We think this is an absolutely wonderful idea, the People's Trust Fund. Not, we hasten to add, that we're saying anything at all about how you should invest. Rather, this is going to be the most wondrous test of what we are really pretty sure we know about markets, finance and investment.
As The Guardian says:
An investment fund that promises to break the mould of City short-termism and aims to make gains of 7% a year is to open for small investors able to put in as little as £500.
As they say in a little more detail themselves:
Nobody can be sure what our investment returns will be, but we believe that over a typical seven-year period, our strategy should be capable of turning £100 into £160 – that’s a total return of 7% a year compound, after costs, and assumes that inflation runs at 2% p.a. over the period.1
In terms of your spending power, this is the equivalent of 5% p.a., giving your £100 a value of around £140 after seven years, after inflation.
A 5% real return after costs? That is a remarkable offer. So, how are they to do this?
Well, firstly the investors own the company - so, it's like Vanguard in that sense, a mutual. Secondly, no cash bonuses for anyone, only shares in the fund itself- be interesting to see how the dilution works there. They'll accept investments as small as £500 or even £25 a month. Those logistical costs of management are going to be quite high.
Further good things:
The People’s Trust will also aim to improve lives directly and immediately, by using a small proportion of the fund to lend to charities and community interest companies that have a direct social impact. This is not charity; we expect a modest return on these loans – but you’ll know this money is being used with the aim of doing good in society.
Deliberately lending at modest returns in order to produce a 5% real return.
The day-to-day money management will be done by five fund management groups, which will each be given a seven-year contract to ensure their performance horizon is the same as the underlying investors.
It's a fund of funds, meaning two sets of fund management costs.
The special magic sauce here is that it will be a long term investment fund. Eschewing all short term fads and fancies, along with making sure that everyone pays all their taxes and so on.
That is, an investment strategy that simply hasn't occurred to any of the other half a million people working in The City is, through that fee structure, charitable endeavour and tax insistence, going to deliver a 5% real return to investors.
That would indeed be most welcome - as we know, over the long term managed funds tend to underperform the basic indices precisely because of those management costs. And it would be welcome too, not least for the investors.
But also it would greatly inform the rest of us out here labouring as we do under that efficient markets hypothesis. That known information about prices is already in prices and therefore no one can consistently and long term outperform that market. Or rather, if someone does then they're very definitely a statistical outlier (Warren Buffett doesn't quite count here, his insurance float means that his cost of funds is rather below that of Treasuries, below everyone else's in the market).
This is going to be the most wonderful test of exactly that basic critique of the current investment markets. If it is true that short-termism damages investment returns then this fund has a chance of proving that. Our own supposition is that that's a simple enough idea that someone's had it before and tried it but still, we look forward to the disproof of our contention.