'Oscars' just a bad joke

THE pension fund trustees who employ Britain's fund managers to run their money may have derived less entertainment than the City did from the ceremony this week in which 'Oscars' were presented to the best of the City's investment analysts.

In this annual event the investing institutions vote for the analysts whom they think have provided the best research and given them the most useful and profitable ideas in the previous 12 months. The votes are aggregated and prizes given.

No one can argue with the principle but in practice it is a bad joke on the client. If you look at the results of these investment managers and how they have invested pension fund money over the past three, five or 10 years, there is no evidence of either skill or the application of good ideas. Because that sounds a bit harsh, I should stress that it is a scientific, not a subjective, judgment.

Research by WM, the Edinburgh-based performance measurement company that charts the investment behaviour and results of more than half Britain's pension funds, shows that over the past three, five or 10 years the performance of pension funds in aggregate has been a fraction of 1% better than the performance of the FTSE All-Share index.

Over three years it has been 0.4% better, over five years 0.6% and over 10 years 0.1%. This, however, is before the deduction of charges, which at a minimum are 0.2%.

What this tells you is that the net result of all that fund manager skill and all those analysts' good ideas is a failure to deliver a better return than the FTSE All-Share index. It is proof positive of the classic joke that a monkey with a pin and a list of shares will beat the average fund manager.

However, it is not funny because if analysts did show decent creativity and if fund managers displayed an iota of skill, pension fund returns could be so much better.

In the past five years, for example, while the All-Share index fell 1.1% and the FTSE 100 fell 2.7% the FTSE 250 rose 6.6% and the FTSE Small-Cap rose 6.4%. Had the fund managers had real skill and had the analysts been offering real ideas as opposed to peddling what suited the corporate finance departments of the banks that employed them, they would have tapped into these opportunities for growth. That was where the potential profits lay but they missed them.

The same sadly negative conclusion can be reached from slicing the WM data another way. In its review of the returns of all the pension funds for 2003, it charts how much the different funds made from their holding of UK equities. This shows that although they have invested hundreds of billions of pounds, it all made virtually the same return.

The total range across the universe was between 19% and 24.5%. But well over half the money generated a return between 22% and 24%. This would suggest that they are all of a similar level of skill - or, for that matter, mediocrity.

Given the opportunity to differentiate themselves - which would have been shown by a much wider range of returns - they failed to rise to the challenge.

No one mentioned any of these issues at the awards ceremony. But the reality is of a highly paid service industry which in far too many cases is failing to add value. No amount of showbiz glitz - with presentations from Greg Dyke and Michael Grade - can conceal that for much longer.

Over-rated

BANK of England Governor Mervyn King has stated as his ambition that the work of the monetary policy committee should come to be seen as boring, and one has to say that the sooner he achieves this objective the better.

It really is quite absurd how much time is devoted by the City's economists and commentators in the media to predicting whether or not interest rates will stay put or go up in any particular month and by how much.

It has to be a pretty pointless exercise. Everyone knows interest rates are trending upward and are likely to continue to do so for some time. Whether they move this month, next month or the one after makes virtually no difference to anything.

There are no end of serious economic issues in the world: overheating in China, oil prices, global overcapacity, the prospect of mass immigration, offshoring, sustainability of the American recovery, conflicts between globalisation and protectionism, to name some of the most obvious. Yet such things get debated only occasionally while all the real effort goes into reading the interest-rate tea leaves.

As economists, they ought to know this is probably not the most productive use of scarce resources.