The Scotsman

Magic money rain forest

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investors and the informatio­n and analysis that accompany interim and full year statements.

There is a trend now not to bother with all of this. Investors would be better off with a ‘passive’ fund .The errors of personal bias can be avoided, investors are automatica­lly kept abreast of changes in market fashion, costs are lower than with an actively managed fund or trust and performanc­e closely mirrors the behaviour of the market as a whole. What’s not to like?

Not for the first time I am indebted to PAT’S Robin Angus for a critical appraisal of so-called ‘passive’ investing. In theory passively tracking an index should result in slightly better than average performanc­e at a below average cost. So why don’t we all become passive investors?

First, while most active investors will underperfo­rm the market over the long term, not all do so – as the net asset value of PAT has proved over the 27 year period between 30 April 1990 and end April this year. Second, a passive investor is locked into buying shares in the chosen index which may be fully priced while an active investor is free to avoid them. Third, passive investment does not eliminate risk – for all equity investment is a risk compared with holding cash.

And finally, lower costs may not compensate for loss of performanc­e that can be achieved by active investment management. And in any event, equity investment cannot be reduced to matching a chosen index benchmark: capital protection remains the cardinal priority for those seeking to build a store of capital over a lifetime. Individual circumstan­ces – and the ability to adjust investment preference­s in line with these – is a freedom never to be lightly surrendere­d. Who dares invest now in an investment trust or mutual fund investing in infrastruc­ture projects? To loud applause Shadow chancellor John Mcdonnell outlined plans at the Labour Party conference for large-scale nationalis­ations and pledged to ‘bring existing PFI contracts back in-house’.

Shares in infrastruc­ture investment companies took a hit. John Laing Infrastruc­ture Fund, with 30 per cent of its assets in health contracts, fell 4 per cent. HICL Infrastruc­ture lost 3.5 per cent. Stockbroke­r Canaccord Genuity said that while the conference speech was high on rhetoric, it was low on detail.

It also noted a subsequent Labour Party press release that ‘Labour will review all contracts and, if necessary, take over any outstandin­g contracts and bring them back in-house’. “We note Margaret Hodge’s comments… that the Labour party should focus on health, social care and schools rather than taking back existing PFI contracts, purely for ideologica­l reasons which is ‘highly unlikely to save any money due to the huge bill in terminatin­g them’. A sum over the £57 billion capital value given to PFI contracts by the Treasury two years ago looks likely – and analysts say this could rise to more than £100bn given the 25-30 year length of many contracts.

In addition, a large chunk of the funding for PFI deals comes from pension funds. Any removal of these PFI assets would limit their ability to meet their income needs whilst it may also hinder the government’s ability to raise future capital. All this comes on top of commitment­s to re-nationalis­e utilities and the Royal Mail and to scrap university tuition fees. Not so much a magic money tree, perhaps, more a South American rain forest?

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