Funds contemplate market meltdown
The European pooled fund industry’s annual navel-gazing exercise in the south of France, otherwise known as Fund Forum International, produced sufficient challenges to justify the term work. And naturally, developments in Europe’s financial infrastructure were a key feature of the discussions.
Examining the prospects for tax harmonisation across Europe, Stephen Roth, tax partner at KPMG, stated that introducing a common regime for pensions in Europe would not only require tax harmonisation but would require the alignment of policy on issues such as social security provision. He suggested the future of the harmonisation initiative depended on the success of the euro and the European economy in general; the price of entry to Euroland could be tax harmonisation. The expansion of the single currency to new participants will increase tax transparency, he said.
Kvaerners’s Lyn Ellis used the platform to say that Kvaerner is pushing ahead with its own prototype for a multi-national pension: “We’re trying to get a global pension fund - one pool of assets and one pool of liabilities, which is something we’ve been told you can’t do. But if you can have one pension operating across the whole of America, why not across Europe?”
She acknowledged the cultural anomalies and in particular the benefit structures, but argued the case for greater choice, more flexibility in terms of asset allocation, with security provided by professional management on a global basis and global custody consolidated for worldwide assets. On the same platform, Peter Koenig of Morgan Stanley Dean Witter in Frankfurt warned that by introducing greater flexibility, we are potentially placing more risk in the path of employees.
The issue of fund charging was highlighted by a number of speakers. Peter Jeffreys of Standard & Poor’s Fund Services stated that high total expense ratios are going to become less sustainable in Europe, but that it will take time for market pressure to have an effect in reducing them.
Former Micropal chairman Chris Poll added that regulation and transparency will be the drivers of change in this area: “Currently, it is not in people’s interests for the world to understand how funds are priced and charges levied.” This issue was taken up by Philip Warland, chairman of the UK funds association AUTIF, who suggested that as investment funds grow in importance, particularly in the area of pension provision, their performance and charges will come more under governmental scrutiny: “This is already happening in the UK and Sweden and may be occurring in other countries. When governments get interested in these issues, they begin by first setting a cap on the charges that products can incur. Then they look behind the cap to see how charges are built up. I do not think it will be long before a government, observing that actively managed funds perform on average worse than a passively managed fund, and incur higher dealing charges, will start asking whether this is not against the public interest.”
Poll was in provocative mood during his presentation, entitled, ‘Is madness to be the norm?’ Having established that most people saw the big-gest risk to market instability as a Wall Street crash, he proceeded to plant the seeds of doubt in their minds. Stating, not inaccurately that the Federal Re-serve is now the World’s Central Bank, he asked what happens if the Fed loses the plot? “If the risk that the Fed has reduced by its firm action suddenly returns, we have big problems. Who will control World Inc post-Greenspan?”
Regent Pacific’s chief investment strategist Peter Everington clearly believes that a substantial fall is on the cards. He pointed out that the tidal wave caused by the Asia/Russia crises only stopped short of the US because of timely intervention by the Fed, though he adds: “This has delayed the inevitable and has possibly made the eventual fall more precipitous. The US market is a bubble that will burst. The Dow will fall to 6,500 and the highs may not be revisited for 10 years. A long bond yield above 6.25% would mean an imminent crash.” (the 30 year bond briefly hit 6.3% at the time of writing).
Perhaps more worrying though is Poll’s assertion that substantial numbers of pension savers in the US are borrowing from their 401k plans to maximise their returns from the stock market. Credit risk suddenly looks like a serious problem; how many of those people were speculating on internet stocks?