Weekend reading: Why is Nest making active decisions about worker’s pensions?

Good reads from around the Web.

I believe humans are causing climate change. There is overwhelming consensus among scientists. Those who argue otherwise almost invariably come from a certain demographic, who I won’t name because I told reader @mathmo I’d try to be more sparing with labels.

Suffice to say, they might as well argue against gravity.

If Einstein wants to argue with scientists¹ about gravity, I’m interested. If a middle-aged Top Gear fan wants to argue with scientists about climate change, they can do so elsewhere.

Liberal Snowflake credentials safely re-affirmed then, let me get to my own indignant outrage.

Why on earth is the government’s workplace provider Nest making active investment decisions based on its employees’ opinions about climate change?

Nest knows best

In a short interview last week, Nest’s director of investment development explained to Share Radio that it had identified climate change as a key risk to returns.

According to The Guardian, the pension provider is therefore shifting around 10% of its members’ investments into a new climate change fund that dials back on fossil fuel firms and favours renewable energy:

Nest is now looking after the pension pots of more than four million UK workers, investing £1.5bn on their behalf, and has signed up more than 290,000 employers.

These numbers are expected to increase markedly over the next few years, making Nest a major shareholder and, it hopes, a difficult voice to ignore.

Why is Nest making such decisions for its members? Why does it need a voice? Why is it not just investing in tracker funds?

As we all know around here, most active funds fail to beat the market. Why is the default option for auto-enrolled workers not just a cheap and effective global index fund, paired with a bunch of gilts?

Climate change is hardly a hidden risk. Even Exxon Mobile’s new chief executive has reiterated that behemoth’s calls for a carbon tax to help tackle it.

The market price of Exxon, Shell, BP, and other fossil fuel firms should reflect these known risks – as well as the potential rewards of having vast reserves of a super-potent fuel.

What do Nest’s decision makers know that the market does not? Nothing, I would suggest. As far as I am aware they are not drawn from the sliver of proven billionaires who’ve made their fortunes reading the market’s runes.

They are no doubt perfectly decent salaried employees, doing what they think is right. I think they’re getting it very wrong in the process.

I agree environmental degradation is a huge threat. But the market will determine over the next couple of decades whether the reserves of big oil companies and the like will end up ‘stranded’ and left in the ground, and if so which alternative energy will take up the slack.

My own hunch is solar, but I wouldn’t bet four million citizens’ retirements on it.

Whose retirement is it, anyway?

Incidentally, we get a lot of emails from people who want to invest passively but don’t want to invest in, say, big oil companies, or banks, or bomb makers.

We’re overdue an article on this. I understand the thinking, even if I’d suggest your views are perhaps better expressed outside of your portfolio. But the point is it’s your personal decision.

I can’t find recent figures, but as of 2013 the stats showed that 99% of Nest savers were in the default fund. These people are not making an active choice to bet against the market on fossil fuels. I doubt most realise their pension provider is, either.

Pension auto-enrollment is a great initiative, but making these active decisions risks undermining the whole project. Tracker funds exist and they do the job best for the greatest number of people. It’s maths.

I think the government should go to Vanguard, Blackrock, and the other leading tracker providers and play them off against each other to get a special deal for bringing four million new customers to the table.

Nest should focus on educating and encouraging savers (a very valuable role) as opposed to playing George Soros – or trying to change the world at the risk to its savers’ retirements.

From the blogs

Making good use of the things that we find…

Passive investing

• What if you know nothing about investing? – The Escape Artist
• Are inflation-protected bonds necessary in a mostly stock portfolio? – Oblivious Investor
• The ‘too hard’ pile – A Wealth of Common Sense
• Doing the right thing for the wrong reason – Abnormal Returns
• Unenviable – Humble Dollar

Active investing

• Learning to be a good loser – Cullen Roche
• The difference between a moat and durability – Gannon on Investing
• Halfords yields 5%, but its go-faster stripes have fallen off – UK Value Investor
• One more reason to do your own investment research – The Value Perspective
• Why growth can be a killer – Oddball Stocks

Other articles

• Weathering a low-growth investment outlook – Vanguard
• UK market forecast to pay over £100bn in dividends for first time [Factsheet] – VT Munro Fund
• The employment income to net worth ratio – The Finance Buff
• What is happening to the world? – 3652 Days

Product of the week: It’s time to lock yourself into a 10-year mortgage, says The Telegraph. It recommends First Direct, which charges 2.49% if you’re borrowing 60% of a property’s value and 2.89% for 80% loans. While very low, these rates are still well above the cost of two-year mortgages. But they provide certainty, in an increasingly uncertain world.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.²

Passive investing

• 5 ways passive investing is actually quite active – Bloomberg
• Don’t let a bad process derail your investments – Bloomberg

Active investing

• How money-losing Snap could be worth so much – New York Times
• John Lee: Independents add value to your portfolio [Search result] – FT
• Some very high income funds have delivered at the cost of capital returns – Telegraph
• What to make of these twice-in-history S&P valuations? – Bloomberg
• Buffett: US stock market is not too expensive – CNBC
• More than six in 10 asset managers are bored at work [Search result] – FT
• By the Bible: New fund “backs arms firms, avoids brands promoting gays” – Telegraph

Other stuff worth reading

• Merryn: My big Budget hope? Scrap the pensions taper [Search result] – FT
• Britain will become a nation of renters, says economist David Miles – ThisIsMoney
• OECD warns of potential global property crash – Telegraph
• How will the new Lifetime ISA work? [Search result] – FT
• Radical economics, rethought [Podcast] – FT Alphaville
• Look to the land for the cause of Britain’s housing crisis – Guardian
• Violent criminals can get off lighter than people late with their water bill – Guardian
• Mem Fox on being detained by US immigration – Guardian
• The Walled Off Hotel: Artist Banksy turns hotelier – Guardian

Book of the week: Warren Buffett smuggled a book recommendation into his much-discussed annual letter. He said Shoe Dog author and Nike founder Phil Knight is “a very wise, intelligent and competitive fellow who is also a gifted storyteller”. Knight’s memoir was the best book Buffett read last year. Shoe Dog is just £9.99 on Kindle.

Like these links? Subscribe to get them every week!

1. i.e. Propose a new working hypothesis.
2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/why-is-nest-making-active-decisions-about-workers-pensions/