February is always a very sad month for the Spanish financial industry, and this February has not been an exception. Pablo Fernández, professor at the IESE Business School, and collaborators have published the latest version of their annual paper on the returns of pension funds in Spain. The paper of this year, ‘Return of Pension Funds in Spain. 2000-2015’, studies the track-record over the last fifteen years of the 322 Spanish pension funds that have been in existence at least for fifteen years. You can find the paper here. The main takeaway? The performance of the pension fund industry in Spain has been simply terrible. Well, it has been even worse than that. As the authors succinctly explain in the abstract (unfortunately the paper is only in Spanish):
During the last 15 year period (2000-2015), the average return of the pension funds in Spain (1.58%) was lower than the return of government bonds (5.40%). Only 1 fund (out of 322) had a higher return than the 15-year government bonds. Nevertheless, on December 31, 2015, 7.8 million investors had 67.6 billion euros invested in pension funds.
What the abstract does not say (but the paper does) is that with an average return of 1.58%, pension funds were not even able to beat inflation! More details: only 2 funds (out of 322) outperformed the Ibex 35 (the main Spanish stock market index), only 1 fund outperformed 15-year government bonds and 47 displayed in average negative performance. Although the paper gives us more interesting details (very small correlation between fund size and return, no correlation between number of beneficiaries and return, etc.), the crucial part is about returns and how pension fund performance compares against other benchmarks. In other words, pension fund performance has been simply embarrassing and it should make us to think why one should invest in one of these vehicles. And as it was reported by Félix López one year ago in this blog, the 2014 paper by Pablo Fernández and collaborators reached the same conclusion: pension fund performance has been consistently dismal.
You could think that the pension fund built-in tax advantage might compensate for the poor industry performance. But that’s not the case. As the paper explains, in many cases the tax advantage is wiped out in 5 years. The poor performance is not only driven by hefty commissions (around 2% of assets under management), but also by the poor ‘active component’ of management (which most of the time trades too much).
To me, this is a perfect example of crony capitalism: you get banks and government involved together plotting something and promising the investment paradise on earth and then you get this kind of result. As the previous numbers show clearly, the tax exemption issue should be explicitly put in context (i.e. overall performance) and the government, instead of promoting indiscriminately pension funds, should promote some pension funds and investments in passive, low-cost strategies. Although the latter may not have the tax advantage, it would outperform lousy pension funds in few years – and certainly over the long-run. By the way, low-cost strategies have already been advocated even by famous active investors like Buffett, who says that:
My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
And this brings me to the optimistic note of the post. Do you know the silver lining of February in finance? Yes, you got it: Warren Buffett must be about to publish his latest anual letter to Berkshire’s shareholders, which is always an invaluable document and an example of how to manage other people´s money ìn an impeccable way. So not everything is gloomy in February.