Irregular Roundup, 12th August 2024

We begin today’s Irregular Roundup with Germans.

German investing

Joachim Klement (who is himself German) says that Germans are bad at investing.

There is a bit of a conundrum when it comes to Germans and their living standards. Germans are famously productive and inventive, creating a lot of income. Also, Germans are famously frugal with a rather high savings rate. But when one looks at living standards, the Germans typically lag the Americans and are not that much ahead of the Brits, French or other nations

This is something we’ve looked at before, and from memory, there are two reasons:

1. They don’t take enough risk – most investors outside of the US and UK use more bonds and fewer stocks in their portfolio
2. They have lower exposure to property – more people rent than own, and prices aren’t a high as in the UK.

German foreign investments (widely defined) do worse than their domestic investments and much worse than UK and US foreign investments.

Leaving aside the asset mix and focusing on equities, German fund returns are still poor. Joachim offers four reasons:

1. Germans focus on investing in countries that are highly developed and ‘safe’ but have low growth rates and similar demographic problems as Germany itself.
2. Germans hold less equity and more bonds, thus creating lower returns through a more defensive asset allocation.
3. Germans underperform markedly with their investments in technology and manufacturing as well as services.
4. German equity funds are particularly bad at market timing, with less exposure during bull markets.

All of these reasons sound like risk aversion of one form or another.

Germans are famously pessimistic, always expecting the next crash. Being pessimistic costs you a lot of money in the form of missed returns. Germans work hard but have less to show for it than the Brits or the Americans.

Joachim also used to be too pessimistic, but now he is on a mission:

To educate investors against the evil that are Cassandras and doomsters. I insist on being optimistic as my default setting changing to a more pessimistic stance only when I have significant evidence.

It’s good advice.

Boosting investment

For the FT, John Lee had Three ideas to boost the UK’s investment culture:

1. More financial education
2. TV coverage of the stock market
3. ISA restrictions to promote investment in the UK

I have reservations about all three.

I can agree that financial education is “abysmal”, but John’s proposal seems pointless to me:

I and a number of Tory peers urged former chancellor Jeremy Hunt to “gift”, say, £5,000 of the government’s NatWest holding to each state secondary school to be held for the long term. The idea is to empower senior pupils to decide how the likely £350-a-year dividend should be spent.

The details are all wrong – dividend investing is a bad idea and NatWest is a dog of a stock – and the exercise would teach kids nothing about what’s important in investing (costs, taxes and asset allocation).

• The kind of education we need is something that encourages kids to think long-term and to see the consequences of using too risky an approach early on.

But that wouldn’t work either (because of human nature) and one hour a week in the classroom can’t compete with the messages from social media that everyone can be an influencer, and rich from crypto.

John’s second suggestion betrays his age.

• TV is for old people (even I don’t watch it, and I’m in my sixties).

Kids watch YouTube and TikTok, and more worryingly, want to hear from people who look and sound like them.

• That’s great if you’re after fashion and make-up tips, or want to jump on this month’s social justice cause, but it means they won’t hear from the people best placed to help them navigate a lifetime of financial choices.

John’s third suggestion is to restrict all future monies going into ISAs to UK-quoted companies.

• I assume he plans to exclude ETFs and ITs, which are the obvious workarounds for sensible investors.

The moral argument that tax breaks should be restricted to those investing on home soil is fine, but too much home bias is just a bad approach.

• The UK market has declined massively over the last decade or two, and I couldn’t support more than 10% of ISA money going to the UK.

The British ISA (an extra £5K pa for UK stocks) has it about right, though we need ISA simplification rather than yet more wrappers.

John would also like to see non-exec directors having larger stakes in the firms they look after.

• I’m with him on this one – the agency problem will always be with us, but there’s no harm in trying to align interests.

Financial advice

Also for the FT, Moira O’Neill noted that fewer people are getting financial advice.

Last July, the Financial Conduct Authority brought in new rules known as the Consumer Duty to improve standards for financial services customers. 

But the Duty appears to be backfiring.

The number of people getting professional help has decreased from 11 per cent in 2023 to 9 per cent this year, with many advisers using the new Consumer Duty regulations as an opportunity to reduce — or rationalise — client numbers.

It seems obvious that more regulation means more expensive advice, which in turn pushes up the minimum pot size at which it is worth paying.

To qualify, you typically need to have £100,000 to invest or be on a fast track to that level of wealth. VouchedFor research found creating a financial plan with £100,000 of investments will cost £7,597, based on a median cost of £2,795 in initial charges, plus £4,802 in ongoing fees over the first five years. Average advice fees were £196 an hour.

Those numbers are crazy – not just in terms of the cost of delivering the advice, but because a £100K pot might grow by £16K over five years, and you are handing nearly half of that gain to the advisor.

• If you have less than £100K, you won’t even be offered that opportunity.

The good news is that it’s never been easier or cheaper to go down the DIY route, and almost no one needs an advisor.

• Unfortunately, those with smaller pots are less incentivised to do the necessary self-education.

Labour watch

The noises coming out of the new government are that we should expect a tough Autumn budget.

• Reeves has been claiming that the Tories have handed Labour a “toxic legacy” (though I can’t remember the Opposition lobbying for any spending cuts).

Reeves said:

Public services on their knees, a tax burden at a 70-year high, debt almost the same size as our entire economy. It makes me pretty angry that they left the country in this sort of state. They’ve left us to pick up the pieces.

I look forward to all these things being fixed.

With inflation at 2% and unemployment at 4%, Jeremy Hunt was not having it:

What is absolute nonsense is this business of ‘the worst economic inheritance since the second world war’.  It’s a very transformed picture and I think the reason that she is doing this is that she wants to [prepare] the ground for tax rises. She should have been honest about that before the election.

The only mystery is what the tax rises will be, and how much money they will raise.

• Labour has promised to keep its hands off the key levers, and the obvious targets are self-defeating, producing more avoidance activity than new revenue.

Pensions review

The King’s Speech included a pensions bill which Labour claims will grow the average pot by £11K (9%).

Measures include:

1. Consolidation of deferred small pots of less than £1K (something like “pot follows member”)
   • I think a £10K limit would be more useful
2. A “value-for-money” framework designed to encourage the consolidation of sub-scale trust-based DC schemes
   • This is an old Tory idea, but it’s a good one
3. Compulsory retirement income solutions and default investment options (no “accumulation only” schemes
   • I think this is intended to lead to more investment in “productive assets” (for which I think we can read UK stocks)
4. Superfunds for DB consolidation (primarily of closed legacy schemes)
   • The Pension Protection Fund had been expected to be a key vehicle here but was not mentioned.

Despite auto-enrolment, the government claims that 40% of working-age citizens are under-saving for retirement.

• That sounds like the ideal motivation to up auto-enrolment rates from 8% towards 15%, but there was no mention of this.

Other notable omissions include social care funding and the advice/guidance boundary.

• The Pensions Review from the manifesto was announced a few days later, and there was also a bill to create the laughably named National Wealth Fund.

The key point of the Review is to get money into “productive assets”.

• With DC pots projected to reach £800 bn by 2030, each 1% increase in the stock allocations equates to an £8 bn investment in UK infrastructure and the economy.

There’s not much in the speech or the Review for private investors, so we’ll have to wait at least until the Budget to find out about the stuff that matters (allowances, relief rates, tax-free-cash and withdrawal caps).

Quick Links

I have two for you this week:

1. Alpha Architect asked: Overvalued or New Paradigm? and
2. All-Star Charts said that the New Blackrock ETF Marks the Top.

Until next time.