This is not just an academic question. Heads of The Bank of England, HM Treasury and the FCA jointly chaired a working group of the investment industry great and the good which in September 2021 produced a paper, A Roadmap for Increasing Productive Finance Investment, arguing that Defined Contribution pension funds be encouraged to invest in ‘less liquid, more productive’ investments. Let’s be clear: this is not so much about expanding consumer choice or nudging consumers but about redirecting passive consumer investment.

When I started this firm in 2005, we offered two types of portfolio:

  1. A quantitative solution using low-cost index-tracking equity funds mixed with a risk free asset – a solution for what we called ‘system players’
  2. A ‘diversified wealth management’ portfolio that combined public markets with a richer mix of asset types including particularly private equity – a solution for entrepreneurial investors

We withdrew the second in 2008. We converted a few clients to the ‘system players’ they really were and we let the genuine entrepreneurs seek out a manager more committed to the belief that private trumped public. Our decision cost us nearly one third of our revenues. Because we kept scope afterwards, we have never had any doubt this painful course correction was in the best interests of our clients. The system players have outperformed risk-equivalent ‘replicated’ private returns (a passive proxy for private fund returns) and those who retained entrepreneurial funds on their own account have been variously disappointed and satisfied, which is a true reflection of the wide dispersion of manager skills (or luck) that characterise these funds.

This is not a particularly scientific approach but there is plenty of peer-reviewed research on the well-rehearsed arguments advanced in A Roadmap for Increasing Productive Finance Investment. I see that two experts, familiar with both the theoretical and empirical evidence, have questioned the appropriateness of DC funds investing in the types of investment the authors argue for. I can’t put the counter arguments nearly as well as have Dr Iain Clacher, Professor of Pensions & Finance at Leeds University Business School, and Con Keating, Head of Research for the BrightonRock insurance group. They posted their article on the widely-followed pension blog run by Henry Tapper. For anyone who is interested in the question of private versus public, or system playing versus entrepreneurial investment, I strongly recommend reading the article. Just to make it absolutely clear: the blue text is lifted straight from the Roadmap and the comments on it are written by Clacher and Keating.

I hope the great and the good also read it, particularly Nikhil Rathi, who as CEO of the FCA put his name to the Roadmap.  You are right about one thing, Mr Rathi: ‘Individuals are increasingly responsible for their future financial wellbeing’. And yes, ‘better outcomes and greater choice may be achieved if a more diversified set of investments is available.’ Better outcomes are possible, but not nearly as likely as you seem to think. More importantly, why should we trust a statement so patently out of the FCA’s character as: ‘Against this backdrop, products offering exposure to alternative assets, such as productive finance, can play an important part in an individual’s investments, particularly their pensions.’ What is in the FCA’s character, as many advisers are painfully aware, is much closer to our philosophy: most investors should stick to playing the system, where private returns are already what a public company captures, and leave genuine entrepreneurs to invest like entrepreneurs.