jtrader - I have some sympathy with the views expressed by Oatman and juanbyte, but they are, perhaps, an over-simplification.
The latest figs I could find for 2000 show that 39% of UK shares were held by UK pension and insurance companies. A further 32% were held overseas - primarily with overseas insurance and pension funds. Add in the holdings in unit trusts and investment trusts which amount to a further 10% and you have 81% of the UK market held in institutional hands, compared to only 16% held by individuals. The balance of 3% was held by charities etc. Therein lies the reason why pension funds and insurance funds cannot beat the market - they ARE the market. No stockbroker or fund manager will ever go on TV and tell you to sell all your shares - they have a vested interest in supporting the market because they are are trapped in themselves. Perhaps they even want to create demand so that they have someone to whom they can sell their own shares?
It's a bit like the old saying that if you owe the bank £100 you have a problem. But if you owe the bank £1 billion, then the bank has a problem. The institutions were powerless to offload shares in sufficiently large quantities to make a difference to their holdings without bringing about the very collapse they were seeking to avoid. Who would be a buyer of stocks in those quantities in a falling market? They can hedge them to a certain extent with derivatives, but not enough to make a huge difference. So the average fund can, at best, match the market, but in reality, by the time you take out the commissions and management fees mentioned above, then perhaps it's not surprising that only 1 fund in 7 beats the all-share index.
Then you must understand what motivates a fund manager. He has a benchmark index as his target for perforamance. If the benchmark index rises by 5% two years in succession, he would rather his fund puts on 5% each year than rise 20% in year 1 and 0% in year 2. In year 2 he will be seen to have underperformed the bechmark by 5% and he will lose his job, and keeping his job is his main priority, not maximising your fund.
Governments of both persuasions must also take some responsibility. Nigel Lawson placed a low limit on how much surplus a pension fund could build up, which led to the prolonged contribution holidays taken by many companies. Further surpluses were squandered by being used to to boost the pensions of those being made redundant - in other words pension funds were used to fund unemployment. This is still going on. I know of at least 1 middle manager with Standard Life who is being made redundant at 50 and having his final salary pension boosted to the level that it would have reached had he worked until age 60, and he will be allowed to draw it in full immediately without any reduction due to early retirement. How many of you would retire from your current job at 50 on 2/3rds salary, free to take up another position elsewhere? So now you know where your bonuses are going!
And then Gordon Brown introduced the tax on dividends for pension funds, amounting to £5 billion per annum, on the basis that most pension funds were in surplus and could afford it. Strange that now that most funds have a huge deficit, and demonstrably cannot afford it, that he's still plundering them at the same level! Never mind. He voted for his own pension to be increased from an already generous 1/50ths scheme to an impossibly generous 1/40ths scheme ( a 20% increase) immediately Labour came to power. So Gordon will be OK - so stop worrying.
