Friday, 31 August 2007

Teamsters call for Iran disinvestment

Not sure what I think about this. The Teamsters president has written to "pension fund managers" (not sure if they mean fund managers or the pension funds themselves) calling on them to disinvest from companies doing business with Iran. The reasons given are the shocking treatment of Iranian trade unionists and the country's involvement with terrorist groups in Iraq. I'm in complete agreement one the former, I don't really know enough about the latter but from eveything I have read it does seem that Iran is involved in some murky activity in Iraq.

However, is disinvestment really the right way to go? It can be a dangerous stance for unions to take as they can appear to not care about financial returns. I accept that in this case it is different, not least because the US Government has taken a stance on companies doing business with so-called rogue states. In addition the SEC launched, and then pulled, a list of companies with links to the US target list. But might it not make more sense to try a bit of investor engagement first?

Anyway, here's the statement:

Official Statement of Teamsters General President James P. Hoffa

Leslie Miller
(202) 624-6911
August 22, 2007

I have written to Teamster pension fund managers asking them to consider divesting shares in companies that do business with Iran.

Government authorities in Tehran abducted Mansour Osanloo, president of the Syndicate of Workers of Tehran and Suburbs (Vahed) Bus Company, on July 10. He was severely beaten. For more than a month he’s been imprisoned in the notorious Evin prison. Mahmoud Salehi, founder of the Saghez Bakery Workers Association, was condemned to a year in prison for his courage in mobilizing workers. He is incarcerated in Kurdistan, far from his family and in danger of dying.

Peace and democracy to the Middle East will require its citizens to come together to exercise their rights and choose their own leaders. There is no better way to foster democracy than to empower its unions.

Further, no Teamster should have to worry that his or her money is supporting a government that helps militant groups attack our troops in Iraq. That is exactly what the government of Mahmoud Ahmadinejad is doing, according to the U.S. State Department.

Because Ahmadinejad seeks to endanger Americans, Teamster money should not be invested in any company that profits from its relationship with his government.

Iran has declared its enmity to the United States of America. It has admitted to enriching uranium and developing missiles. It has continued to funnel millions of dollars to terrorist groups throughout the Middle East.

I believe that divestiture of investments in companies that do business with Iran can help bring peaceful change to that nation. Shareholder democracy brought about change in South Africa and in Latin America, and it can work again in the Middle East.

I also believe that divestiture of investments in companies linked to Iran is the patriotic thing to do as well as a wise investment strategy. The Securities and Exchange Commission has said that share prices can be harmed by business ties with countries that pose a global security risk.

The State of Missouri has a terror-free investment fund. A number of states, including my home state of Michigan, are passing legislation forbidding public pension funds from investing in companies that do business with sponsors of terrorism.

Just last month, the U.S. House of Representatives overwhelmingly passed a bill that protects private and public funds that divest shares in companies that invest more than $20 million in Iran’s energy sector.

Teamster money should never be used to support terrorism in any way, nor should it be used to support companies that do business with states that sponsor terror.

We Teamsters are proud patriots. I am confident that our pension fund managers will make sure that Teamsters’ investments will not be used to support companies that do business with Iran.

Thursday, 30 August 2007

Recent market volatility

Time for a belated (sorry Simon...!) bit of rambling, ill-informed commentary on recent market volatility. As everyone one will be aware, stockmarkets around the world have been bouncing around in recent weeks in response to concerns about the crisis in the sub-prime market in the US. Lots of money has been lost, reputations have been battered (hedge funds, quant managers, ratings agencies), and central banks have been forced to intervene to steady market nerves. UK pension funds, which were just about heading back to surplus, have seen deficits re-emerge. It all looks rather bad.

But this time around I'm not actually that worried. The earliest crash I can remember was in 1987. Since then we have had some pretty serious follow-ups, including the Asian financial crisis, LTCM collapse, and the TMT bubble bursting post 2000. Each time it didn't turn out as bad as many expected and, thankfully, the underlying real economy didn't take too much of a battering.

That seems to be the case currently. The cheap debt binge was bound to come to an end sooner or later, but it's mistaken (I think) to view the fact that it happened as an entirely bad thing. If debt is cheap, it makes sense for companies (private equity) and people (mortgages) to take advantage of it. It is pretty rational. I have seen it argued on a Marxist (!) site somewhere recently that the growth of the use of debt could almost be described as a sort of private sector Keynesianism.

We are bound to go through a period of correction and capital markets, being what they are, will over-react and then get back to normal. I think capital markets, and the people in them, are far less important to the real economy than their cheerleaders think. Hence the FTSE can display a continuous downwards march in a period when the underlying companies whose value such indicies supposedly reflect, can continue to perform well.

If there is a problem it is that such volatility as we have seen lately can make it difficult for companies to invest. Here's a nicely written expression of this from The Soul Of Capitalism by William Greider:

“[M]odern finance theory employs the stock price in its fiendishly complex capital deals as an easy-to-read meter on corporate performance – and as a triggering mechanism for rewards or penalties. If the stock price rises smartly, it may liberalise credit terms for the company or allow its major lenders to convert their bonds into stock. When the stock price falls persistently, it will disturb – and may cut off – the company’s access to capital from the money market, bond borrowing and non-market sources. In the modern era, as financial value has become increasingly abstracted from a company’s real assets or everyday production, Wall Street has devised rarefied mathematical formulas to determine and predict corporate ‘value’ for investors. Despite continual errors of volatility, the stock price is a key anchoring fact for these calculations. Thus, as Keynes observed in simpler times, the short-term variations in stock price can perversely disrupt long-term plans for genuine investment…”

Also it's worth putting recent volatility in perspective. Look at the performance of say the FTSE100 over the past quarter, the normal period for fund managers to report returns to pension funds, and it looks pretty scary. Over a year it looks even worse - we are back to where we started. But over five years (reasonable period for a mandate?) and it starts looking fairly manageable. Maybe I'm being optimistic but it's notable that the official statement from the NAPF said much the same thing.

In addition, as the market over-reacts this will surely create opportunities for investors to spot seriously undervalued companies and start buying again. Already there is some of this sort of chatter going on.

The main issues that still do bother me are the role of the ratings agencies, and the apparent lack of knowledge amongst investors about exactly who is exposed to what. The latter one is important as financial "innovation" means that an increasingly small number of people understand how some of the investment instruments out there really work. Much of the panic in the market recently stemmed from this lack of understanding. As John Kay put it:

“If trading was motivated not by differences in attitudes and preferences but by differences in information and understanding, risk would gravitate not to those best able to bear it but to those least able to comprehend it."

But broadly, I'm not panicking. Yet.

Wednesday, 29 August 2007

Exec pay is massive - shocker

Another exec pay story already... The Grauniad has published its annual survey of executive pay in the FTSE100 today. Guess what - total rewards have gone up again, this time by 37%. That's about 11 times the increase in average earnings, and puts FTSE100 chief execs on average on about £2.9m in total. Meanwhile the ratio between employee and directors pay is now almost 100:1, although in some companies with lots of low-paid staff (supermarkets etc) the ratio will be a lot higher.

The Institute of Directors has made the half-decent argument that we shouldn't inform our views on exec pay by looking solely at the FTSE100. That's true. The survey is based on less than 1,500 directors (including over 800 non-execs). They are a small group of people, and most company directors don't earn anything like the amounts being talked about.

However, you do have to wonder how long this widening gap in the division of the rewards from our economic system can be allowed to continue. Why does it take substantial year-on-year increases to get corporate leaders to do the job? Why are they so much more valuable than the rest of us, and why does their notional superiority (as expressed in the rewards they receive) increase every year? I think in the longer term this can only undermine people's faith in the economic system (for me this is a Bad Thing by the way).

Middle-aged men dominate trustee boards

Here's an interesting, and unsurprising, bit of research. Trustee boards fail to reflect the diversity of either society or even their own schemes' membership. There really is no excuse for this. Thanks to TU campaigning occupational pensions are no longer largely the preserve of full-time male employees, although there is still work to be done. So why do the trustee boards of schemes not reflect this?

As member representation on trustee boards increases in the push for a proper 50/50 split, maybe unions who run trustee training courses ought to be making a conscious effort to ensure that trustees are genuinely representative of scheme membership.

Middle-aged men 'dominate' pension trustee boards 28 August 2007 15:00:

UK – Pension boards lack diversity and trustees are struggling to come to terms with the complexity of pension legislation, a new study has found.

In a survey of 157 trustees, consultant and actuary Hymans Robertson found the majority of UK company-sponsored pension schemes are government by men over the age of 50.

“The study found 82% of pension trustees in the UK are men; 60% are over the age of 50, while just over one in 10 (12%) of pension fund trustees are less than 40 years old,” the firm said today.

"The dominance of men over the age of 50 at the helm of company-sponsored pension schemes demonstrates one of the challenges companies face when engaging with younger employees and women to become more active in saving towards retirement,” according to Hymans Robertson.

Gail Paterson, partner at the firm, also commented: “Trustees who participated in the study highlighted the skills they regard as essential to the role – decision-making, communicating, organising – skills which men and women alike possess. Whilst older, more experienced people may be considered to have the edge in these areas, less experienced and younger workers should certainly see themselves as capable of taking on the role of trustee,” she added.

Moreover, the study found pension legislation is one of the major issues facing trustees,as some 53% of respondents said legislation was the biggest single challenge to trustees as is grappling the volume of pension legislation they have to deal with.

Other findings in the survey highlight trustees’ governance and funding issues are a likely source of conflict of interest for trustees, over what is right for the members and what is good for the company.

Tuesday, 28 August 2007

Chief execs vs centre forwards 2

I blogged previously a while back about what I think is a false comparison between the pay of company directors and that of professional footballers. I'm not defending the pay of the latter (how can you, really?) rather that I don't like seeing it be used as a justification of the pay of the former.

I just spotted the recent research done for the Fabian Society on public attitudes to pay and it turns out (surprise) that the punters think both groups are paid far too much:

A new Fabian poll shows the British public's appetite for fairness and equality: they believe public sector workers should earn more, and are unhappy with the high salaries of those at the top end.

The report from the Fabian Society/YouGov which forms part of a new Fabian publication called The Equality Challenge, due out in September, found that although the British public thought the PM should earn more than top managing directors and footballers, he should earn less than he does currently. They felt £135,000 was a reasonable rate for the PM's job. However, they would slash salaries for professional Premiership footballers to around £62,000 a year closely to their currently monthly salary.

The Fabian Report on equality in Britain found the public felt the following were reasonable salaries:

• Prime minister - £135,000
• MD of a top company - £120,000
• A best-selling author - £80,000
• A GP - £70,000
• A leading Premiership footballer - £62,000
• A state secondary school headteacher - £52,000
• An experienced hospital nurse - £33,000
• A local beat police officer - £29,500
• A good local plumber - £28,500
• A bus driver - £22,500
• A supermarket check-out worker - £15,000
• A fast-food restaurant worker - £14,000.

Thursday, 23 August 2007

Investors & cluster bombs

This bit from the Observer is quite interesting for a couple of reasons. First, because the institutional investors in question seem to be actually screening out companies involved in the manufacture of cluster bombs. This is quite a shift from the trend in recent years to try and engage with companies rather than sell their stock, but then again what does a "socially responsible" cluster bomb manufacturer look like?

Secondly, I'm a bit surprised to see Hermes mentioned in there (by the way Hermes is a fund manager not a pension fund as the article suggests). Although they are definitely a very activist fund manager, and totally committed to good corporate governance (far more than any other fund manager), I don't think I'm telling tales out of school by saying they haven't been that impressive on social responsibility issues in the past. Maybe the issue simply has a bit of momentum.

Cluster bombers face City boycott

Nick Mathiason
Sunday August 19, 2007
The Observer

Leading UK institutions have told The Observer they are about to withdraw hundreds of millions of pounds from firms linked to the manufacture of controversial cluster bombs.
The move will be seen as a major breakthrough for campaigners such as Handicap International, the International Campaign to Ban Landmines and Human Rights Watch.

Last month French insurer Axa announced it was pulling its investments from companies that manufacture cluster bombs, which can lie unexploded for decades and have a devastating effect on civilians in war zones. Now a number of fund managers in Britain have indicated that they view the issue as a pressing ethical concern on a par with investment in Sudan and Burma.

The pension fund Hermes has recently written to the board of BAE to establish whether it plays a part in the industry. The move was revealed by online magazine Responsible Investor
Cluster munitions work by dispersing several smaller submunitions, often referred to as bomblets or grenades, over a wide area. A significant proportion of the bomblets do not explode and remain dangerous decades after a conflict has ended. Cluster bombs have been widely used in Iraq, Afghanistan and in Israel's air strikes in the Lebanon.

Giant arm firms such as EADS, BAE, Raytheon and Lockheed Martin are expected to face a battery of questions from fund managers in coming months over whether they are involved in cluster bomb manufacture.

Other firms linked to the production of cluster bombs include GenCorp, whose subsidiary Aerojet produces cluster munitions for Lockheed Martin.

However, a spokesman for Lockheed Martin this weekend said: 'We don't currently produce cluster bombs or any other explosive warheads used in rocket and weapon systems. We do develop systems that improve the accuracy of munitions.'

Raytheon, which campaigners say produces an air-delivered bomb with some cluster variants, denied involvement in the trade.

Last February 46 countries, including the UK, committed to banning cluster bombs by next year. But the US was not one of them. A number of Dutch institutions have pulled out of investing in cluster bomb manufacturers after criticism in a television documentary. And Norway's Oil Fund has also left this market.

Millions of people will be endangered by up to 132 million cluster bomblets that have not yet exploded, causing lasting economic and social harm to communities in more than 20 countries for decades to come, Handicap International warned earlier this year.

The vast majority of cluster bomb casualties occur while victims are carrying on their daily lives, according to the report Circle of Impact: The Fatal Footprint of Cluster Munitions on People and Communities.

Wednesday, 22 August 2007

Tories trouser another £30k from Fidelity

"Generally non-partisan" fund manager Fidelity gave the Tories a further £30,000 in April this year, according to the Electoral Commission website:

Conservative And Unionist Party [The]
Conservative Central Office

Fidelity Investment Management
status: Company
company reg no: 02349713

Oakhill House
130 Tonbridge Road
TN11 9DZ


£ 30,000.00

(have a go yourself here).

That makes it almost £400,000 Fidelity has given to the Tories in the past few years. The company rather bizarrely claims that it is non-partisan, despite admitting it has only donated money to the Tories. Needless to say it creates something of a conflict of interest when the company is pitching to Tory-controlled local authorities. I can't imagine Labour-controlled authorities employing Fidelity wil be best pleased!

Tuesday, 21 August 2007

MNTs block indie trustee appointment

Quite an interesting story involving Lord MacGregor!

British Energy trustee board shuns new appointee - EXCLUSIVE
by Chris Panteli 16-08-2007
TRUSTEES of the British Energy pension scheme have refused to work with a newly-appointed independent trustee and have reported the company to The Pensions Regulator.

Three elected members of the trustee board say they will walk out of their next meeting in protest against the “deceitful and disgraceful” way British Energy appointed Lord MacGregor of Pulham Market as independent trustee and chairman of the £2.4bn scheme.

They claim they were not consulted on the proposals to introduce an independent trustee and were only told after MacGregor’s appointment.

The trustees, who are backed by trade union Unite, have logged a formal complaint to the regulator calling for the watchdog to investigate the matter.

Unite national officer Dougie Rooney told PP: “We are not in any way challenging the principle that appointing an independent trustee is a good way to proceed; we are questioning why the company did it behind the trustees’ backs.
“It compromises the very nature of an independent trustee and displays a complete contempt for the elected trustees and scheme members.”

Unite has also questioned MacGregor’s credentials.

Rooney added: “We have tried not to personalise this but we have checked his professional track record and there is absolutely no evidence to suggest he has any qualifications to act as an independent trustee.”

A British Energy spokesman said: “Unite’s concerns lie around the process of appointment not the suitability of Lord MacGregor to carry out this role.”

“Lord MacGregor is currently a trustee of another pension scheme. He has extensive business and City experience.”

Friday, 17 August 2007

Tory pension proposals

Took me ages to download the Redwood report which can be found here. Here are their key recommendations on pensions:

We recommend the following proposals to assist in maintaining the schemes we still have, in opening new ones, and in helping those choosing to save through defined contribution schemes:

1. There should be no compulsion to buy an annuity with the invested money in any pension fund on retirement.
2. There should be no maximum age to start drawing down a pension.
3. Future pension contracts could specify a range of benefits that are guaranteed, to be agreed between employer and employee.
4. A future government should seek to persuade the Accounting Standards Board that FRS17 and IAS19 have introduced too much volatility into company balance sheets, and need to be changed.
5. The discount rate applied when valuing the funds’ assets and liabilities should not necessarily be based on the bond rate. When bonds are expensive this can distort the valuation. The government should consider legislation to allow fund-specific discount rates, which reflect the asset and liability pattern of the fund.


We favour the idea of the lifetime savings account, partly modelled on the US 401K plans. We would recommend that people are allowed to establish their own lifetime savings plan, which would:

1. Allow investment in the fund with full income tax relief on contributions.
2. Be free of Capital Gains Tax on investments sold within the fund.
3. Allow tax free withdrawal to buy a pension annuity or to make pension payments.
4. Allow a borrowing facility to permit property purchase or a training course, where the money has to be put back into the fund over an agreed period.
5. Allow commercial borrowing against the security of the fund for other purposes.

Just a couple of quick points. Delaying annuitising tends to benefit the better of as they can afford to live without an income stream for a bit. Also allowing punters to borrow against their pension is probelematic too. The evidence from the US suggests that a large proportion of people who do this don't pay the money back. That means they have less to live on in retirement. Personally I'm a bit of an authoritarian on this one. If it's a pension it should be used for retirement income, because you need it.

Darling plans to tax buyout funds more

Hehe I'm not at all surprised by this one. After some pretty stooopid speculation that Alistair Darling might not touch the taxation of private equity at all, now HMT is briefing the FT that it is thinking about both raising the capital gains tax paid on "business assets" (from 10% to 20%) and increasing the qualifying period for taper relief.

This is all still under review, but you can see the thinking behind it - the industry wil be relieved that CGT didn't go up to 40%, whereas it marks a clear move away from the status quo that most people now agree is flawed. And by increasing the qualifying period for taper relief it looks like HMT is refocusing the incentive on what it was originally supposed to do - helping those making genuinely long-term investments.

Already one firm of tax advisers is saying even this approach will - you guessed it - push entrepeneurs overseas. Well, I suppose that is what they get paid to argue, though notably the BVCA hasn't made the same point this morning (probably because they realise most policy folk are a bit sceptical about it).

Sensible comment in the Lombard column:

Darling can't avoid fall-out from buy-out tax reforms
Published: August 17 2007 03:00 | Last updated: August 17 2007 03:00

Unions claim a "secret memo" between private equity firms and the Treasury enshrines beneficial tax treatment. Alistair Darling must wish it were that simple: find the memo, abolish the tax break, job done.

Instead, the new chancellor of the exchequer has a choice of unpalatable consequences of tax reform. Everyone agrees Something Must Be Done - and so it should - but altering the tax rules for all would whack entrepreneurs, venture capitalists and Aim shareholders, as well as buy-out firm partners. On the other hand, making fine distinctions based on size of fund or deal - a proposal aired by Gordon Brown's friend and confidant Sir Ronald Cohen earlier this year - would add complexity and invite serious gaming of the system. If you could halve your tax bill by legally redefining yourself as a "mid-cap" fund, what would you do?

The only no-brainer is the extension of the qualifying period for the lowest rate of tax relief from two years to five. The shorter period always looked like an incentive to short-termism and most true entrepreneurs are likely to hold their investments for far more than five years. Doubling the lowest band from 10 to 20 per cent only seems a let-off if you are a buy-out partner, relieved that carried interest on your business assets (essentially a performance fee) will not be taxed as income, at 40 per cent. For other investors it could be punitive.

Mr Darling's "no knee-jerk reaction" approach is laudable. But there will be consequences. The important thing is that as many of them as possible are intended and explained. The chancellor needs to take longer, as he has promised, to consult more widely and to prepare for some serious briefing of all those who will be affected.

Thursday, 16 August 2007

SEIU calls for private equity tax changes

This is from today's FT. As the Pink 'Un notes, the SEIU has been trying to be pretty pragmatic in its approach. It's Behind The Buyouts report on the private equity industry went as far as suggesting that PE firms adopt some voluntary best practice principles, something the industry (naturally) sniffed at. But the debate has turned on its head, especially given recent market developments. The unions know (or should do) that they are in a stronger position in the debate now. And you wouldn't bet against a review of PE taxation in most developed markets.

US union hits at private equity ‘tax dodges’
By Edward Luce and Stephanie Kirchgaessner in Washington

Published: August 16 2007 03:08 | Last updated: August 16 2007 03:08

Andrew Stern, president of the Service Employees International Union, on Wednesday day called on Congress to look more broadly at the “tax dodges” of private equity groups which he said are receiving billions of dollars in public subsidies “at the expense of everyone else”.

Mr Stern’s attack is significant because SEIU – one of the US’s most centrist and pragmatic unions – had this year said it wanted to work with private equity groups to ensure employees of companies taken over in leveraged buyouts were treated as stakeholders.

But the SEIU, which has attracted criticism from other unions for working with Wal-Mart on healthcare reform, said it had failed to find one uninsured American who had received healthcare as an employee of a private equity group.

Mr Stern also warned the pension funds that invest on behalf of the SEIU’s 1m public sector members to think twice before investing in the portfolio funds of Kohlberg Kravis Roberts – one of the largest private equity firms – and to avoid buying shares in its initial public offering.

Pension funds with SEIU members’ money account for more than 30 per cent of KKR’s $16.6bn (£8.3bn) 2006 Fund, he said. Lobbyists for the private equity industry have warned in congressional ­testimony that a tax rise could lead to a reduction in pension fund returns.

“The leveraging strategies of KKR have run headfirst into the credit crunch and it raises concerns that pension fund investments in KKR could be at risk,” Mr Stern said. “I agree ... that what is good for business is good for America. But I don’t think that applies to private equity groups.”

The SEIU also criticised the Carlyle Group, a private equity group headed by David Rubenstein, for benefiting from interest payment subsidies on its recent $6.3bn takeover bid for ManorCare, a nursing home group, which the SEIU says will cost the taxpayer $600m in foregone revenues.

A trade group to which ManorCare belongs, funded advertisements attacking a bill that would expand federal coverage to uninsured children. “I find it offensive that David Rubenstein, whom I’m told is now worth $1bn, could be involved in efforts to restrict health insurance for uninsured children,” Mr Stern said.

Carlyle said: “Carlyle does not yet own ManorCare and therefore has no involvement in its trade association’s activities. So such a claim is quite a stretch.”

Mr Stern’s attack comes amid debate within the Democratic Party over whether to redefine the tax status of “carried interest” private equity revenues. Critics say it provides a large loophole for private equity and hedge fund executives to pay far lower taxes than others.

Chuck Schumer, a leading New York senator, said he was opposed to any tax rise that targeted the private equity industry because it would unfairly penalise his home state.

The Private Equity Council, a Washington-based lobbying group, said: “Portfolio companies owned by private equity firms pay corporate taxes, payroll taxes, health insurance taxes and real estate taxes, just like any other company. There is no evidence that private equity-owned firms are more apt to lay off workers than publicly traded companies. In fact, several studies suggest just the opposite.”

Wednesday, 15 August 2007

My geekiest post (so far)

I was trawling the Govt’s statistics on local government pensions recently, as you do, and was interested to see the changes in fund management and admin costs that the DCLG reports. In this table look at the line “Costs charged to the funds”. If my maths is right then the changes in fund management and admin costs look like this:

2001/02 – 2002/03: -2%
2002/03 – 2003/04: +10.6%
2003/04 – 2004/05: +15.1%
2004/05 – 2005/06: +15.5%

I can understand the first entry as that was when the markets hit rock bottom. That should have meant that fund management fees fell. Much of the fund management cost schemes incur will be based on assets under management, and I’m sceptical that many managers would have earned any performance-related fees in this period. As such, for the same reasons, you can understand the subsequent pick up in costs afterwards.

For comparison here are the average (mean) changes in market value across the funds in the same period (taken from SF3 returns).

2001/02 – 2002/03: -19%
2002/03 – 2003/04: +25%
2003/04 – 2004/05: +13%
2004/05 – 2005/06: +26%

Here are a couple of obvious points. First, the fall in costs is a lot less than the drop in the market value of the funds. Secondly, when the fund values recover, the costs also increase fairly significantly. I did wonder if there was something going on with the admin costs (excluding fund management) but that doesn’t seem to be the case. Below are changes in both admin and fund management costs per scheme member over the same period as the previous figures, plus a couple of extra years (in bold) that I have data for. (I know this isn’t a like for like comparison, I’ll try and do that later).


1999/00 – 2000/01: +3.7
2000/01 – 2001/02: +3.6

2001/02 – 2002/03: -0.11%
2002/03 – 2003/04: +0.7%
2003/04 – 2004/05: +7%
2004/05 – 2005/06: -1.2%

Fund management

1999/00 – 2000/01: +13.3%
2000/01 – 2001/02: -4.4%

2001/02 – 2002/03: -12%
2002/03 – 2003/04: +11.6%
2003/04 – 2004/05: +12.6%
2004/05 – 2005/06: +16.8%

As you can see the admin costs are fairly stable, whereas the fund management costs jump around quite a bit. And the fund management costs are very roughly double the admin costs so have a greater impact on the total. Overall in the period 1999/00 to 2005/06, admin costs per scheme member went up by 14.2%. Despite the stockmarket correction, fund management fees per scheme member went up by 41.3% in the same period. Nice work if you can get it.

I will do more on these stats when I have time. The underlining SF3 data tells some interesting stories, with inner London funds seemingly paying way more in fund management and admin costs than any other group. Although they are generally smaller funds, my initial skim of the data suggests that it’s not all about economies of scale.

Private equity starves AA of IT investment says GMB

Very interesting report out from the GMB, produced as part of their ongoing punch-up with the AA's private equity owners. This research piece looks at the (lack of) investment in IT and systems. Interesting development as it shows the increasing sophistication of the TU critique of private equity. You can only get so far by attacking PE people for earning too much and paying too little tax, but if unions get into some of the, dare I say it, business arguments they will find quite a lot of peoplpe share their concerns.

For example, have a look at some of the analysis of private equity's claims on the website of former Redland PLC director Don Young. Here and here.

GMB release below...

14 Aug 2007

GMB today publishes a technical report, by an independent computer systems company, on the computer hardware and software that the AA are using in their fleet of patrol recovery vehicles. The report was commissioned by GMB following myriad complaints from GMB members employed by the AA that the current IT systems do not work very well and lead to long delays in responding to breakdown calls from motorists.

The report concludes "There are two words that can describe this setup; slow and unreliable." The report goes on to say that, "The AA has allowed this Solution to be run down and starve it of investment. The lack of investment also has other serious implications such as on the morale of The AA engineers in the field trying to work with a solution that is unworkable.

The AA has to invest in order to solve this urgent problem, and they have to invest soon. The modern and efficient way of servicing this type of industry is with proper use of technology. Technologies needs investment. Updating technology solutions also need significant financial commitments. The AA appears they are trying to solve "a new problem with old technology" and it will not work. The AA need to make a significant investment on improving their technology, and they need to start investing now."

The report makes the following recommendations,

"For the AA to start servicing their paying customers again they need to take drastic investment decisions towards improving their existing system.

The aging Panasonic CF-28 rugged notebook PC will need to be replaced with a newer generation type hardware that is significantly faster and with more RAM installed. This will have to be a major investment by The AA when the unit price is considered (£3,000 - £3,500).
New development of a new Application Software (VixEN) - Redevelopment (Major cost involved)
Installation in each vehicle (Deployment)
Software installation and configuration for each notebook
Training all drivers on the new system
Stocking of spare parts for servicing the equipment.
With only such a significant investment The AA will meet the levels of service they promise their customers. An investment that will run into millions of pounds.

Paul Kenny, GMB General Secretary said, "I told the House of Commons Treasury Select Committee that the private equity owners of the AA were asset stripping the business to feather their own nest to the detriment of their customers and their employees. This report bears this out.

Meanwhile back on the frontline in the recovery patrol vehicles helping paying customers who are broken down, the frontline staff do not have the best tools to respond to the customers needs in the most efficient manner. With private equity the necessary investment in customer services comes a poor second to looking after the interests of the multi-millionaire elite owners.

Total borrowings on the AA/SAGA balance sheet are now £4.8 billion. This is £400,000 per employee. The annual interest payments are in excess of £30,000 per employee which is more than double the annual wages of the AA's call centre employees. Almost £2 billion of these borrowings have been used by the private equity multi-millionaire elite to pay to themselves vast sums when they walked away."

Tuesday, 14 August 2007

They're gonna come for your pensions 2

One to keep a look out for on Friday. From Professional Pensions website (the pic is my idea...).

Conservative Party set to publish pension review
by Jenna Towler 14-08-2007
THE Conservative Party is set to publish a wholesale review of pensions policy and economic competitiveness later this week.

John Redwood – the chairman of the political party’s Chairman of the Economic Competitiveness Policy Group – is expected to unveil plans to encourage greater retirement saving through the protection of final salary pension schemes.

It is understood the Tories want to help companies keep defined benefit schemes running and reopen schemes that have been closed in the past.

Redwood – a minister in the last Conservative government - will publish full proposals to boost Britain's economic competitiveness and plans to boost savings across the board on Friday.

Another nice quote

This is from John Kay's comment in today's FT, looking back on the Lloyds collapse:

"Lloyd's was, I came to realise, a microcosm of what was happening in other financial markets. If trading was motivated not by differences in attitudes and preferences but by differences in information and understanding, risk would gravitate not to those best able to bear it but to those least able to comprehend it."

One to remember next time you hear someone talk excitedly about how financial markets parcel out risk.

Monday, 13 August 2007

Pension funds not impressed by audit committee reports

The latest news from activist local authority pension funds:

Company audit reporting is inadequate say pension funds

1. A quarter of the UK’s larger companies do not provide proper reports to shareholders on audit practices, a leading pension fund group has claimed.

2. In its response to the Financial Reporting Council’s recent consultation on the Combined Code on corporate governance, the Local Authority Pension Fund Forum (LAPFF) says that its research has established that 23% of the FTSE 350 do not adequately report on the activities of their audit committees. LAPFF says that in these cases, companies’ disclosures amount to little more than a summary of their audit committees’ terms of reference.

3. The Forum research found that the standard of audit committee reporting varied by size of company. The Forum discovered that 11% of the FTSE100 did not produce adequate reports, compared to 30% of Midcaps and 40% of Smallcaps.

4. In its response to the FRC consultation, the Forum argues that the Combined Code should reinforce the need for an informative description of the work covered during the year, rather than a general statement of responsibilities. Although the Smith guidance, which is now incorporated into the Code, provided a proposed outline for audit committee reports, the Forum believes many companies do not act in the spirit of the guidance.

5. Cllr Darrell Pulk, chair of the Forum, said: “Audit committee reports represent an area of company reporting where we believe there is substantial room for improvement. Simply disclosing terms of reference is not good enough. We want to see meaningful reports to shareholders, and the Forum believes the FRC can use the recent consultation on the Combined Code as an opportunity to encourage better practice.”

6. A copy of the Forum’s response to the FRC consultation is available from the website,, under ‘Publications'. A copy of the response is available on request.

7. In February the Forum announced that it would carry out a major shareholder engagement campaign on audit reform during 2007. The campaign employs a tiered strategy aimed at both encouraging laggard companies to meet baseline industry practice, and embedding best practice.

8. Audit has become an increasingly high-profile corporate governance issue in recent years. In addition to concerns about the independence of auditors there has also been a focus on the concentrated nature of the audit business, with the so-called “Big Four” accounting firms dominating the market for company audit services.

Nice quote on hedge funds

From today's FTFM:

"Hedge funds are best defined as a fee structure in search of an investment strategy."

Friday, 10 August 2007

Returns from the run-down

On a day of bad news in the markets, here's something a bit more encouraging from the FT. Basically, investing in the run-down bits of the UK is something of a win-win. The areas benefit from the investment, but the investors also do well. My entirely unscientific judgement is that this seems to make sense. On the retail level, much as many people hate Tescos and Starbucks (for some half-decent reasons) you can tell that when they open in an area that things are changing. It's a bit of a signal that the area is improving, and I think it becomes self-fulfilling (a bit like the "broken window problem" in reverse).

Anyway, there's a bit from the FT piece below. Full article here. And Tescos if you are reading this please open a store in Loughborough Junction.

Britain’s most rundown inner cities and suburbs were historically seen as a no-go area for many big property developers.

However, research is set to challenge conventional wisdom by suggesting that investors can, over the long term, get higher returns from real estate in “regeneration” areas than elsewhere.

Not only have total returns over five years been higher – 16.7 per cent against an average of 15.1 per cent – but they have been less volatile. The results are based on research from Investment Property Databank, the research firm, which will be unveiled at a presentation on Friday.

In particular, there has been much stronger capital growth in residential values in those areas that were previously overlooked or dismissed.

“These figures confirm unequivocally what we have suspected for a long time – that investors are missing a trick in rejecting regeneration areas because of poor historical performance,” said Steve Carr, head of policy and economics at English Partnerships, the regeneration agency.

The study, carried out with Morley Fund Management, English Partnerships and Savills, the estate agency, takes data from 581 properties in 20 of England’s urban regeneration companies in towns such as Blackpool, Gloucester, Swindon, Salford and Walsall.

These URCs were set up by the government in an attempt to encourage private investment in down-at-heel neighbourhoods.

They're gonna come for your pensions...

Are you a public sector worker with an occupational pension? If so think very hard next time you vote. The unrelenting message from the Right (and sometimes the Lib Dems) is that public sector workers' pensions are too generous. The Tories have talked openly about "reforming" them.

Today's Telegraph features a typical rant from the Garry Bushell of business journalism Jeff Randall. In it he trots out the usual attacks on public sector pensions, and as usual makes some very basic errors.

For example he says that the Pensions Commission called for the retirement age to be put up to 68 in the long term. Not quite, the Commission was referring to State Pension Age - the age at which you draw your state pension. If SPA goes up to 68 it affects everyone, in the public and private sector. He gets it wrong again when he says the deal over public sector pensions allows existing scheme members to "retire" at 60. No Jeff, it means existing members can draw their pension at 60 - not the same thing. He also fails to mention, presumably because he doesn't know, that a large number of private sector schemes also allow their members to draw their pensions at 60.

Because he gets these basic facts wrong, he seems to think that public sector workers can retire at 60 whilst the rest of us work on to 68. Aside from the fact that he has confused pension age and retirement age, he obviously hasn't seen any stats on average retirement ages. I will try and dig some stats out but when I last looked at this they showed that average retirement age in the public sector was HIGHER than that at large companies in the private sector. Guess what Jeff, the private sector sometimes wants to boot out the oldies. And one reason why public sector workers have higher retirement ages is that some of them need to work past pension age to have a decent income.

We need to be very wary of these attacks because they represent an attempt by the Right to get private sector workers to agitate to undermine the conditions of those in the public sector. Make no mistake about this - the labour movement suffered a major setback in the private sector over pensions. Most final salary schemes have closed and they have typically been replaced by much less generous money purchase schemes. This is effectively a significant cut to the total package on offer.

But the cutbacks in the private sector should not be used as a reason to attack public sector pension schemes.

Thursday, 9 August 2007

Pension trustees disrupt merger and acquisition activity

Interesting bit from Pwc. The implication seems to be that the progress of M&A is more important than the funding of pension schemes. First, I don't agree. If employers are running pension schemes they should fund them properly. Second, a lot of M&A activity is value-destroying - which means it costs pension funds money - so maybe it's not a bad thing that a brake is put on some of it. Actually I quite like the idea that trustees are able to through a spanner on the works of investment banks' deal activity.

From Prof Pensions:

TRUSTEE funding demands could scupper merger and acquisition deals as increases in interest rates and market volatility hit dealmakers, PricewaterhouseCoopers warns.

The financial services giant said increased market volatility over the past month had increased scheme deficits as equity markets and bond yields had fallen.

It added it was becoming a lot more expensive and much more difficult to raise debt to buy firms, meaning there was less cash around for dealmakers to make available to schemes in a bid to satisfy trustee funding demands.

PwC partner Marc Hommel said the combination of these two factors meant that trustees had to be increasingly vigilant about monitoring the employer covenant during deals and noted this would magnify the influence of schemes in deals going forward.

Hommel explained: “Finan-cing around deals has become tighter and the impact of each of the liabilities on each of the creditors on a deal has probably increased as a result.”

He added: “There is less cash around. Pensions, along with other creditors, are probably having even more of an impact than they were a month or two back.

“There may be some instances where dealmakers can no longer justify the sort of packages they were prepared to make available to trustees just two or three months ago in order to facilitate a deal happening.”

Hommel said the increase in volatility – with the associated drop in equity markets and changes in bond yields – had highlighted the fact companies and trustees needed to assess their appetite for retaining risk in scheme portfolios.

He said: “The real question is how much do you want to de-risk your liabilities and assets to take the volatility out of the situation?”

Wednesday, 8 August 2007

Fidelity rapped over Tory donations

Nice work from Mr Gray!

Fidelity faces pension fund campaign over contributions to Conservative party

By Raji Menon

Fund manager faces criticisms that the donations are both 'fundamentally wrong' and contrary to the principles of good governance.

LONDON (Thomson IM) - Fund manager Fidelity is facing the ire of pension funds who claim that its contributions to the Conservative Party are both 'fundamentally wrong' and contrary to the principles of good governance.

John Gray, an observer at the Tower Hamlets Pension Fund, believes the manager risks posing a conflict of interest when bidding for business at Tory-run councils. According to the Electoral Commission, Fidelity has donated 360,000 stg to David Cameron's Conservatives over the past three years.

Several local authority pension funds including Bromley, Haringey, Greenwich, Norfolk, Ealing and Buckingham County Council - which all have Fidelity on its roster - now want an explanation from the fund manager over its donations to the party.

Gray told Thomson Investment Management News: 'There are two main issues here - one is of good governance. Obviously if a fund manager or any contractor of the council funds a political party, it's a fundamentally wrong.

'Scheme members are paying their [Fidelity's] wages and a lot of scheme members who don't support the Conservative party will feel aggrieved that the profits from their scheme are being used to fund a party that is unsympathetic to say the least of their interests.'

Gray, who is also chair of the Capital Stewardship Forum at Unison which aims at flagging up corporate governance issues at local government pensions schemes, said the forum would write to Fidelity, demanding an explanation.

'There may well be an explanation that Fidelity can offer us that will satisfy us - that is reasonable. Obviously if they can't offer a reasonable explanation we will ask them to review their stance; undertake not to do it further.

'If they don't agree, we urge Unison, other trade unions and labour councils to reconsider whether or not Fidelity are an appropriate company to do business with.'

Gray, who is a Labour Party supporter, insists that the matter is 'one of principle'. He said: 'It would be unwise for any fund manager to donate directly to people to whom they are actively bidding for business.'

He added that the National Association of Pension Funds also maintains that it would not 'normally' support the policy of making UK political donations.

Fidelity was not available for comment at the time of publishing.

Tuesday, 7 August 2007

More on overseas ownership

I wrote previously about the shifting nature of share-ownership and the growing role of overseas investors in UK companies. I thought I would come back to this for a couple of reasons. First, there's a wail in the Mail (scroll down a bit) today about ICI being taken over by Akzo Nobel. Secondly I spotted this bit on the Thomsons investment management news website about Chinese insurers being requirted to invest in blue chip companies overseas.

So I'd thought I'd look in more detail at the stats the ONS put out recently. Here is the full report. Some interesting points in there include -

* Individual investors favour financial companies, and really don't like UK manufacturing companies (pages 14 & 15).

* Overseas investors have their ownership conncentrated in the largest companies (eg FTSE100). That's where they put 83.1% of their investments. Overseas investors therefore own a higher proportion of the FTSE100 than the UK market as a whole - this now totals a whopping 43%. (pages 16 & 17).

* North America and Europe account for a broadly similar proportion of overseas investment in UK companies - 33% and 30% respectively. Asia isn't miles behind at 19%. Africa accounts for 13% which I assume is driven by South Africa. (page 20).

Attack on trustees

I recently spotted the story below on the Professional Pensions website. There has been a bit of a trend in the last few years for providers to take pot-shots at the trust-based model of pension provision. Unfortunately it's hard to untangle genuinely constructive criticism from self-interested spin. There are legitimate questions to be asked, for example, about recruitment of member trustees - where do we find all the new trustees? - and about time constraints - how much time can lay trustees give towards running a multi-billion pound fund.

However the story below seems to be more in the self-interested camp. I'm particularly struck by the implication that trustees of DC schemes are at fault because trust-based DC schemes often offer "only" four or five fund choices. Actually there is plenty of behavioural evidence out there that increasing the number of fund choices makes it less likely people will choose. However a product provider wants to put the best gloss on their offering - forget the trustee model, just give us the business and we'll make sure that everything is taken care of.

Ho hum...

Trustee ‘paternalism myth’ needs debunking
by Alex Hamilton 03-08-2007
Employees are likely to get better investment choice under a contract-based defined contribution scheme than one run by trustees, Truestone Employee Benefits claims.

And the firm said it was time the myth that trust-based schemes offered greater paternalism was debunked.

It said that trust-based schemes were much less likely to provide scheme members with enough choice or personal involvement in their retirement planning.

It added that schemes should be engaging with employees and providing them with knowledge and tools to make their own decisions – and in the 21st century this goal would be best served by adopting a contract-based approach.

Truestone said this would boost the investment choices available to members and allow individuals to tailor their fund management to their own likely retirement date.

Truestone senior consultant Ed Smithson said: “This myth of a trustee board system providing more paternalism than a contract scheme is just that – a myth.

“A contract-based scheme can offer greater paternal-ism than a trustee board over investment choice. It is time for these 21st-century approaches to be taken on by companies.”

Truestone employee benefits director John Deacon said a typical DC trustee-based scheme would offer only four or five fund choices, which was not enough for all employees.

He said: “Trustee boards could do with exploring in more detail what are the options.

“We are not ‘anti’ the whole structure of trusteeship but if a company has got to a position where it is struggling to find trustees, the realisation is to sit down and say this scheme is not appropriate for us any longer.

“If you cannot get trustees then the interests of the members are not being served.”

Friday, 3 August 2007

Quote for a friday afternoon - Adam Smith

Here's a quote from Adam Smith on limited liability and public companies. I think he must have lost a few quid in over-hyped tech stocks that day or something.

"This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies who would, upon no account, hazard their own fortunes in any private copartnery. The directors of such companies, however, being the managers rather of other people's money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own."

Private equity funds could be forced to disclose job cut plans

I should have really blogged about this a couple of days back. The FT reported that the Walker review into the transparency of the private equity industry could go further than previously thought. Although Sir David Walker who chairs the review is pushing a voluntary approach, the very idea that he suggests that buy-outs might disclose plans for job cuts really does take the debate to a new level. Make no mistake, the industry will hate this. But if we are talking about private equity wanting to play a major economic role (running large companies like Boots) they probably aren't going to have much of a choice.

Here's a bit from the FT earlier in the week:

Sir David said the feedback received so far had convinced him of the need for a "model template" of the exact information private equity firms should publish whenever they announce a buy-out deal.

He suggested the template would include details of how the transaction will be financed, the strategy behind the deal, including any factory closures or job cuts, as well as a description of who will take over as management and board members.

"I think an employee in all these situations has a justifiable interest to know 'is my job security materially diminished as a result of this?' I think that is a fair question," said Sir David.

While unions may welcome the proposals, some private equity executives are expected to shudder at having to announce their strategy and planned staff changes for every deal.

Meanwhile today the FT reports that buy-out activity will dry up for months because of current global wobbles over debt exposure.

Just to remind anyone who wasn't listening at the back, this stems frome concern about the sub-prime market in the US. This is basically the low-income bit of the market with poor credit history. An interesting reminder of how interconnected we all are these days through our financial assets. Working people defaulting on mortgage payments in the US can affect how well your pension does in the UK, or how likely your employer is to be taken over by a private equity firm. That's precisely why the Left needs to get its head around capital markets. RANT RANT RANT!!!

Thursday, 2 August 2007

Cider loses its fizz

I was surprised to see that C&C, the company that makes Magners cider, is in a bit of trouble. Based on my own unique investment analysis (buying the odd bottle when I go out, seeing lots of other people drinking it etc) I had the impression that Magners was doing very well and I would have given it a "strong buy". But according to The Guardian that is not the case.

Again using my analytical skills, I deduced that must be because of the crappy summer we've had, with less people wanting to drink cider when it's chucking it down. And indeed C&C does in part blame the weather. But as the Grauniad points out, it doesn't seem to have affected C&C's rival Scottish & Newcastle, who make Bulmers Cider.

industry insiders pointed to a trading statement from Scottish & Newcastle, which makes Bulmers Original, this month. It said: "In cider, we have also gained share in a market which has continued to grow strongly despite the poor weather."

It seems that the real issue is deals with pub chains. So if you find you can only get Bulmers in your local rather than Magners it's not down to consumer choice, it's the result of fierce haggling between the cider producers and pub chains. Isn't the free market great?

The value of investment consultant advice

Interesting bit from Watson Wyatt here claiming to show that if you are a pension funds and you follow their advice on which fund managers to pick then you'll be quids in. This seems to be based on the returns of managers they recommended over the returns of the relevant index for each asset class. I won't try and reproduce the table that shows their performance by asset class so click the link above to see it (you'll need to scroll down a bit).

Interesting as there has been quite a bit of scepticism of the value of consultants in recent years, and some attempts to measure consultant advice independently (although one firm offering to do this went bust last year). I'm a bit of a sceptic about the value of much of the stuff flogged to trustees, but the Watsons numbers look pretty convincing. Maybe more digging required?

Wednesday, 1 August 2007

Sarbox not so bad after all that

There's a fair-minded editorial in the FT this morning about the impact of Sarbanes-Oxley - the major corporate governance reform act in the US that came after Enron, WorldCom etc. Many business leaders hate Sarbox (as it is known) and some blame it for the drop in companies listing on the NYSE. (In fact recent analysis suggests that the drop of in listings began well in advance of Sarbox, so another example of people - wilfully? - misreading the data).

Anyway here's the FT's take on it -

Five years of Sarbox
Published: July 31 2007 18:57 | Last updated: July 31 2007 18:57

In July 2002, the Sarbanes-Oxley Act swept into law on a tide of populist indignation over the Enron and Worldcom accounting scandals.

Five years on, Sarbox – intended to restore confidence in corporate America – has become a synonym for heavy-handed regulation, chief whipping boy for those who fear US markets are losing their competitive edge to lighter-touch jurisdictions.

That reputation is largely undeserved. Given the political pressures that rushed the legislation through, its achievements – for example, in promoting audit committee independence – are perhaps more notable. Even companies that have struggled to comply concede that Sarbox has focused attention on the quality of financial reporting.

Yet the Securities and Exchange Commission was unable to prevent some more cumbersome aspects of Sarbox taking effect. The reviled section 404, requiring outside auditors to attest the quality of internal risk controls, was implemented in a way that allowed over-zealous auditors to run riot, imposing unnecessarily steep compliance costs. Many blame the legislation for a fall-off in listings by foreign companies and the measures have undeniably damaged perceptions of US markets.

So the SEC deserves credit for its latest proposals to smooth Sarbox implementation. Christopher Cox, the SEC’s Republican chairman, has won unusual consensus from Democrat colleagues for new guidance that will let management take a more pragmatic, principle-based interpretation of section 404.

The next challenge will be Sarbox’s extension to smaller public companies, which have previously won successive stays of execution. This will require careful handling: even a tailored regime could deter small companies, with limited capacity to comply, from listing.

Yet with compliance costs finally starting to fall, perceptions of Sarbox within the US are improving, and there appears to be little pressure for repeal or radical reform of the legislation.

Efforts to rationalise its application, though, reflect a broader swing towards more flexible regulation, as worries over the US’s competitive position start to eclipse concerns over corporate governance.

While Sarbox has proved a favourite scapegoat for the absence of foreign listings, other factors remain far more significant deterrents – international executives cite the risk of litigation, whether class actions or actions brought by the SEC itself – as the most important.

The US has learnt from Sarbox’s painful introduction, but it should now apply those lessons to a broader regulatory canvas.