Tuesday, 31 March 2009

BT pension fund halts all stock-lending

According to a report on Thomson Investment Management News. Here's the key section:
The BT Pension Scheme (BTPS) has suspended all stock lending on concerns that short-sellers using the shares could further hurt market sentiment, two sources close to the pension scheme said.

The BTPS, Britain's largest pension scheme, in September placed some 20 British and global financial companies on its list of stocks it had barred from lending, but has now widened the ban.

"The BT Pension Scheme stopped all stock lending not just on financial stocks some months ago. Cannot say if the (decision) is permanent but it is still considered to be prudent at this time," one of the sources said.

This, I would suggest, is a pretty big deal, as BT is the biggest pension fund in the UK. Some of the feedback you get from in-house staff at funds is that such moves are driven by trustees, and it's sometimes an ill-informed decision. But the BT trustees are a pretty competent bunch, and surely recipients of much more specialist and expert advice than many others out there. So this must be quite a significant decision.

It may also suggest that the theoretical assumptions around stock-lending and shorting are beginning to shift and part of a wider reassessment of views about how markets work - something that came up in the Turner Review. The Turner Review of course asked whether decisions about shorting should take into account the dangers of market irrationality - suggesting a rather broader conception of how financial markets operate. Could BT's decision suggestion something similar developing in relation to stock-lending?

I'll briefly restate my own views here. I'm not particularly bothered by shorting in principle - because I think that it's just a set of trades so no better or worse than any other - but nor do I buy the argument that it plays as positive function as it enables negative sentiment to be expressed. A (sort of) comparable argument would be that borrowing money to buy shares is a good for markets as it allows vakuable positive sentiment to be properly expressed. And all that extra trading must be (in aggregate) a cost to someone, somewhere.

Stock-lending does provide an income for long-term investors, but it also confuses the ownership question. First, you may lend to someone who shorts the company - is that in your long-term interest? Second, you may lose the voting rights, meaning that the oversight of corporate governance is reduced. So I think there are questions for investors to ask (and some may conclude that actually the lending income is worth more).

These are by no means straightforward issues, but it does seem that sentiment is turning away from the simple mantra that shorting and stock-lending are good for liquidity and market efficiency.


zedman said...

BT's decision is directly at odds with the view expressed recently by the head of the NAPF. In January, Chris Hitchin encouraged pension funds not to stop lending securities while maintaining that each fund needed to take its individual decision. It is also a move in the opposite direction of LPFA which has just announced its return to lending.
BT has always been an activist investor and in my view the portfolio has never been appropriate for lending. Hermes had its own securities lending business until relatively recently when they decided to outsource to its custodian. I can't help but think that the motivation has less to do with whether securities lending is a positive/negative activity and more to do with the fund dynamics itself. It is entirely their decision whether to participate in lending or not, but it shouldn't be dressed as something it isn't.

Tom P said...

Hi Zedman

Fair points. I assume this applies across the BT fund's portfolio, rather than just the bits managed by Hermes? Presumably the latter isn't actually that much of the total these days since they flogged off the index-tracking bit to L&G.

I agree that some funds are heading in the opposite direction, hence my comment that some pensions managers think the trustees are taking the wrong action. But I do think there is going to be a bit more policy interest in these issues going forward. FSA is sposed to be taking a look at stock-lending - dunno if you've seen any info rabout what this is going to cover?

zedman said...

Correct - leaving securities lending was tied to the shift to L&G.
Not aware of anything new at FSA regarding stock lending, other than the work they were doing for IOSCO. IOSCO has acknowledged the value of short selling and securities lending while at the same time inviting commentary for transparency & reporting etc. Will see if anything else is going on outside of that.