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Zombie funds
Yes, there is such a thing and no you won’t have seen them on Dawn of the Dead. They are very scary however when you see what effect they can have on your pension money.
To understand the significance of zombie funds we must first understand how a ‘living’ fund works. All pensions are invested in investment funds of some description which is essentially a pot of money run by a fund management team on behalf of multiple investors. Each fund will invest in certain types of assets as stated in its ‘brief’. This allows investors and advisers alike to understand the risks associated with the fund. For example a Latin American Stocks & Shares fund is going to be a lot more of a roller coaster ride than a UK fixed interest fund.
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There are two main investment strategies that the fund managers will use for growing the fund. Going ‘long’ and going ‘short’. We are not going to go too deep into this at this point but if you want some more info on this then here is a helpful article. Click here to read the article on Zombie Funds. Going ‘long’ means that they will buy an asset (a company share for example), at what they believe is a good price and hold it for a period of time (long) with a view to selling it when it has risen in value and therefore make a profit. Dead easy. Investment funds can have many millions of investors money in them and every day new investors will deposit money and existing investors will decide to cash in. This means there is always liquid money coming into, and going out of, the fund and a good fund will have more coming in than going out. This means that all of the money in the fund can be invested in the long term assets which produce the growth and investors who want to leave the fund can be paid from the liquid money of new investors. The more of the fund that is invested in long term assets, the greater the potential return. |
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Imagine however that the fund belonged to an insurance company that no longer accepts new business. There are many of these around who couldn’t survive as an ongoing entity when regulations were tightened but have many billions under management from existing policyholders, possibly under a high charging structure.
The managers of these funds have no new money coming in, only money going out from investors who are leaving. This means that a significant proportion of the pot needs to be retained in easy access, and therefore lower producing, assets such as cash in order to fund the withdrawals. Additionally, the level of withdrawals are likely to be higher than a normal fund because investors are easily persuaded to leave as they become aware of the situation. It becomes a self fulfilling prophesy.
That is why they are called zombie funds because they are run pretty much on auto pilot. Another consideration is that a normal fund must try very hard to produce good investment returns in order to attract new investors. A zombie fund has no new investors, nor does it want any therefore the fund management performance is pretty irrelevant from a commercial perspective. Ask yourself whether you think they will be investing in the best fund management talent or getting by with the basics and keeping costs to a minimum?
If your pension is stuck in a zombie fund then call the helpdesk on 01642 525514 for guidance.
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