Anthony Hilton: When it comes to investment funds, size does matter

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The Independent Online

Breakfast in Cambridge on Tuesday morning to speak at the launch of a new bank set up to provide secured lending to small businesses.

The Cambridge and Counties Bank (C&C) is unusual, not in what it is setting out to do, but in actually being able to open its doors. It must be three years since the Governor of the Bank of England said this country needed a host of new banks as the old ones were likely to take years to overcome their difficulties, but launches since then have been few and far between.

C&C is one of the few to make it through the regulatory maze.

What's significant about C&C, therefore, is not just its activity but its ownership. It has been financed by Trinity Hall, one of the oldest Cambridge colleges, in partnership with the Cambridgeshire local authority pension fund. At a time when many city fund managers think no share is worth holding more than six months, they remain willing to provide what Vince Cable calls patient capital. They will invest with a 20-year time horizon.

Pension funds in other countries do this kind of thing a lot, but it is more unusual here because the average pension fund in this country is too small to be able to afford the expertise it would need to invest outside the mainstream. This explains in large part why it is so hard to get UK pension funds to invest in infrastructure, or indeed in housing. It is significant, for example, that when Barclays this week sold a portfolio of student accommodation worth around £1.4bn, the buyer was the Dutch pension fund PGGM, not a British fund.

The Dutch have a few large funds which cover whole sectors like retail or engineering or technology. We have lots of small funds focused on the individual employer. So they have the scale they need to take on deals like this and we don't.

This fragmentation of the pensions industry is good for advisers and investment managers because it gives them lots of inexperienced clients whom they can overcharge but bad for everyone else.

The £1,000bn in UK pension funds represents one of the UK's last big pools of unencumbered capital. But the money is too often stuck into low-yielding government securities rather than being used to finance infrastructure, housing or long-term loans to small businesses, all of which would provide a better return and give the country something it needs.

The key to investment success is to have large funds which have the scale to lock away large chunks of money for a long time. Small funds have to follow the mainstream, do what everyone else does and earn average returns, much of which are eaten up by high costs.

Unless we can find some way to consolidate these funds into larger, more efficient units we have invented a sure-fire formula for poor returns and even poorer pensions for decades to come.