It’s always an interesting time returning from holiday. You find a desk overflowing with post, most of it in the junk category, although as I spend a fair proportion of my time organising conferences I wouldn’t like to include all conference literature in that category. Actually it is amazing just how many conferences and seminars are being arranged at the moment.
You sometimes get the impression that one could live a fascinating life just attending conferences five days a week and almost 52 weeks a year without ever getting any work done. The task therefore is to sort the wheat from the chaff and ensure that important events don’t get overlooked. In this increasingly complex world we all need education and to keep up with events. Magazines like IPE do a fantastic job at keeping us informed but there is no substitute for the networking and personal interaction that a good conference provides.
However, as we all must acknowledge, reading material forms the basic means of education and illumination. So the last few days have been spent catching up on reading material and getting up to date on developments. Even in summer not everyone is on holiday and the investment scene continues to develop in its usual myriad of ways.
One of the more interesting reports to hit my desk over the summer is the latest of the annual performance reports from the British Venture Capital Association. It may only be a report on the UK venture capital and private equity industry but its comprehensiveness and the very size of the private equity industry in the UK make it required reading for the whole of Europe.
In fact the BVCA claims that its survey is the most complete single country specific survey on the performance of venture capital and private equity in the world.
The headline results make very impressive reading, with combined 1999 performance returns of 33.6% comparing more than favourably with the FTSE 100 index, which grew by 20.6% and a pension fund median return of 21.3%.
However, rather more attention should be paid to the longer-term performance and whilst too much should not be read into historic information a 10-year combined performance of venture capital and private equity of 20% compares very well with a pension fund median return of 12.5%. That is the good news. The bad news is that averages and medians do not show the full picture and for venture capital and private equity dispersion is simply too big to ignore. Just looking at the overall figures the range of results (between the 90th and 10th percentile respectively) vary from –3.9% pa to 37.4% pa for 1999 alone and for the last three years from –11.4% pa to a staggering 95.9% pa. Apart from the obvious message that great care should be taken over the selection of fund managers these results emphasise the need for pension fund investors to spread their investments across a whole range of funds.
Whilst one can criticise this dispersion one should not forget that many venture capital and private equity funds are very specialist. Indeed, pension funds would not think of putting their quoted equity exposure into only a handful of stocks. Indeed, as the report rightly points out pension funds do not invest in only one or two sectors of the FTSE All-Share Index. Remember that in 1999 the IT sector delivered a return of 208.4% while the utilities group returned – 15.9%.
Talk about diversification leads me on to the remarks reported to have been made recently by Leif Pagrotsky, the Swedish trade minister. His suggestion that Swedes would be better served letting an ape invest their savings, reminds me why politicians should stay away from investment matters –we let them interfere at our peril. Apparently Pagrotsky was referring to the fact only a few Swedish equity funds have performed better than the Stockholm General Index. If this were the case, he wondered why the public should pay fees to active investment managers. Pagrotsky said that: “Almost six out of 10 savers would have been better off to let an ape place their money.”
Personally, I think Pagrotsky should stop monkeying around and let investment managers get on with their job. If they are no good they won’t last too long. The problem Pagrotsky ignores is that the Stockholm General Index, in common with a lot of indices, is not a good diversifier. While you may strike lucky every few years you will also get periods when index investment does not serve you well.
Investing blindly in a single country index is generally not a good idea and this can be said to be especially true in Stockholm, where Ericsson accounts for such a large part (about 40%) of the market’s capitalisation. Thank goodness Peter Norman, head of the Seventh Swedish National Pension Fund, the new state scheme’s default fund, has more sense. It looks like he will invest the massive assets he will soon inherit in a well diversified international portfolio.