The Pinstripe Revolutionary

by | Aug 19, 2014

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George Ross Goobey, who changed pensions forever. Born in London, May 1911.Died March 1999

Revolutionary Spirit

It takes a pretty radical life to be dubbed, at your funeral, “the only truly revolutionary figure in the post-war history of British fund management”.  And all the more so if you started out by mere bean-counting. But Ross Goobey changed the assumptions of the pensions industry forever – and in the process he forced a re-evaluation of the entire equity market in a way that added to its desirability and drove up equity prices across the board. Beat that, Soros.

A modest start

Ross Goobey’s start in life wasn’t stellar. His family’s financial pressures didn’t make university a possibility, and so he moved into pensions management as an actuary – a relatively humble profession at that time, largely because it was so dull and predictable.

In the 1950s, every pension fund wanted government bonds to the exclusion of almost everything else. The memory of the 1930s depression had scarred the collective memory with an expectation that equities would prove far too volatile to offer the security which pension fundholders were thought to require.

Riding the rollercoaster

Ross Goobey thought differently. As the manager of the Imperial Tobacco pension fund in Bristol, he concluded that pension fund orthodoxy was completely mismatching its time frames by avoiding equities. The supposed safety of bonds was actually tailored toward the short term, he decided – whereas most pension investors were in it for the long term and could easily afford to ride out a few switchback experiences.

Perceiving that inflation would soon rise and that corporate profits would follow suit, he launched his fund definitively into equities. And in a ground-breaking address to what is now the National Association of Pension Funds, he publicly declared in 1956 that it was no longer acceptable to settle for the relatively low yields of government bonds when attractive capital gains were on the table.

Facing the storm

Ross Goobey had lost no time in putting his own fund’s money where his mouth was. By the late 50s nearly all of Imperial Tobacco’s cash was in shares rather than bonds. And, unsurprisingly for a revolutionary, his viewpoint had made him enemies who were to dog his career for decades.

One by one, however, they all came round to his point of view. And as the pension funds’ appetite for equities grew, so the prices of equity were boosted and dividend yields were driven down. The so-called “reverse yield gap” was born. And by 1993 it was estimated that 81% of all UK pension funds were in equities.

Could it last?

No it couldn’t. By the advent of the 21st century the dotcom crash had forced many pension fund managers to reconsider their punt on equities – by 2007 the equity sector accounted for only about 60% of funds. And by 2011, according to the Pension Protection Fund, defined-benefit pension schemes in Britain had scaled back their equity exposure to just 38.5%, while bonds accounted for 43.2%.

Were there other possible reasons why Ross Goobey’s theory had gone wrong? Indeed there were. The ageing of the workforce, especially in DB schemes, has shifted the optimal risk balance of funds, so that it has become more logical for managers to want the security of bonds. That’s something that hadn’t been an issue in the fifties.

But it wasn’t the reason why bond demand soared in 2008, of course. The equity crunch sparked a stampede for low-risk, and we spent the next four years paying too much for the vanishingly small yields from government paper. But, now that shares are resurgent, are we about to see the pendulum swinging into Ross Goobey’s territory? It seems very possible.

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