Comment: PDFM's radical bet has not paid off

A great deal has already been written and said about PDFM's radical bet against the markets over the past 18 months. It nonetheless seems worth returning to the issue in the light of the most recent quarterly survey of pooled pension fund performance just published by CAPs. This could scarcely be more damning of PDFM's investment strategy. In the year to the end of September, PDFM's performance comes out bottom of the list of 69 companies surveyed.

Perhaps more worrying still, the effect of PDFM's dramatic bet on a stock market crash has been to wipe out all the years of steady overperformance previously enjoyed by clients. On a rolling five-year view with a cut- off date of September 1995, PDFM was ranked 17th, or virtually top quartile. Factor in the latest year and PDFM plummets down the league table to 44th. On a two, three, or four-year view, relative performance is even worse. In a single year, then, PDFM, has given back all the outperformance of previous years.

For the time being PDFM, and its Swiss masters, UBS, are keeping their nerve. There is no question of a change in strategy or of heads rolling, both of them insist. And indeed things could change very rapidly, even without the stock market crash the house has bet its name on. PDFM's underperformance is only partly caused by its overweight position in cash and index linked gilts. It is also to do with stock selection and here the news is rather more encouraging. Quite a number of stocks PDFM's value-based method of stock selection have identified, such as British Gas, have picked up considerably over the past couple of months.

On the whole, however, clients are going to be looking at these figures with growing concern. This is not because there is anything wrong with the PDFM house view; PDFM makes a compelling case for why US equities are far too high, which many people would share. It is more to do with the fact that PDFM's extremely poor performance this year may be indicative of an unacceptably high degree of risk taking. That may have worked in favour of clients up until 18 months ago but now it is working badly against them.

Pension funds like to be close to or above the median in terms of performance. What the PDFM experience demonstrates is that outperformance requires a degree of risk which, as likely as not, is eventually going to result in underperformance. Many clients will be wondering why they don't just stick to trackers, for it is not just PDFM which is plummeting down the league tables right now. Other previous high flyers such as Mercury and Morgan Grenfell have also fallen precipitously over the past year.