.
Bonds have an inverse relationship to interest rates in general. As such, with an end to quantattive easing and the likelihood of rate rises at the end of 2014/ start 2015 the outlook for most classes of bonds is not great. I've seen research suggesting 10-15% off capital pricing could be in store. As such I'd be inclined to cut exposures quite a bit.
Equities look reasonably valued on a 5 year view, but at the top of pricing short term. There's likely to be a fair bit of market volatility in the first half of the year. Although rates are poor cash is your friend at present, with tactically going long equity at decent pricing points the real aim. I'd tend to prefer developed markets with decent dividends usually, but emerging markets are looking really good value at present, although better to be a month later than a month early with those blighters.
Very often pension plans think everyone is 55 years old and set the stock bond mix accordingly.
Bond funds with long duration have dropped drastically (sorry I'm telling you something you probably know).
Part of the problem is fund companies sometimes have too many funds. Long, intermediate and short term each of these funds react differently to interest changes or the perception of future changes.
A fund manager can only trade within his mandate, so....if he is a manager of a long duration bond fund he is VERY restricted in what he can buy.
If you look at the holdings of a balanced fund (a mix of stocks and bonds) where the manager has carte blanch you will find very few long bonds a couple of intermediate some short and hopefully a boatload of variable loans (also known as bank loans) to satisfy whatever mandate he has to follow. maybe a 40 60 mix.
Similarly with a bond fund that is not designated long int or short, they would go for the variables.
Too many funds with narrow mandates that handcuff the managers.
But this does not get your friend off the hook, he took his eye off the ball, it is hardly a secret what has happened with int rates!!!!
What you do from here is based on your age, current assets and target amount.
But get shot of those long bonds unless you are in your teens
NOW.
Bond funds with long duration have dropped drastically (sorry I'm telling you something you probably know).
Part of the problem is fund companies sometimes have too many funds. Long, intermediate and short term each of these funds react differently to interest changes or the perception of future changes.
A fund manager can only trade within his mandate, so....if he is a manager of a long duration bond fund he is VERY restricted in what he can buy.
If you look at the holdings of a balanced fund (a mix of stocks and bonds) where the manager has carte blanch you will find very few long bonds a couple of intermediate some short and hopefully a boatload of variable loans (also known as bank loans) to satisfy whatever mandate he has to follow. maybe a 40 60 mix.
Similarly with a bond fund that is not designated long int or short, they would go for the variables.
Too many funds with narrow mandates that handcuff the managers.
But this does not get your friend off the hook, he took his eye off the ball, it is hardly a secret what has happened with int rates!!!!
What you do from here is based on your age, current assets and target amount.
But get shot of those long bonds unless you are in your teens
NOW.Many thanks for the replies, just a bit of info' on me..........I'm 63 and retired but do not need to use my pension fund and don't see that I will ever need it as I have other investments. My understanding is that if I don't touch it the funds will remain inheritance tax free and pass direct to the kids.
gra001 said:
Many thanks for the replies, just a bit of info' on me..........I'm 63 and retired but do not need to use my pension fund and don't see that I will ever need it as I have other investments. My understanding is that if I don't touch it the funds will remain inheritance tax free and pass direct to the kids.
That explains why you were so bond heavy (age) but growth does not suddenly stop at 60 it just becomes less aggressive (safer)As it will be passed on to your kids, I would still dump the long bonds, discuss with your guy a new mix based on current financial situations around the world. Like UK, Europe and maybe the US.
Look at the market size of each of the regions and get a nicely balanced mix.
If you are not concerned about personal income from this money, there was never a reason to be so bond heavy. It is possible you did not convey this to your man at the time of set up !!!
So just get it adjusted.
If it's of any consolation long bonds had a stellar year in 2011
around 30% gains.This is the pertinent paragraph from my IFA:
"The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket and in order to further spread your investments and risk £20,000 has been taken from both the UK gilt funds being the SSGA over 15 year gilt and Scottish Widows Indexed stock and £40,000 has therefore been invested into the Scottish Widows All Share UK Equity Tracker. £15,000 has been switched from the Newton International Bond fund and allocated to the equivalent International Equity Tracker. Tracker funds have been preferred over managed monies as the fees for these funds are considerably lower and will follow the indexes they are tracking"
"The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket and in order to further spread your investments and risk £20,000 has been taken from both the UK gilt funds being the SSGA over 15 year gilt and Scottish Widows Indexed stock and £40,000 has therefore been invested into the Scottish Widows All Share UK Equity Tracker. £15,000 has been switched from the Newton International Bond fund and allocated to the equivalent International Equity Tracker. Tracker funds have been preferred over managed monies as the fees for these funds are considerably lower and will follow the indexes they are tracking"
gra001 said:
This is the pertinent paragraph from my IFA:
"The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket and in order to further spread your investments and risk £20,000 has been taken from both the UK gilt funds being the SSGA over 15 year gilt and Scottish Widows Indexed stock and £40,000 has therefore been invested into the Scottish Widows All Share UK Equity Tracker. £15,000 has been switched from the Newton International Bond fund and allocated to the equivalent International Equity Tracker. Tracker funds have been preferred over managed monies as the fees for these funds are considerably lower and will follow the indexes they are tracking"
So this guy has discretion over your investments ? "The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket and in order to further spread your investments and risk £20,000 has been taken from both the UK gilt funds being the SSGA over 15 year gilt and Scottish Widows Indexed stock and £40,000 has therefore been invested into the Scottish Widows All Share UK Equity Tracker. £15,000 has been switched from the Newton International Bond fund and allocated to the equivalent International Equity Tracker. Tracker funds have been preferred over managed monies as the fees for these funds are considerably lower and will follow the indexes they are tracking"
The world and his wife was calling for equities to out perform at the beginning of last year and what I would say is where bond markets were valued a year ago you should either have been moving to cash or equities given capital preservation at your age is the single most important target. At least that's what an IFA would assume of a 63 year old. When did he move you into the bond funds and what have your returns been like over the last couple of years.
In my experience IFA's are generally good at structuring advice i.e. make sure you have pensions, ISA's, VCT, EIS etc etc But when it comes to where you are invested they are almost all s
t....purely because they don't have time to be good at it. If they were good at it they would be doing it themselves and earning much more than they do as an IFA.......Cheib said:
gra001 said:
This is the pertinent paragraph from my IFA:
"The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket and in order to further spread your investments and risk £20,000 has been taken from both the UK gilt funds being the SSGA over 15 year gilt and Scottish Widows Indexed stock and £40,000 has therefore been invested into the Scottish Widows All Share UK Equity Tracker. £15,000 has been switched from the Newton International Bond fund and allocated to the equivalent International Equity Tracker. Tracker funds have been preferred over managed monies as the fees for these funds are considerably lower and will follow the indexes they are tracking"
It seems your IFA is a bit late to the party, we were looking unfavourably at Bonds well over twelve months ago, and like other investment managers, looking favourably at equities, in fact we don't use any bonds in our 'balanced/med risk' managed offering. We hold single equities, hedge funds & equity funds in the 'return' part of the portfolio and hedge funds, hard currencies and index options in the 'diversification' part of the portfolio. "The background is bonds are declining in value as the perception is the world economy is in a recovery from the crisis of 2007/08. Money is returning to the stockmarket and in order to further spread your investments and risk £20,000 has been taken from both the UK gilt funds being the SSGA over 15 year gilt and Scottish Widows Indexed stock and £40,000 has therefore been invested into the Scottish Widows All Share UK Equity Tracker. £15,000 has been switched from the Newton International Bond fund and allocated to the equivalent International Equity Tracker. Tracker funds have been preferred over managed monies as the fees for these funds are considerably lower and will follow the indexes they are tracking"
I understand that this is quite a different strategy to other investment managers who typically pull in a greater bond component as the appetite for risk reduces, or client gets closer to retirement or simply gets older.
With our strategy the results have been good, typically capturing 80% returns of the equity market but only taking 50% of the risk.
If your IFA is steering you towards trackers or ETF's this is something you could fairly easily do yourself. I note he is also quoting the old adage that trackers are more cost effective than managed funds which is great and indeed true (in most cases) until the arse falls out of the market (ala 2008) and you slide (unhedged) along with the index you are tracking. It seems you certainly have a few points to consider and to perhaps relay to your IFA. It would appear your investment objectives are geared towards growth for future generations rather than your own retirement, you have also mentioned no need to draw income, both of these elements should steer whoever is managing the money to potentially take on more risk (and potentially more return), than if it was just a pure pension fund per se.
Cheib said:
So this guy has discretion over your investments ?
The world and his wife was calling for equities to out perform at the beginning of last year and what I would say is where bond markets were valued a year ago you should either have been moving to cash or equities given capital preservation at your age is the single most important target. At least that's what an IFA would assume of a 63 year old. When did he move you into the bond funds and what have your returns been like over the last couple of years.
In my experience IFA's are generally good at structuring advice i.e. make sure you have pensions, ISA's, VCT, EIS etc etc But when it comes to where you are invested they are almost all st....purely because they don't have time to be good at it. If they were good at it they would be doing it themselves and earning much more than they do as an IFA.......
Yep, he advises and I accept his judgement, we have been close friends for the best part of 20 years and I have no reason to doubt his honesty and integrity. We brought together 3 pension plans back in 2011 and started a Scottish Widows retirement account (heavily weighted towards bonds) then worth circa £414K, some changes have been made during the last three years, the policy peaked around £420K but since Jan 2012 has dropped to the current £354K.The world and his wife was calling for equities to out perform at the beginning of last year and what I would say is where bond markets were valued a year ago you should either have been moving to cash or equities given capital preservation at your age is the single most important target. At least that's what an IFA would assume of a 63 year old. When did he move you into the bond funds and what have your returns been like over the last couple of years.
In my experience IFA's are generally good at structuring advice i.e. make sure you have pensions, ISA's, VCT, EIS etc etc But when it comes to where you are invested they are almost all s
t....purely because they don't have time to be good at it. If they were good at it they would be doing it themselves and earning much more than they do as an IFA.......IMO its best to hold bonds directly yourself and to maturity. They are only showing a capital reduction because that's the market price based on yield.
If you ladder bonds and hold to maturity then there is no capital loss. (with gilts anyway)
A bond fund is an income fund with a variable price which makes it hard to exit cleanly. If you hold to maturity your own bonds they will exit at par.
Plus you save the fund fee's
Thats my take anyway. Plus if you DYOR and buy corpo bonds at issue there is often a capital gain. There have been a few good ones recently.
IMO you should always have bonds irrespective of what you think the macro situation is.
Japanese bonds have been in a 20yr downward trend. The US and UK are showing similar signs. As is Europe. Deflation is more prevalent than inflation at present. So what makes it a slam dunk deal that rates are on the rise?
Diversification/Asset allocation is your friend. Dont kill it because you are using emotions to guide your investment decisions. That always ends badly.
If you ladder bonds and hold to maturity then there is no capital loss. (with gilts anyway)
A bond fund is an income fund with a variable price which makes it hard to exit cleanly. If you hold to maturity your own bonds they will exit at par.
Plus you save the fund fee's
Thats my take anyway. Plus if you DYOR and buy corpo bonds at issue there is often a capital gain. There have been a few good ones recently.
IMO you should always have bonds irrespective of what you think the macro situation is.
Japanese bonds have been in a 20yr downward trend. The US and UK are showing similar signs. As is Europe. Deflation is more prevalent than inflation at present. So what makes it a slam dunk deal that rates are on the rise?
Diversification/Asset allocation is your friend. Dont kill it because you are using emotions to guide your investment decisions. That always ends badly.
Edited by ringram on Wednesday 1st January 11:41
ringram said:
IMO its best to hold bonds directly yourself and to maturity. They are only showing a capital reduction because that's the market price based on yield.
If you ladder bonds and hold to maturity then there is no capital loss. (with gilts anyway)
A bond fund is an income fund with a variable price which makes it hard to exit cleanly. If you hold to maturity your own bonds they will exit at par.
Plus you save the fund fee's
Thats my take anyway. Plus if you DYOR and buy corpo bonds at issue there is often a capital gain. There have been a few good ones recently.
IMO you should always have bonds irrespective of what you think the macro situation is.
Japanese bonds have been in a 20yr downward trend. The US and UK are showing similar signs. As is Europe. Deflation is more prevalent than inflation at present. So what makes it a slam dunk deal that rates are on the rise?
Diversification/Asset allocation is your friend. Dont kill it because you are using emotions to guide your investment decisions. That always ends badly.
I would like to see any half decent bonds offering a real return. I think you might find they are few and far between.If you ladder bonds and hold to maturity then there is no capital loss. (with gilts anyway)
A bond fund is an income fund with a variable price which makes it hard to exit cleanly. If you hold to maturity your own bonds they will exit at par.
Plus you save the fund fee's
Thats my take anyway. Plus if you DYOR and buy corpo bonds at issue there is often a capital gain. There have been a few good ones recently.
IMO you should always have bonds irrespective of what you think the macro situation is.
Japanese bonds have been in a 20yr downward trend. The US and UK are showing similar signs. As is Europe. Deflation is more prevalent than inflation at present. So what makes it a slam dunk deal that rates are on the rise?
Diversification/Asset allocation is your friend. Dont kill it because you are using emotions to guide your investment decisions. That always ends badly.
Edited by ringram on Wednesday 1st January 11:41
Cheib said:
The world and his wife was calling for equities to out perform at the beginning of last year and what I would say is where bond markets were valued a year ago you should either have been moving to cash or equities given capital preservation at your age is the single most important target.
Since when did 'moving into equities' become consistent with 'capital preservation'...??Cheib said:
In my experience IFA's are generally good at structuring advice i.e. make sure you have pensions, ISA's, VCT, EIS etc etc But when it comes to where you are invested they are almost all st....purely because they don't have time to be good at it. If they were good at it they would be doing it themselves and earning much more than they do as an IFA.......
Agree with this - there job is to understand products not predict markets.t....purely because they don't have time to be good at it. If they were good at it they would be doing it themselves and earning much more than they do as an IFA.......Gra,
Notwithstanding the issue of fund performance and the timing of the fund switches, what caught my eye was your suggestion that you were looking at saving the fund, uncrystalised, so that it might pass to your estate.
If you're a sprightly 63, lets assume that you have a couple of decades infront of you yet. Let's also assume that you are never, etched in stone and written in blood, EVER going to draw on that pension. That makes for uneasy reading and writing because we never know what the future holds, least of all when in retirement.
But, taking that assumption at face value, you have now, a 20 year investment strategy. That should, in theory, do away at a stroke with the concept of less 'risky' investments and talks of yield and returns over a paltry one year window - think long term, think macro. Cliche alert - it isn't timing the market, but time IN the market.
Therefore, if your inclination and capacity for risk is now at odds with your capacity and inclination for loss, that should steer your thinking a little more. It shouldn't provide you with a prescriptive and dogmatic course of action, but it is certainly something to consider.
Your IFA will have taken your circumstances into account and if he IS a hands on type, then there is possibly an argument for suggesting he *should* have seen the dip on bond returns (I assume you're in a bond fund - OEIC etc) and not in individual placements which I am pretty certain, is not possible anyway with the Scott Wid product). Notwithstanding that, I would venture that you think long term and don't worry unduly about short term peaks and troughs but bear in mind that it takes more than a gain of 10% to make good a loss of 10.
On another note, will your pension fund harm you if you need long term care? It would be tragic if you needed care and having deprived yourself for so long, you suddenly had to dip into the fund because the state used the fund as an asset when working out your qualifying income. If that was the case, and if you did decide on a longer term strategy which exposed you to more riskier volatile assets for your estate, that might harm you if you needed to dip into them during a period of future downturn.
I'm an IFA/financial planner so I won't second guess what your IFA has done. But the idea that an IFA is only there to bounce whenever the market is good/bad is an outdated one. IFAs look at most strategies these days on a multi faceted basis. One par tof a client's plan might be akin to an ocean going linner, another, more like a speedboat. Think target, then work backwards to establish what you need to do in order to reach that target - are you going to be happy with the risk and cost, or will you moderate your target?
Finally, you have a decent fund. The SW product is a decent one, however - does it offer functionality that you are paying for but don't need (especially if the money is in fire and forget mode)? Is that the cheapest that you can find? The effect of even the smallest variances oin management costs can make a big difference. Don't be swayed by the AMC figure either, an actively managed fund might be returning nice headline figures but after the total cost of investing is applied, what is the net result to you, compared with being in a basket of trackers that are set up to reflect your financial objectives and needs, and your wishes and feelings?
Notwithstanding the issue of fund performance and the timing of the fund switches, what caught my eye was your suggestion that you were looking at saving the fund, uncrystalised, so that it might pass to your estate.
If you're a sprightly 63, lets assume that you have a couple of decades infront of you yet. Let's also assume that you are never, etched in stone and written in blood, EVER going to draw on that pension. That makes for uneasy reading and writing because we never know what the future holds, least of all when in retirement.
But, taking that assumption at face value, you have now, a 20 year investment strategy. That should, in theory, do away at a stroke with the concept of less 'risky' investments and talks of yield and returns over a paltry one year window - think long term, think macro. Cliche alert - it isn't timing the market, but time IN the market.
Therefore, if your inclination and capacity for risk is now at odds with your capacity and inclination for loss, that should steer your thinking a little more. It shouldn't provide you with a prescriptive and dogmatic course of action, but it is certainly something to consider.
Your IFA will have taken your circumstances into account and if he IS a hands on type, then there is possibly an argument for suggesting he *should* have seen the dip on bond returns (I assume you're in a bond fund - OEIC etc) and not in individual placements which I am pretty certain, is not possible anyway with the Scott Wid product). Notwithstanding that, I would venture that you think long term and don't worry unduly about short term peaks and troughs but bear in mind that it takes more than a gain of 10% to make good a loss of 10.
On another note, will your pension fund harm you if you need long term care? It would be tragic if you needed care and having deprived yourself for so long, you suddenly had to dip into the fund because the state used the fund as an asset when working out your qualifying income. If that was the case, and if you did decide on a longer term strategy which exposed you to more riskier volatile assets for your estate, that might harm you if you needed to dip into them during a period of future downturn.
I'm an IFA/financial planner so I won't second guess what your IFA has done. But the idea that an IFA is only there to bounce whenever the market is good/bad is an outdated one. IFAs look at most strategies these days on a multi faceted basis. One par tof a client's plan might be akin to an ocean going linner, another, more like a speedboat. Think target, then work backwards to establish what you need to do in order to reach that target - are you going to be happy with the risk and cost, or will you moderate your target?
Finally, you have a decent fund. The SW product is a decent one, however - does it offer functionality that you are paying for but don't need (especially if the money is in fire and forget mode)? Is that the cheapest that you can find? The effect of even the smallest variances oin management costs can make a big difference. Don't be swayed by the AMC figure either, an actively managed fund might be returning nice headline figures but after the total cost of investing is applied, what is the net result to you, compared with being in a basket of trackers that are set up to reflect your financial objectives and needs, and your wishes and feelings?
There is a multitude of good advice here so I won't repeat.
For a pension fund though, especially within this age group is naturally going to be more risk adverse (from an advisors point of view). However even with fixed income funds like ours are producing 8.25% (fixed) p.a. at a 'very low risk' level and 12% variable with a 'low-medium' risk (I would point pensions in the former direction). So I would suggest there are many options that you have to help counter your current losses - I'd be tempted to comment the boat has sailed slightly with equities at the moment though.
For a pension fund though, especially within this age group is naturally going to be more risk adverse (from an advisors point of view). However even with fixed income funds like ours are producing 8.25% (fixed) p.a. at a 'very low risk' level and 12% variable with a 'low-medium' risk (I would point pensions in the former direction). So I would suggest there are many options that you have to help counter your current losses - I'd be tempted to comment the boat has sailed slightly with equities at the moment though.
Yes, I think that the recent good economic news has certainly been priced in over the past few months, maybe even the past year. Depending on what still might happen within the Eurozone (keep your eye on France?), a contrarian investor with a suitably leisurely investment window might argue with some justification, that dipping in to the bond market whilst the price is low might still pay dividends, if we see another flight to quality in the foreseeable future.
Guys, thanks again for all the comment, some I understand the rest goes overhead. I have been, and still am a cautious investor and I'll arrange a meeting with my IFA, print this thread out and discuss with him at length. I've stayed away from high risk, I'm prepared to play the long game but the losses just realised, to me, seem a big hit and not reflective of my cautious approach.
Ginge, your "20 year investment strategy" needs to be investigated. The pension is only a part of the portfolio and it doesn't appear to be sufficient to take investment action and then leave well alone. If constant monitoring is necessary I certainly do not have the knowledge to interpret the market and make decisions and some of the comment here suggests that IFA's don't either or can't be expected to.
Ginge, your "20 year investment strategy" needs to be investigated. The pension is only a part of the portfolio and it doesn't appear to be sufficient to take investment action and then leave well alone. If constant monitoring is necessary I certainly do not have the knowledge to interpret the market and make decisions and some of the comment here suggests that IFA's don't either or can't be expected to.
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