Tuesday, 30 June 2009

I keep saying this, but

Paul Myners has given another interesting speech, this time to the British Bankers Association. Usually in ministerial speeches you get a mixture of political scene-setting, a recap on initiatives undertaken and, if you're lucky, today's policy announcement. You very rarely (for all kinds of understandable reasons) see an attempt to grapple with some of the intellectual issues behind the policy brief.

Myners has given a string of speeches that I think many people in my bit of the world will think are both well-informed and challenging (in a good way). I can't think of another minister likely to make reference to strong-form efficient markets hypothesis and portfolio theory. He makes reference to the fact that the current review of governance etc needs to go deeper than Higgs and Cadbury, so we can only hope that Walker is indeed going to take a crack at some of the big issues.

Anyway, here's a short chunk, but the whole thing is worth a read.

If we challenge the objectiveness of markets in finding ‘fair value’ and expose the very approximate date that lies at the heart of TSR and portfolio performance calculations we create an opportunity for a more enlightened debate that might take us towards a better understanding of shareholder value. But this will not happen while focus for institutional investors is on outperforming competitors and indices over short time periods. This approach, quite rationally, has lead most core fund managers to create portfolios that are highly diversified and lacking in stock specific conviction; going with the crowd; not dissenting form the consensus (as we saw with the dot.com bubble); subordinating ‘fair value’ to second guessing. Such an approach has a profound bias over time to extremes of under or over valuation. That is why no major institutional shareholder stood up to challenge the increased leverage building up in the banking sector; no major institution seriously questioned hubristic take-overs; no one told Chuck Prince to “sit out the next few dances”; few challenged the wisdom of putting companies under pressure to ‘optimise balance sheet efficiency’ by taking on more debt or risk falling in to the hands of bank-financed private equity. No one spoke up for the end client, the pension scheme member or funder. No one exposed the nonsense of extreme behaviour and extreme valuation.

I'm interested to hear what Duncan makes of this too.