Lessons from Investment Professionals

1. Do we need highly paid pension fund managers to place money with the largest index investment funds?

There was some interesting news about our fund managers who pay their bosses huge salaries under the pretext that they that need to recruit the best talent to invest other people’s pension money. 

It has been reported that the largest Finnish pension company, Ilmarinen, has invested over €1 billion of their funds in two exchange-traded funds with BlackRock – one for investments in environmental, social and governance and another for investments in US companies. 

BlackRock is an American company and the world’s largest asset manager, whose CEO has happened to have received USD 24 million in remuneration in 2018.

Choosing index investment products from the world’s largest and most famous fund manager does not exactly justify a hefty salary since anyone can buy the same low-cost product from a discount broker!

2. Huge infrastructure projects always require government guarantees

The Chinese are expanding their influence in the world by investing in a series of long-term projects called the “Silk Road” in English, or, in Chinese, “yi dai yi lü” or in Chinese characters “一带一路” which means literally “One Belt, One Road”.

An old plan to build a tunnel under the Baltic Sea between Helsinki and Tallinn has been around for a long time, but it has never been built because of the high costs and the high risks. It would be a long tunnel requiring many expensive and specialised engineering solutions because the ground under the sea is so varied with many undersea pipelines, cables and old explosives…

During the last decade the Finnish and Estonian governments have been talking about re-opening the project but progress has been slow because this is a huge and risky project. 

These are two small countries with populations of 5.6 million and 1.3 million, and there are many tunnel projects that have ended up costing several times the original estimates. The Channel Tunnel between the UK and France, and the Boston Dig are two prime examples that both ended up costing more than USD 20 billion, which was 4 to 10 times more than the original estimates… and they were constructed by big countries with huge resources!

A private consortium organised by one of the founders of Supercell has been trying to put together a “private” consortium to build and operate this Baltic tunnel with a Chinese Group. He claims that this private consortia its faster and cheaper than the governments’ engineers, He has been marketing this as a totally private business project without the need for support from the public sector, However, as every financial specialist knows, there is no consortium on this planet that would finance and build such a project without strong guarantees from the respective governments – in other words from taxpayers… The Chinese have always secured such big “private” projects with public guarantees.

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In both of the above cases taxpayers should always be aware that you do not need highly paid fund managers to give other highly paid fund managers manage contracts to manage your pension funds with simple ETF indexes… 

…. nor should you put too much trust in the first cost estimates of big complex public projects. In these cases you are always on the hook for the cost and time overruns, not the contractors, and not the consultants responsible for the project’s planning and implementation. Just recall the new metro underground line that goes west from Helsinki, or the plans to automate Helsinki’s metro system, or just look at our last planned nuclear power stations. They all ended up way over budget and way past the original time line… and you ended up paying these costs.

Photo: Wikipedia Commons

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