How good are you at picking winners?  Take the Aintree Grand National on Saturday for instance.  The horse I backed at 20 to 1 came in at 20 past 6.  It was the last of 19 that finished from 40 starters.  Last year my selection was so late the jockey was wearing pyjamas.  Picking winners is clearly harder in practice than it sounds in theory.  But then again as I’ve discovered from bitter experience most things are.

The race is regarded as the ultimate test of horse and jockey.  30 fences, some over 5 feet high and over a course more than 4 miles long.  A test so hard that usually only 25% of starters manage to finish.  But at least if your horse doesn’t win but survives there’s always next year.  Which sadly still isn’t the case for investors approaching retirement and trying to pick a winning system to replace their earnings.  Not the sort of thing to decide by sticking a pin in the paper is it?

Twenty Aprils ago I wrote an article in the “The Scotsman” comparing “The National” to hurdles that investors nearing retirement face in their attempts to replace their employment earnings by picking a winner in the “Novice Hurdle Stakes” for them and their partner for the rest of their lives.

As I wrote 20 years ago… “For many of them, particularly those who have accumulated private pension plans of one sort or another, selecting the most appropriate method of turning their funds into cash and/or income is a far more arduous task than it is for those facing the Aintree racecourse.”

Now whereas Aintree has been made easier and safer 5 years ago the difficulties facing retiring investors have increased exponentially.  Former Chancellor Gordon Brown exactly 20 years ago started taxing dividends inside pension plans making it much harder for us to accumulate wealth.  Then he and George Osborne followed up with a few hundred changes to pensions legislation making financial hazards even harder to negotiate.

Add to all that falling interest rates that pulverised annuity rates, plus volatile stock markets since the Dotcom bust in 2000 and the Financial Crisis in 2008/9, stir in umpteen invented alternatives to annuities, now including so-called “Pensions Freedom” and you end up with a financial assault course few can hope to successfully negotiate without detailed preparation and a top trainer behind them.

Take for example the nasty ditch hidden from view if you manage to clear the recently erected Pensions Freedom hurdle.  Until you’re age 75 an untouched pension fund can still be totally free from tax on profits and Inheritance Tax (IHT).  So why would you remove some or all of it to dump elsewhere that isn’t tax free?  Even worse as a recent survey finds, on average 41% has been taken from its comfortable tax free stable and left grazing in deposit liable to IHT at 40%.

It was also in that “Scotsman” article 20 years ago I accused media-darling Equitable Life, a widely fancied favourite amongst tipsters for their allegedly superior performance and low charges, of rampant mis-selling to their customers.  As you can imagine that didn’t go down well in certain quarters.

Three weeks later a journalist who’d previously fallen for the Equitable hype published a hard hitting piece quoting me and accusing them of dire investment performance.  Before you could say “Becher’s Brook” I was threatened with a writ from Equitable’ s London lawyers.  Not a pleasant experience when you face losing everything thanks to their bullying response to the truth.  Thankfully we fought them off.  Three years later Equitable fell at the “Canal Turn” and had to be destroyed.  As have the retirement plans of their loyal customers.

It’s maddening watching investors and commentators still convinced that if an investment product’s cheap it must be the horse to back.  Take time to study the form instead.  Before Equitable Life’s alleged superiority “experts” promoted Mutual With Profit Insurance Societies for their “low cost/value for money.”  One by one they fell by the wayside too, leaving millions of savers stuck in savings also-rans.  Same went for heavily promoted “safe” With Profit Bonds.  Ouch.

And what about the investments promoted as “Safe as a Volvo”……Split Cap Investment Trusts.  “Nice and safe with low costs”commentators decreed before they fell too long before the finishing straight.  And now it’s Passives and Index Trackers that’s the latest low handicap sure-thing judging from rave notices from tipsters and the increasing inflows of punters’ money over the last few years.

Five years ago while Aintree changed the hurdles to more forgiving barriers no such help came for investors on the week of the 2012 National when a BBC headline was “Stock markets have fallen in the US and Europe led by Bank shares as worries over Spain re-emerged”

Faced with constant gloomy headlines like this most investors shunned active equity funds in favour of “safety” like Deposits or Gilts and new-fangled “safe” inventions such as Absolute Return plans.  After all the FT All Share Index was still 12% below its level at the previous all-time high in 2000. And fear was in the air.  Like to guess when it broke through that all-time high?  May 2013.  Any idea how many all-time highs have occurred since?  Only another 51.

Over the last 5 years the UK’s most sought-after Absolute Return fund attracting £ billions is up only 15.1% after costs.  The FT 100 total return (no costs) is up 57.7%, and over 20 years up 236.1%. (Source: Lipper stats @ 12/4/17)

Sounds good eh?  Many of our readers will recognise the name Neil Woodford an active manager we’ve backed heavily since 1989 when on the reins at Invesco Perpetual High Income.  Though Neil left to set up his own stable a couple of years ago his replacement jockey is stablemate Mark Barnett who we continue to back.  That fund over 5 years after all costs is up 70.7% and over 20 years it’s up 649.9%.  A winner in all conditions (Source:  as above).

For long term investment success you need a finishing line to aim at.  Winners need to be well prepared to last the course with the best trainers and jockeys for all conditions.  Successful financial planning results don’t come from popular favourites, shortcuts or cut price offers.  Pedigree and long term form is what matters.  My grannie used to say that.  And funnily enough she had a knack of winning at the horses.  Wish it was in the blood.

Oh I almost forgot, I have to tell you that past performance is no guide to future performance

Alan Steel
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your advisor before taking or refraining from any action.

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