UK - Investment advice to pension schemes is only moderately useful and can be "useless" during market bubbles, a leading fund manager warns.
GMO chairman and co-founder Jeremy Grantham said that consultants have to follow the mainstream – or face losing clients for being too radical.He noted that in bull markets few investors want to hear bad news and will sack those managers who give it.
Grantham said: “Consultants in general are in the business of producing advice that pension funds find reasonable.
“While advice given to pension schemes is moderately useful at all times – during a bubble [the same] advice is useless.”
Grantham pointed to firms like GMO and Phillips & Drew, now UBS Global Asset Management, which had spoken out against technology stocks as they began to peak – but were punished by pension scheme investors for doing what they believed to be right and lost many clients.
Other fund management firms ended up losing clients large amounts of money when the markets crashed, yet did not lose pension fund clients in the quantity of those who had been proved right.
Grantham said that there is a profound propaganda effect in a bull market with good performance eventually leading to the belief that nothing can go wrong – making the contrary view dangerous for consultants and managers.
He added: “Really useful advice will always be very dangerous for the person giving it.”
Grantham fears many schemes still feeling the pain of volatile stockmarkets will decide to avoid equities altogether and sell out of the asset class at the wrong time.
He added: “A lot of pension schemes will say that they simply can’t stand the pain [of equity investing] anymore.”
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