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Holly's Blog: Cheap pensions and stubbed out fags

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News out this week that US giant Vanguard will roll out its SIPP (Self Invested Personal Pension) in the enigmatic timeframe of ‘early 2020’. With an annual administration fee of 0.15% (which is capped at a maximum £375 a year, or everything over £250,000 has no admin fee), this is basically cheap. (Although the marketing will probably say ‘low-cost’!) Add in their ready-made one-stop shop investment solution called the ‘LifeStrategy’ range and you’re looking at total annual costs of about 0.37%. (0.15% for pension admin and 0.22% for managing the investments). That’s a super low £37 on £10,000.

So far, so good. Competitors will be quaking in their boots as this does throw a serious gauntlet down. Fellow US darling RobinHood – pioneer of fee-free trading – is also heading to the UK in ‘early 2020’. I think we have to expect competitors to respond so watch this space.

 

Problem with passive?

There are many great things to say about Vanguard which is a fantastic business. They are my ‘go to’ suggestion for many first-time, or busy, investors. Perhaps then I might offer one contrarian view which I think is their biggest challenge to address in coming years.

 

Vanguard is known for its ‘passive’ management. This means using computers to run the decision-making and transactions – they buy the biggest companies or back the biggest investments in any geography or sector, regardless of human opinion. If HSBC is 6% of the FTSE100, then your FTSE 100 passive fund will have 6% of your money in HSBC. Regardless of any opinion, headlines or sentiment. No posh expensive humans to pay = cheaper products.

 

Here’s the challenge. Regular readers will have heard me talk about ESG (environmental, social and governance factors)– the new marketing buzzword amongst asset managers who are all tripping over themselves to say that this is in their DNA and they’ve been doing this since time began. (To be fair – a few have.) But active managers who exercise discretion have a huge role to play here. They can turn up at company meetings, as part owners, and vote against directors. They can attempt to force change because they have the ultimate weapon of being able to sell. Money talks.

 

As sustainable investing becomes more nuanced and more satisfactory than simply saying “we’re not buying nasty companies” but “we are actively buying and supporting future-focussed businesses” – then passive investing looks flawed in its ability to play. To dig into ESG factors properly – especially in less developed markets – is not something where data alone can do a good enough job today. This needs aforementioned posh expensive humans.

 

Choking Phillip Morris

There is, I think, one sector which has no place in investment portfolios today. Tobacco. The hugely admirable Dr Rachael Melsom sees patients as her day job and runs the UK and Europe arm of charity Tobacco Free Portfolios in her ‘spare time’. She spoke at an industry event we ran this week.

 

The health stuff is obvious. It kills 8 million people a year. And forget vaping as the way forward - there are now 48 reported vaping-related deaths. But that aside there’s regulation and litigation risk everywhere you look. Brazil is suing British American Tobacco and Philip Morris, after similar class actions with $17 billion damages were upheld in Canada this year. (Can you imagine being sued by a country!!) Ciggie butts are the largest incidence of single use plastic pollutants in oceans. Child labour is endemic – kids as young as 14 are working in US tobacco fields for less than $8 an hour. Tobacco violates 14 of the 17 UN Sustainable Development Goals. Repeat to fade.

 

Leave the bleeding heart stuff to one side – it’s very hard to see how anyone can make a case for this being a good investment. I don’t want my money to back these dying companies and I want to invest with a fund manager who puts my money where my mouth is. Disappointingly, there are very few who have come out with an active decision to get rid of tobacco across the board– NEST (the Government’s low-cost pension provider for the workplace market) is an interesting exception. I wonder who will be the first big brand UK fund manager to stub this out?

 

Circling back around to my earlier comments, passive houses cannot by definition lead the charge in sustainable investing and using the collective clout of investors’ money to force change. It will be super interesting to see how we all vote with our feet. Low-cost bundles of investments? Or curated higher-cost investment parcels designed to back sustainable businesses? What do you think? Let us know in the comments below.


Have a cracking weekend everyone.

Holly

 

Thanks to our sponsors at this week’s event. Speakers included Lewis who runs the Hermes Global Equity ESG fund. Euan who heads up stewardship globally for Aberdeen Standard Investments. And Amy who is the MD of Close Brothers Asset Management. Thank you all.

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Comments

We run an ESG passive portfolio which comprises 9 SRI equity and bond ETFs all tracking MSCI socially responsible indices. TER of the portfolio is 0.27% not much more than Vanguards 0.22% for their plain vanilla strategy and we have much less concentration / counter party risk (i.e.not 100% Vanguard risk). Its our best performing portfolio in 2019 up 19% YTD. Surely the first line of activism should be the ESG index providers such as MSCI and FTSE 4 Good, who have huge clout and resources.
06/12/2019 15:24:24
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interesting read on tobacco: British Am Tobacco is a good example of why emotion and stock picking are not good partners. The current dividend yield on BAT is 6.69% - FTSE 100 has barely moved the dial since Dec 1999, but in the same timeframe - mostly post UK smoking ban - BAT has multiplied by nearly X9.
06/12/2019 14:26:48
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Holly, You're right that ESG investing is Vanguard's Achilles' heel. They offer two SRI equities funds but nothing equivalent in other asset classes. But I do believe there must be a middle ground between active and passive, by using an index provider to do the research. Indices will always be imperfect as everyone has a different opinion of what should be included or excluded. A scout through the many hundreds of shareholdings in Vanguard's SRI global equities index fund identified investments in petroleum, gas, coal and mining, aviation, automotive (including high-end sports brands), and casino owners. On top of this were consumer brands whose profitability depends on unsustainable consumption (e.g. clothing), built-in obsolescence (e.g. mobile tech), or companies with a history of contributing to deforestation, human rights abuse or environmental damage. There were even some big-name financial firms with a recent record of poor practice. It should be possible to build a set of indices targeting specific consumer values. As you rightly point out, this kind of research comes at a cost, so it feels unlikely anyone can run a more tightly screened ESG fund to compete with 22bps. Jon
06/12/2019 14:07:18
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I don't smoke and don't agree with smoking but don't lets single out particular investments, it's dangerous territory. Competition is good and so lets hope it reduces some of the gross overcharging by many Platforms and Unit Trusts providers whether passive or active.
06/12/2019 13:54:56
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I think it is fantastic news regarding Vanguard and SIPPs. For me it is not the low charges but the transparency of the charges which is a breath of fresh air. its about time the pension providers and consultants staRt coming clean despite all the efforts of regulators - there is too much cloak and dagger stuff. Thank you VANGUARD..
06/12/2019 12:52:48
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This makes very interesting reading. Let's hope the major wealth management companies recognise that Vanguard represents very serious competition on wealth management costs that can be very steep. Of course Vanguard don't offer financial advise which is very important in relation to SIPP drawdown.
06/12/2019 12:47:44
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Hi Holly I keep hearing that the active investors can 'sell' their positions in a company that doesn't comply with certain ESG criteria, and thereby withholding the capital needed by firms. But in a listed equity, that has little effect in the grand scheme of things, unless they've got a massive holding or sufficient investors all sell, and decline to hold at the same time, thus tipping the point of no support for the share price. This is because there is no new equity capital offered/withheld unless there's an IPO or secondary issue in the offing. Perhaps support for M&A has an effect. If they're bond investors then there's likely to be more new issues that could be turned down, and that would have some bite to it as companies would draw on debt markets more frequently. Really the power is in engagement and academic evidence indicates that does create upside value. The passive firms therefore can and should be engaging and although I believe there's a place for both active and passive, I think investors need to understand that. Let's not confuse allocation of clients' capital with investment firms having major influence over the allocation of capital of the investee companies....they may offer their views on it, but they could also vary and company execs are paid to make those decisions - so incentive structures are the best way to direct. It might be worth elaborating on that more for investors.
06/12/2019 12:47:31
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Thanks, Holly - Interesting read as always your Friday blog. I have been offloading my Fundsmith Equity to Fundsmith Sustainable Equity fund. I do like Terry Smith's strategy, not to mention the returns so far and long term vision but Philip Morris is the only reason, I am trying to move to his sustainable equity fund and glad this found is now with Fidelity platform as well.
06/12/2019 12:43:21
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