RI Europe 2013: Woolley suggests curbing high pension fund portfolio turnover

Leading industry figure calls for changes to funds’ status

Paul Woolley has called for pension funds and foundations to lose their tax free status if they trade more than 30% of their portfolios in a year.
Woolley, the former GMO guru who now heads up a centre for market dysfunctionality at the London School of Economics and is recognised as one of the leading figures looking at the causes of the financial crisis, made his remarks at the RI Europe conference in London today.
He also suggested that asset owners such as pension funds should report much more to their beneficiaries about their activities, a sentiment echoed by Catherine Howarth, CEO of campaign group ShareAction (formerly FairPensions). Howarth called for pension funds to have company-style annual general meetings to face questions from their beneficiaries.
Woolley expanded on his idea that the established efficient market hypothesis’ has been proved as a dud theory of economics – he called it the ‘efficient market hoax’. He said: “You can’t use a theory that predicts perfection to invest in imperfect markets.” Woolley also called on bodies such as the International Monetary Fund to develop an instruction manual for investing in inefficient markets.Woolley, who was co-founder of GMO Woolley, the London affiliate of Boston-based value manager GMO, retired as Chairman of GMO Europe in 2006.
He told delegates of the perils of chasing short-term performance: “Trying to do the best each year doesn’t give you the best return in the long-term.” At the core of the problem he referred to the role of the investment contract, or mandate, between principal (the asset owner) and its agent (asset manager).
Wolley said capitalism would fail unless the owners recognise they are the authors of their own destruction.
In response to a question from USS Daniel Summerfield, Co-Head of Responsible Investment at the Universities Superannuation Scheme, Woolley stated that investment consultants, as agents “can be part of the solution, but are currently part of the problem” of short-termism.
ShareAction’s Howarth called for pension funds to disclose their carbon intensity reduction targets for their portfolios. She also bemoaned the fact that few large investors attend company annual general meetings.