It has been a miserable few weeks. Education riots, VAT at 20%, while to cap it all, Russia snaffled the World Cup. While we fielded Beckham, Cameron and Prince William for the big push, Vladimir Putin didn’t even feel the need to attend the final schmooze fest. To add insult to injury, they then sent us their weather. The bad sportsmanship exhibited afterwards, though, really was a surprise. England has no divine right to host the competition and for the media to cast aspersions on the integrity of such an august body as FIFA, is truly outrageous. We suspect Russia’s success was, shrewdly, assured months ago and simply results from the excellence of its bid; no doubt, the best that money could buy.
It struck us that the World Cup situation reflected what is happening generally; the ‘old’ world giving ground to the ‘new’. So, as we’ve now entered the second decade of the 21st Century, it prompted us to ruminate on what the future holds. It is clearly a big question but one we do not shrink from confronting. We regularly wrestle with weighty issues, some of which mankind has struggled with for millennia. Why are we here? What is the meaning of life and perhaps most baffling of all, is it possible to buy a sofa from DFS that is not in the sale?
We would argue that living standards in the West must, on average, decline. Welfare and state pension provision are just far too generous and will be scaled back. They are based on what was rather than what will be. We also suspect investment returns will be lower than many anticipate. With the FT-SE 100 Index still well below where it was 11 years ago, you might ask how they can be but it’s the level of expectation we query.
We were interested to read the recent comments of veteran fund manager, Bill Gross, Chief Executive of PIMCO, the world’s largest bond fund manager. Gross makes the point that over the past 25 years, overly cheap financing drove asset prices to unsustainable levels. Property, investment management and banking et al did remarkably well but debt and deregulation are now retreating while their polar opposites are in the ascendancy.
As such, a system that encouraged speculation rather than true wealth creation is broken. Gross goes on to point the finger at pension fund managers for their inability to understand this new environment. Many managers and consultants continue to assume annualised returns of approximately 8% in perpetuity. With 20 year bonds yielding 4.0%, a 60/40 asset allocation of stocks to bonds means the former needs to deliver around 11% p.a. in order to hit that magic 8%. How likely is that to happen, we (and Gross) ask? Mmmm ………our best guess is about the same as England hosting the World Cup.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
