Who's to blame for low savings?

Another day, another report claiming that Britons aren't saving enough. This has prompted the usual bleating from the financial "services" industry. Foreign & Colonial say:

The poor health of the nation's personal savings is simply not getting the attention it deserves...The 'savings time bomb' is a long-recognised problem but things appear to be getting worse rather than better. With access to final pension salary schemes rapidly disappearing, the British public are going to have to become even more reliant on making their own provisions whether through pensions, ISAs or other means. Yet alarmingly the household savings ratio has fallen dramatically since 1997 from over 9% to under 6% now. A combination of factors are behind this fall, not least the state of investment markets, but the problem has also been exacerbated by public policy moves such as the abolition of dividend tax credits on equity ISAs. Furthermore, one of the Chancellor's first acts was to reduce the tax advantages of pension funds which will undermine the long-term return on these schemes.

What F&C don't say - and nor does any other  fund management company - is that fund managers are themselves partly to blame for low savings.
These figures show that retail investors bought £4.7bn of unit trusts last year. That's 0.6 per cent of disposable income. That's the same proportion as in 1972, and  barely half the proportion of 1985.
Decades of rising incomes, and an ageing population, have therefore had no obvious effect in raising the demand for unit trusts.
Why? One reason is that there has been almost no technical progress in the unit trust industry. The typical unit trust is the same thing it was back in 1972; a middle-aged man with a second-class degree from a second-rate university uses accounting information to try to spot good shares.
If cars or computers were the same today as in 1972, demand for them would be tiny. Why, then, does the fund management industry expect decent demand for its products?
In truth, though, even this question is too kind. Even in 1972 cars were at least designed according to sound engineering principles. Conventional fund management has no such intellectual foundation. The notion that you can use accounting information to spot good stocks is just absurd. One group of economists who stopped laughing long enough to test the theory concluded that:

There is no persistence in long-term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. (full pdf here)

It needn't be like this. Behavioural finance emerged 20 years ago, but it's only in the last couple of years that fund managers have been thinking about it. And in my day job (subs req, I'm afraid), I've shown that portfolios based on simple Markowitz mean-variance optimization techniques - which are over 50 years' old - have out-performed the All-share by 90 percentage points in the last five years, beating all but 3 unit trusts. 
If fund managers want more customers, they should abandon failed managerialism and start thinking about proper economics. Until they do this, their call for the "savings time bomb" (which is of course no such thing) to be an election issue has as much credibility as my belief that the real issue should be society's appalling under-valuation of tall balding Leicester-born Oxford-educated economists.

Comments

[snafu]

I would be more inclined to have unit trusts if the management charge was only paid if they outperformed some financial index such as the FTSE-100.

In an age of high consumer debt, it is also far better for most individuals to pay off outstanding loans and pay off their mortgages before using any savings vehicles.

[dearieme]

In my experience, when you call yourself "balding" your friends cackle, point and ask "what do you mean 'ing'?".

[dearieme]

When a personal finance journalist left the FT a few months back, such was her contempt for the fund management biz that she recommended that you invest in property or, if that was bad value when you had your money available, you should nip down to the Post Office and buy some index-linked savings certificates.

[Chris]

Have you considered the possibility that F&C are making a sophisticated advertising finesse on the collective psyche of the UK? The economics seem to press towards a collective response (cf Shiller) but Fund Managers are unlikely to benefit from any such decision. They are also closely focused on cash savings in tangible asset bases as opposed to, say, investing in excellent family relationships, where families provide a suitable caring infra-structure. And of course rather a lot of people don't live until retirement age at all a morbid statistic which has underpinned the entire 'retirement package' industry for generations.