Pension gate - paying fees for bad performance

My defined contribution (DC) pension has an option to invest in the passive ishares developed world index fund. This is what I obviously do but most of my colleagues have Nationale Nederlanden to actively manage their pension. This means they buy into the NN first class return fund. A fund with a name like that must surely outperform the market! Let’s have a look at the actual, shocking numbers.

Did they really underperform every year on record!?

I can’t go back further than 2014 as the NN fund became operational in that year. I used performance data from Morningstar and initially compared the NN fund to the ishares developed world index fund as these are the two options I have within my pension. The passive tracker outperformed the higher cost active fund each year. Simply investing in all stocks in the developed world resulted in a more than double yield (69.72% vs 32.82%) compared to “experts” picking stocks for you…

Performance (%) of NN active fund vs. passive strategies (1-10-2018).

You could argue I just got lucky as the developed world outperformed the developing world in the last 5 years. Bringing VWRL (passive whole world tracker) into the mix proves that argument wrong. The developing world is relatively small and only has a minor negative impact on the still impressive performance (66.62%), and still hugely outperforming the "experts".

You could also argue the NN fund is not only investing in stocks but also in different categories like real estate (stocks anyway), a hedge fund (mostly stocks again), as well as commodities and bonds. All these positions are acquired by buying into their own funds again, let’s at least hope they don’t charge fees again inside the NN first class return fund. 

Play it safe
Why they try to play “safe” by diversifying out of stocks is beyond me. While you get older they throw larger proportions of bonds into the mix anyway (via 3 separate funds to complicate things further). Plus if anyone can bare the risk of going 100% stock for young people it is pension funds, as the risk is shared with participants from all generations. 

Anyway, as 30% of their positions were outside stocks in the 2018 Q2 report, I added a VWRL:bond (70:30 mix) into the equation just to show it still outperforms the NN fund by quite a margin. I used the best performing bond NN has on offer (ishares core euro corporate bond) so this is as much help as I can offer them. 

The conclusion is NN heavily underperforms a passive strategy, whichever way you look at it.

Listen to Jim!

Jim Collins is the author of the legendary stock series posts and the book the simple path to wealth. In essence his advice is to avoid stock picking, market timing, and fees. Many people in the FI community follow his advice. NN is clearly trying to pick the winners which I show here is a fool’s game. Along the way they charge fees to keep the stock picking circus running. 

At least they are not timing the market, right? They simply invest the money that comes in from the salaries of their participants every month instantaneously. Or are they? I noticed cash funds are showing up in the investment list of the NN first class return fund lately. This implies they keep cash inside their fund. Effectively they are trying to time the next market crash. Three basic rules of investing, all broken!

Business as usual

NN did what any pension fund does, or in fact anyone offering active funds. After underperforming for a few years, you slightly tweak the fund and give it a new name. NN send everyone a letter explaining they tax-optimized the fund and added a “I” to the end of the name. 

This comes in handy as rating websites like Morningstar  cannot connect the dots anymore and your fund gets a fresh start. If you are lucky the first couple of years you can even start an ad campaign on TV showing off how much you outperform the market. 

Sadly, in the case of pensions, most people don’t have any choice but to play along and hope for the best. When investing in personal accounts, it should not be a surprise I avoid active funds like the plague.