£36 trillion whale

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And it’s cheer up me lads
Let your hearts never fail
For the bonny ship the Diamond’s gone fishin’ for the whale…

– The Bonny Ship The Diamond, old Scottish sea shanty

CHEDDAR, SOMERSET – “Whales” in capital markets – those individuals, funds and other players with enormous investment positions – are dangerous beasts.

They can move markets with their trades, and if you get in their way, they can crush your portfolio.

Some whales can be benign – the founder of a business with a large holding of its shares is (with exceptions) unlikely to disturb the market, even when seeking to sell them. Other whales can be malicious – predators seeking to scare investors into selling to increase their hoard on the cheap, or care little for crashing the price of an asset provided they come out with a profit.

Other whales still are neither benign nor malicious, but simply unconscious. I refer here to those large passive investment funds which simply track an investment index, like the FTSE, the S&P, or a bond index for a certain type of debt. I say unconscious as those managing these funds have little discretion over when they buy, what they buy, or at what price.

They have a mandate to simply follow (or “track”) their index – not outperform it or protect investors’ capital. So when they receive money they go out and buy, and when they’re asked for money from investors they go out and sell. You might argue that those investors giving them the money or asking for it back are conscious, but even this can be questioned.

Regular pension contributions from employee paycheques into these funds are automated, as often are the redemptions once retirement is reached – there’s nobody “at the wheel” steering investment decisions. And this presents us with an opportunity.

Further, there are plenty of pensions here in Blighty which have a “lifestyling” strategy built into them. This is where the fund will automatically reduce its holdings of stocks and buy more bonds the closer its owner gets to retirement – thus, even more trading takes place with no oversight. No conscious investment decisions are being made, but investment actions are.

These pension funds are less whale, more enormous jellyfish – dangerous but drifting, pushed by the tide. But dangerous as they may be, shrewd investors can use their movements to their advantage. On a fortnightly basis, in fact.

Global pension assets now stand at around $50 trillion – some 36 trillion quid. That’s roughly three times the current value of all the gold ever mined in human history at current prices.

These pension funds aren’t all invested in passive tracker funds of course. But even a sliver of that capital can move markets once it arrives – so there’s a fortune to be made if you can get ahead of it. Just the automatic payments American workers make into their pensions (known as 401(k) “retirement plans”) regularly buoy US stock markets on the days they get paid. If you have the dates, you can use them to your advantage.

I expect at some point in the future the UK government will push British pensions to invest in the green sector – by hook or by crook. You’ll find in other European countries many large pension schemes (both private and state-run) have enormous green exposure. The Dutch, French, Fins, Swedes can all provide examples.

At some point, I expect our government (and those of other developed nations) will want pension schemes within its borders to catch up – willingly or not – so as to look good. In effect, whales will be forced to buy into the market, and those who got into the green sector early will reap a fortune.

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Economics

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