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Devil's Advocate: What happened to my pension fund?
"Money is not usually simply lost. More often, it finishes up somewhere else."

By Martin Brampton

Published: Monday 24 March 2003

In the third and final part of his look at the damage the bubble years did, Martin Brampton asks what happened to all the money invested in technology and telecoms shares.

Unless you are lucky enough to be one of the diminishing band covered by pension schemes based on final salary, you have probably seen your pension fund shrinking rapidly over the last year or two. Or maybe you were among the crowd that succumbed to the blandishments of the financial sector and put large sums of money into technology funds, perhaps through ISA vehicles. If so, you may easily have lost nine tenths of the cash.

I was lucky enough to never be quite persuaded by the technology boom. Not that I saw clearly what was happening but as a risk averse investor I just could not persuade myself to buy expensive shares in companies that had no immediate prospect of making a profit.

That was not enough to stop my pension funds suffering. One was established quite recently and involved the managed fund of a highly respected financial institution. My little nest egg is now worth less than two thirds of the cash put in. I have written to ask about the merits of fund management that does worse than placing the cash in a shoebox in used five-pound notes but am not optimistic about receiving a constructive reply.

Recently, we have looked at the way in which borrowed money sloshing around the US corporate sector drove up share prices. And we saw it followed by a period where companies could not achieve the profits needed to sustain those share prices. The preferred solution was to find different ways to keep accounts that gave the impression of profits where in reality there were none. What does that have to do with your shrinking pension fund?

Well, the fact is that money is not usually simply lost. More often, it finishes up somewhere else. So, for example, the people behind the great boom in telecom shares did not do so badly. Between 1997 and 2001, people in the know cashed in around $18bn of shares. More than half of this total was sold in 2000, which was the year in which the shares reached their peak.

From 1995 to 1999, US executives saw an enormous increase in their incomes from stock options, with the aggregate figure growing from $26bn to $110bn. This is also reflected in the pattern of ownership of shares in US companies. Chief executives owned an average of two per cent of the companies they managed in 1992. The figure is now 12 per cent.

If you were left holding shares in telecoms companies by the middle of last year their value had plummeted by 95 per cent, compared with their peak. The money in your pension fund had been transferred to corporate executives, bankers, investment analysts and others who had sold shares during the boom years.

Why did investment managers get you into this mess? Well, with the constant publication of league tables, it would have been a brave fund manager who stayed out of telecom shares while they seemed to be forever rising in value. In fact, institutional investors poured your money into the sector.

There is a fundamental contradiction between what is needed and what actually happens. In the nature of things, a pension fund is a long-term investment that needs to be soundly based. Fund managers, though, operate as a herd, ploughing money into whatever shares they think will be bought by other fund managers. Then when things go wrong, they can say that they have done no worse than their rivals. None of this is enough to prevent the huge transfer of money from the powerless pension fund investors to the corporate insiders.

So that is where your pension fund went. There is little chance of getting it back. The only thing that could alter the situation would be fundamental reform of the legislation surrounding the direct and indirect ownership of limited liability companies. With our current government apparently besotted by the virtues of everything corporate, there looks little likelihood of that here. In the US, the government is looking to improve the financial lot of the already wealthy.

** Martin Brampton is a director and founder of Black Sheep Research (www.black-sheep-research.co.uk ), an independent consultancy providing research, writing and speaking services on a wide range of business and technology subjects. Martin was previously a director at Bloor Research, and has worked with IT as a user and analyst for over 20 years. He can be contacted at silicon@black-sheep-research.co.uk.

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