The looks of joy and excitement on the faces of Newcastle United’s supporters at their first home game following the Saudi-backed takeover said it all.
Never mind that Newcastle eventually lost after a bright start, the fans were celebrating the start of a new era. After the tribulations of the Mike Ashley years, the Geordie faithful are now looking forward to dining at football’s top table, bankrolled by Saudi Arabia’s Public Investment Fund, one of the world’s biggest sovereign wealth funds. Some may agonize over involvement of a an authoritarian regime in English football, but for Newcastle fans starved of success, the wealth of the new owners is all that matters.
These supporters know that two other football clubs, Paris Saint-Germain (PSG) and Manchester City, have benefited hugely from Middle Eastern owners with very deep pockets, Qatar’s sovereign wealth fund and Sheikh Mansour of Abu Dhabi, respectively. Investment in sport on this scale has created the term ‘sports washing,’ when states or institutions seek to launder their reputations by becoming associated with sporting success. Whether or not we like it, sports washing works because in football and most professional sports, there is normally a simple rule for success; the clubs that can afford the best talent win most of the trophies. Or as Logan Roy, the tyrannical patriarch in Succession, the hit TV show about an ultra-rich, business-owning family, pithily puts it: “Money wins.”
If money can bring success on the football pitch, does a similar rule apply for pension fund investing? The question is pertinent for UK pension funds, given debate over the 0.75% charge cap on defined contribution (DC) pension funds for auto-enrolled employees. While the charge cap is widely regarded as a success in controlling pension fund fees, it has prevented these DC funds from investing in expensive, but potentially high performing asset classes. Some large DC funds now want to diversify into illiquid assets, such as private equity, which can come with higher costs, so raising the charge cap could help them do this. And Chancellor Rishi Sunak is keen to see UK pension funds invest more in UK start-ups and the green energy revolution. In his Autumn Budget, Sunak announced a review of the charge cap to consider giving DC funds more scope to invest in assets with higher fees and enable them to back British businesses via private equity funds.
The rising popularity of private market assets has been examined by CoreData in several recent research projects. One reason for this is that listed equity and fixed income markets are now seen as expensive and volatile, driving investors to look elsewhere. At the same time, assets such as private equity, private debt and infrastructure offer an appealing mix of attributes to investors, from potential returns to income generation and inflation protection. Another plus for private market assets is the chance for investors to exercise a positive influence on ESG policies at investee companies. But we have also found that high and opaque fees are one of the biggest deterrents to greater investment in private market assets.
Before they pay more for certain assets, DC pension funds and their advisers should think long and hard. For DC pension funds, the case for money buying success is not nearly as black and white as Newcastle United’s iconic shirts. In fact, there is ample evidence to say that keeping fees as low as possible is a better predictor of investment success. Future returns are uncertain, whereas higher fees are not, so keeping investment costs as low as possible is a sound strategy for good long-term results. One common way to do this is through low-cost index equity funds, which have a habit of outperforming most, if not virtually all, more expensive actively managed funds over time.
In areas such as private equity and hedge funds, fee structures such as the ‘2 and 20’ of a 2% annual fee and a 20% performance fee can mean that investors pay high fees for mediocre results, as manager performance can be inconsistent, as it is easily affected by a range of factors, from changing market conditions to the fallibility of manager decisions. And if a highly paid manager is very successful, a rapid growth in assets under management can make it harder for them to continue to find good opportunities that ‘move the dial’ on their performance.
In the UK, Nest, a national low-cost DC scheme, is understood to be looking at private equity investments but it hopes to invest within its existing fee cap. Nest head of private markets, Stephen O’Neill, says it won’t pay traditional private equity fees: “We will not pay any performance fees or carried interest – we don’t like to pay people for a service twice and think that a management fee should be enough motivation to come in and do the job” (source: NEST challenges private equity fees, top1000funds.com, September 30th, 2021).
Nest is surely right to prioritize low fees and it is to be hoped the DC charge cap stays in place. Low fees make sense for DC pension funds like Nest and the evidence to date shows this approach works well. Higher fees do not necessarily bring better investment results; the relationship between price and performance is much more complex than in football and other sports.
Even in football, Saudi Arabia’s billions will not automatically bring success to Newcastle. Keen students of sport will be aware of the lessons of Moneyball, the book by Michael Lewis, which showed how low-budget sports teams can gain an edge on richer rivals through smart data analysis and disregarding conventional wisdom. While the relationship between money and success in sport is very strong, it is not infallible. PSG and Manchester City have both enjoyed domestic success under their wealthy owners, but neither has yet managed to win the coveted Champions League, the ultimate barometer of success in European club football. Culture, managerial skill, and other factors, including luck, are also needed for success at the very highest level. Throwing money at a football club may make success more likely, but it can be an expensive and inefficient way to operate.
Whatever happens at Newcastle, the fans will doubtless enjoy the ride after years of relative underperformance, and it is very likely that the club’s fortunes will improve with a substantial injection of Saudi money. But whereas football club owners can afford to spend lavishly for the chance of sporting success, pension funds need to keep their costs down and find other ways to perform well.