Saturday, 20 September 2008

UK's biggest pension fund stops stock-lending

This is a big deal, and other funds are taking similar measures. As I've posted previously, pension funds do well out of stock-lending in the short term, as it is an extra source of income. But there's always been a question over whether it's counter-productive over the long term. The fact that BT/Hermes, CalPERS, ABP etc are all taking a similar line is a pretty significant signal that major market participants don't accept - at least for the time being - that shorting has no downside.

One could read into these decisions the idea that the regulators may have tapped them on the shoulder and quietly asked them to have a rethink. The fact that they have all only applied the bar to financial stocks might appear significant, as it matches the move by the FSA for example, but it's also common sense really isn't it? I have no inside track here, but it's possible something is going on behind the scenes (though the fact that PGGM seems to be sticking with lending might point in the other direction).

But arguably it's more significant if the funds have reached this decision alone. Pension funds often take a long time to make major policy shifts. To give up a steady income stream because you've changed your theoretical position on how capital markets operate is quite a decision in itself. To execute it quickly too suggests a real shift in belief. Interesting times.


tory boys never grow up said...

It will be interesting to see whether they will be any coomon law actions against fund managers who have been involved in (large amounts) of stock lending of their clients investments for a breach of their fiduciary duty. There certainly would seem to be a case to answer.

zedman said...

The pension funds have not reached these decisions "alone".
I think that you will find that the three funds that you mention all have very close ties and regularly speak about common issues, stock-lending in particular.
There are also at least a couple of regulators that have tried to exercise a bit of nudging of investors to stop them from lending.
Stock lending in particular is easy to stop. You just tell your custodian or specialist agent. Literally that's it. And the structure of all contracts allow for the immediate cancellation of lending activity without penalty.
It also makes it easy to restart. Just as some funds did after temporarily ceasing lending in the aftermath of 9/11. Some stopped altogether, others stopped for airline stocks.

Tom P said...

Hi Zedman

Tnanks for interesting comments.

Yeah I know CalPERS and Hermes have worked together, dunno about ABP? Incidentally, according to Financial News a few local govt funds in the UK are also putting a temporary bar on lending.

I did wonder whether the regulators might be putting a bit of pressure on behind the scenes.

I'm going to have a stab at a further post on shorting - particularly the argument that it's just the mirror of going long. I'm not sure that it is.

zedman said...

Hi Tom P,
The people with responsibility for securities lending at CalPERS and ABP (now called APG if I am not mistaken) definitely have direct communication with each other and I have absolutely no doubt they discussed their respective views, even if they did come to the same conclusions separately. Those two, along with BT also share a securities lending service provider.
I look forward to your piece on short selling. I don't always agree with what you have to say, but you do it persuasively, thoughtfully and without being alarmist.