Responding to the Financial Conduct Authority's (FCA's) Asset Management Market Study, Michael Johnson at the thinktank Centre for Policy Studies has said some 80% of the active investment industry is unnecessary, calling for pension schemes to embrace passive investing.
Commenting on the report, Johnson (pictured) said the consequences of the study for the asset management industry are "potentially devastating, but radical surgery is long overdue".
He pointed to the Melbourne Mercer Global Pension Index, which reveals a fall of the UK's pension funds in the global rankings.
He also noted British pension funds have the weakest funding in Europe, as well as the highest proportion of company schemes (38%) which are flagged as the weakest 20% of the industry peer group.
Johnson said: "Simplification is the key. In respect of listed assets, over any meaningful timeframe, passive management should be embraced.
"The government, acting through the Department of Communities and Local Government (DCLG) as sponsor of the Local Government Pension Scheme (LGPS), has a great opportunity to exhibit leadership, in the interests of all members of funded pension schemes."
He suggested proposals made by the LGPS in May 2014 should be resuscitated, which include moving all of the scheme's actively managed listed assets to passive management (some £85bn), while all funds of funds should be replaced by one alternative investment vehicle and managed in-house.
He said if this is done, "millions of scheme members would benefit, and it would become apparent that we do not need 80% of the industry.
"The remaining 20% should focus on adding value in the unlisted asset arena that lacks the indices required by (passive) tracker funds to replicate investment performance: principally 'alternative' assets, property and emerging markets and smaller companies funds."
Johnson also agrees with the FCA on 'star' managers failing to outperform benchmarks, pointing out that over three years only 0.2% of all funds investigated produced outperformance through skill.
He calculated this using the figure of 161 funds (14.2%) which produced above average returns over three years, saying some 142 of these "would statistically achieve this through luck".
"Data shows us that the dominant contributor to total returns is the asset class mix, not individual stock selection," he said.
"In practice, as the FCA has now confirmed, many so-called active managers are actually 'closet trackers'. Once their high costs are deducted, the outcome of sub-index performance is no surprise.
"To misquote Sir Winston Churchill, never is so much being taken by so few from so many, and for so little in return."
He concluded: "The FCA has laid bare the nonsense that is the active fund management of listed assets.
"It is time that DCLG's proposals were resuscitated and implemented, in what would then mark a seminal moment for all occupational pension schemes."
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