Friday 28 December 2007

Andrew Glyn

I was sad to hear that the Left economist Andrew Glyn died just before xmas. I read Capitalism Unleashed last year and I thought it was an impressive piece of work. Two bits stuck with me from it, one fairly obvious, the other less so.

The first is that the decline of organised labour has coincided with a decline in the share of profits going to labour. I guess most people will think that this is an obvious development, but it is a very important one. Unfortunately many people these days wonder what unions are for, given that government can legislate to address workplace issues. Well, that's true to an extent. But if you are concerned with economic inequality, or even just with getting your fair share of the economic pie, then you ought to favour re-unionisation of the workplace. Incidentally, when I have made this point to people, even those who are hostile to Labour, let alone the rest of the Left, I have found people quite persuaded by it. That gives me cause for a bit of 'optimism of the will'.

The second point from Glyn's book is a bit more of relevance to this blog. This is that with along with the decline of organised labour, and the restoration of profits, the macroeconomic environment stabilised. As such you would expect to see the level of business investment increase, and indeed it was predicted by supporters of market 'reform' that this would occur. Only it hasn't really happened. This is still something of a puzzle. This isn't covered in Glyn's book from memory but there is some suggestion that in countries with large capital markets, or in its place significant foreign ownership of companies, investor pressure for short-term returns may make businesses reluctant to invest. It's an area that is worth further exploration. A number of studies recently have looked at how short-termism on the part of investors is self-defeating, but few go on to conssider how this may impact the wider economy.

Finally Glyn also devotes quite a bit of time in the book to the rather radical idea of Basic Income. I think this shows that he still harboured a desire for radical reform, despite having moved on from his earlier Marxist approach to economics and politics.

Thursday 27 December 2007

Bad language

Reading through the xmas edition of The Economist I stumbled across the the following bit in the (actually pretty rubbish) cover feature - 'Mao and the art of management'. Following a passage describing how Mao actually enjoyed a relatively luxurious lifestyle, whilst always employing the slogan 'serve the people', the article claims -

"Psychologists call this 'cognitive dissonance' - the ability to make a heartfelt case for one thing while doing another."

If I am reading the Economist piece the right way, then they seem to be saying that cognitive dissonance is about being able to do something that you have previously argued against (or something like that). In other words the ability to not care about (or perhaps even not be able to 'see') the inconsistency between an idea and an action.

If my understanding of what they are trying to say is correct then I think that gets the idea the wrong way around. As I understand it cognitive dissonance is actually the uneasiness we feel about two ideas that are apparently in conflict. For example the uneasiness I might feel about the apparent conflict between my belief that The Economist is a good and reliable source of information, and my belief that they have misunderstood a given psychological term. If you think about it, it ought be quite clear that it's about conflict in the mind when you think about what 'dissonance' means on its own.

I like reading The Economist as I find it quite challenging given its pro-market liberal stance. So it's nice to know that even they get things wrong.

Sunday 23 December 2007

Mobiles, magpies and markets

If there is one advert I really hate at the moment it's that Orange one with the slogan 'Good things should never end'. Several things about it make me want to put my foot through the telly. First is the irritating 'faux hippy' music and styling. Like, hey guys, we're just a bunch of crazy, idealistic slackers like you - our target 18-35 demographic - so why not sign up to a kooky contract with us?

But the slogan says it all really. It's the kind of meaningless hippyish-sounding but actually thoroughly self-indulgent blah you find in a lot of yoof oriented stuff these days. For instance, next time you're watching telly have a look at how many adverts are using folksy/hippy music, even as they try to sell you something you don't need and which is no doubt quite anti-hippy in its ethos. Unfortunately I'm too convinced that our feeble minds are easily fooled to not think that such hippy-corporate junk probably has an impact on us.

As an example of just how stoopid we can be, me and the Mrs were having a coffee this morning and saw a magpie land in a tree in the communal back yard which our flat faces into. We both agreed that when we see one magpie on its own we think of the "one for sorrow..." rhyme and instinctively feel a bit anxious. This is clearly ridiculous (unless someone is aware of any serious academic work suggesting a correlation between single magpie appearances and sorrowful events) but at some point in our lives we have been told it and, as irrational as it clearly is, it still features in our thinking even to the extent of provoking an emotional response when we see a single magpie.

This is turn reminded me of a bit in Naseem Nicholas Taleb's Fooled By Randomness (one of the best things I have read lately) where he talks about falling prey to a similarly irrational supersitition. He got a taxi to work one day, whilst working as a trader, and for once decided to get it to drop him off a block away from work and he walked the rest of the way. That day one of his trading strategies paid off handsomely. The next day he got a taxi to work... and got it to drop him off a block away from the offoce so he could walk the rest of the way. He knew that it was crazy to think that the taxi ride the day before had led to his trading success, but some part of his brain still compelled him to feel it had in some way been a factor.

We are constantly grasping for explanations, even where there don't need to be any.

Shareholder activism: theory and practice

Shareholder activism in theory ought to be a straightforward and commonly utilised strategy. If the owner of a public company thinks that it is being run in a way that destroys value (or threatens to) then they should engage with the management of the business to bring about change. Concerns about the threat to value might involve company strategy, corporate governance or even social or environmental concerns. But in theory it should be in the shareholders' self-interest to engage with management. Afterall, they are the owners, it is really their business.

In practice things are very different. For one, neither company management nor investors (again I'm talking fund managers here) seem to really consider the latter as 'owners' in any meaningful sense. They all pay lip service to the theory, but on a day-to-day basis it seems to be taken for granted that investors are principally traders rather than owners.

There are some rational explanations for this from the investor point of view. For example there is the 'free rider' issue. If a shareholder does engage with a given company, and as such prevents value destruction (or even creates value) than ALL shareholders gain by this, not just them. So, from a fund manager's point of view, why incur the cost of doing something that benefits your rivals.

If you think that line of thinking is problematic consider another one. For example, if a fund manager has concerns about a certain company they may well underweight it relative to that company's standing in a given index. If the manager is also underweight in that company relative to its peer group then it is actually in its short-term interest for the company to perform badly. It will hurt that fund manager's performance, but it will hurt their rivals more.

A more straightforward explanation is that it may simply be easier in the fund manager's mind to underweight or even sell out of a given company than engage with it.

There are of course exceptions. Investors like Hermes and Governance for Owners base their whole pitch to pension funds on the basis that they will engage, and on a serious basis. For example their focus funds will do the opposite of the process above and take an overweight position in a company that they believe has problems. By using the leverage of their increased stake they try to convince the management to change direction, alter the governance of the company etc. By doing so they aim to benefit from the value created by improving the company.

But most fund managers do not, in my opinion, operate anything like that. Although most managers now employ staff to work on corporate governance they typically seem to be quite separate from the portfolio managers. Their principal activity is voting shares, typically with a view to encouraging compliance with the Combined Code or comparable standards overseas. Now this is certainly an improvement from the situation in even the recent past where some fund managers did not vote at all. But simply pushing for compliance with a certain set of standards clearly has its limitations. It's a bit like a school inspector focusing on whether the right curriculum is being taught, rather than the quality of teachers, or the school's actual exam results (as misleading as such stats might be...).

This leads me to think that some fund managers undertake this activity because they think they need to be seen to be doing it, rather than because they genuinely believe it has value. They are traders who feel compelled to exhibit some basic signs of being interested in ownership. I'm not doubting the sincerity of people who work in the corporate governance teams of such investment houses, rather I wonder how seriously the leadership of such organisations take such issues.

As I have said before I think one of the reasons the ownership bit of shareholding malfunctions like this is because of the delegation of power from the ultimate investors (us, or our trustees) to professional fund managers. It is another version of the principal-agent problem. And I actually think that fund managers are doing pretty much what we are telling and paying them to do. The main message that they get from pension fund trustees is that performance is very important, and poor performance will result in them getting the sack. Corporate governance and social responsibility are very much an afterthought, and not considered at all by some trustees. In such a scenario it's not unreasonable that fund managers prioritise trading to deliver returns over engagement. Therefore until trustees change the signals that they send to their investment managers this situation will likely continue.

Friday 21 December 2007

Private equity and governance

Back on the private equity issue (topic of the year really) the bit below is from an interesting opinion piece by the editor of Financial News, a publication which is always worth a read as it's effectively the trade mag for the City.

Perhaps the best indicator of the systemic failure in governance is the dramatic rise of hedge funds and private equity firms – the second category that can be termed "investor governance" in the sense that they act more as owners of companies instead of just holders of their securities. The jury may be out on the claims that they are a force for moral or social good, but there is little question that they are a positive economic force. They act like "good" bacteria in attacking inefficiencies with a superior governance model and bridging the agency gap. Their rise has not been an accident. Poor governance has left the door open for them.

This is an increasingly common argument in favour of private equity as an ownership model. It is supposed to get over the agency problem of the separation of ownership and management in listed companies. And there is clearly some validity in the critique of public companies. Many investors - and I'm talking about fund managers here, not the real shareholders (us) - are very focused on short-term performance, because it is what they themselves are judged on. They are also trying to oversee hundreds of companies, so they are always a long way removed from the action (look at how many got burnt in Northern Rock). I have heard directors of public companies moan many times about how little investors understand their businesses, and how they have to manage news to suit how analysts react.

In contrast private equity funds invest in a small number of companies and the general partners are far more 'hands on' than even a large institutional investor will be in respect of a public company. In addition, private equity will typically 'own' a company for several years before selling it on, whereas the average length of ownership of shares is now under a year I think (although this doesn't actually tell you as much as many people make out). So, clearly, private equity as an ownership structure has some theoretical advantages over public companies.

But, and this is a big but, governance structures only get you so far. What matters much more is how people behave within those structures. As many have said before, good governance structures don't create good managers, and this is as true for private equity as it is for public companies. Cases like the AA demonstrate that actually private equity owners can be pretty clueless. And flip it around, are we really to believe that all those managers in public companies are performing sub-optimally, simply because the ownership structure is different? What sounds good at a theoretical level, sounds odd when you think about it in the real world.

Isn't it therefore far more realistic to view private equity as a bacteria alright, but one that principally attacks companies' capital, rather than governance, structure? In this view the success of private equity is really about arbitraging 'inefficiencies' in companies' use of capital - ie get the most out of debt while it is cheap. Arguably public companies were slow to make use of leverage, though it is clearly a strategy that has limitations and dangers.

My feeling is that the next couple of years will really see whether private equity can deliver the goods, as it won't be able to use leverage to turbo-charge its returns as it has done in recent years. The industry has taken out some big public companies, and how they perform will tell us a lot about what private equity actually does. The industry's pitch is that they run companies more efficiently AND create jobs. It will be interesting to see whether they can back these significant claims up. If they can, maybe the governance argument deserves some further scutiny. If they can't then maybe they were just another group of people who got excited by cheap money.

Tax blog

This blog looks like an interesting one to keep an eye on.

Hat-tip: Charlie.

Thursday 20 December 2007

Private equity ‘a force for good’. Repeat.

Don’t worry, this isn’t going to be a long rambling post debating the positives and negatives of private equity. Rather I want to draw attention to the number of times that the private equity industry and its supporters seem to use the term ‘a force for good’.

Just a few examples from a quick Google search:

Stephen Schwarzman of Blackstone:
"Private equity is here to stay as a significant force and as a force for good within much of the world economy."

Dominic Murphy of KKR:
"We are a force for good."

Wol Kolade of the BVCA:
"I believe passionately that private equity is a force for good in the UK."

Jonathan Russell, 3i
"A force for good"

Jonathan Feuer, CVC
"We are a force for good transformation."

And that’s without bothering to repeat some of the more gushing commentary from the business pages (The Telegraph being particularly guilty).

What’s my point? Well, I am wary of how easily we get taken in by the emotional pull of language. You might think ‘a force for good’ sounds like simplistic propaganda (even a bit Star Wars?) but I wonder whether it actually might work quite well on a subconscious level. The word ‘force’ lends the phrase a bit of dynamism, and the whole thing probably sparks a bit of a positive emotional reaction within us. And this reaction is being tied to the activities of the private equity industry.

Maybe I’m making a mountain out of a molehill, but the more I read about our behavioural quirks and cognitive blind-spots the more I think we get taken in by ‘directions’, whether these are intentional or not. In the case of this phrase there is clearly intentional direction. A good example of non-intentional direction is the effect the result a random spin of a roulette wheel has on our estimation of another, completely unrelated, number. See this account for example.

It’s understandable that we fall prey to these kinds of things as we are constantly struggling to make sense of a complex world. Sometimes (most of the time?) it is simply easier to take your ‘understanding’ of a given issue from someone else. So it also bothers me that this simple mantra might become stock phrase for people to pull up when they can’t be bothered to think through what private equity is really about.

I don’t think this is an evil corporate plot by the way. I always tend to boring explanations of why things happen, rather than conspiracy theories, hence I doubt very much that the private equity industry and its cheerleaders have decided to use the same slogan. It is possible that a PR firm may have encouraged the BVCA to use it, as a quick skim of Wol Kolade’s interviews reveals that he has used it a lot. But then Digby Jones always used to bang on about ‘responsible wealth creation’ didn’t he? More likely people recognise, consciously or otherwise, that the phrase has a bit of emotional power and have decided to nick it for themselves.

This is a complex area, and many of the union criticisms of the private equity industry are well-grounded. One cannot blithely assert, as much as many financial journalists like to, that it is a purely positive economic force. Therefore when you read/hear someone telling you that the industry is simply ‘a force for good’ it should set of an alarm bell that they are trying to sell you a simple narrative.

Wednesday 19 December 2007

Unison appoints SRI mandate

A little snippet from the Professional Pensions website. Would be interesting to see what Standard Life are going to do for the Unison fund since it is badged up as an engagement overlay.

The Unison pension fund has awarded Standard Life Investments a £140m active equity mandate.

The mandate, which covers UK and overseas equities, includes a socially responsible investment and engagement overlay.

Standard Life Investments head of socially responsible investment Julie McDowell said: "Our appointment by Unison provides an ideal example of the way in which SRI can complement and enhance investment goals, whilst enabling clients to adhere to key principals."

Unison staff pension scheme chair of trustees David Limb said: "We have applied an SRI policy to our investments for some time. Such a policy, especially when it includes active engagement, is very important to us."

Flat taxes

This is an oldie from this time last year but worth a plug – a paper produced for the IMF on the impact of ‘flat taxes’ (ie one rate for everyone). Proponents have put forward a range of arguments in favour of flat taxes such as that they are fairer, simpler, lower and can actually increase tax revenue (because people will work harder if taxed less, there will be less tax avoidance etc). Pretty big claims, obviously.

Although my lefty kneejerk reaction is against anything that moves away from a redistributive tax system, I do try and keep an open mind and think through whether new policy approaches would actually benefit working people, regardless of what my existing views lead me to want to believe. But luckily in this case I didn’t have to go through the unwanted hassle of changing my views (again) as you will see from the abstract of the paper below.

It is worth a read in its entirety. One important political point worth making is that flat taxes benefit those at the bottom and the top at the expense of the middle. Therefore such an approach would a very difficult political ‘sell’ in a developed country like the UK where the middle tends to determine election victories.

Full paper can be downloaded here.

Summary: One of the most striking tax developments in recent years, and one that continues to attract considerable attention, is the adoption by several countries of a form of "flat tax." Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence. This paper reviews experience with the flat tax, seeking to redress the balance. It stresses that the flat taxes that have been adopted differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

Unite warns hedge fund

Straight lift from the Unite website:

Stop destabilising Cadbury's business, Unite tells hedge fund and Qatar
19 Dec 2007

Angry Cadbury workers today demanded that hedge fund boss Nelson Peltz and the Qatari state investment fund stop interfering with Cadbury Schweppes, accusing Peltz of creating an environment in which British jobs are being put at risk.

Unite national organizer for the food industry Brian Revell charged that statements by Nelson Peltz about 'becoming more active as a large shareholder' in Cadbury's affairs were destabilising the company.

"Nelson Peltz and his Qatari friends are interested only in the short and medium term profits they can squeeze from Cadbury Schweppes, " said Brian Revell. "He has no concern for the workforce or their communities. The state of Qatar and Mr Peltz have no business interfering in the affairs of an iconic British company like Cadbury's. We believe that company's directors must stand up to Mr Peltz and his Qatari friends.

"At the time when this unwelcome interference is taking place, we are faced with an outrageous plan to close Cadbury's Keynsham factory near Bristol and transfer production to Poland. There is no doubt that this plan reflects the approach of vultures like Nelson Peltz, and Cadbury's must reconsider the proposal before it damages the market share of a popular British product.

"The idea that Britain's traditional chocolate should be freighted into the UK from Eastern Europe is an attack on everything agreed at last week's Bali climate conference."


Further information: Brian Revell 07976 845352
or Unite press office on 020 7611 2550

Unite was formed on 1st May 2007 through a merger of amicus and the Transport and General Workers Union (T&G)

Monday 17 December 2007

Hain delivers pensions justice

The Government is finally sorting out the situation of people who have lost their pension entitlements because their occupational scheme failed. See this announcement from Peter Hain today. TUC reaction below. This is excellent news, especially coming just before xmas.

Warm welcome for FAS pensions victory

Responding to the Government's announcement on the future of the Financial Assistance Scheme, TUC General Secretary Brendan Barber said:

'This is very welcome news and a real victory for the long union campaign for compensation for the victims of the schemes that collapsed before the Pensions Protection Fund could assist.

'It will be the best Christmas present imaginable for the thousands of workers who lost out, but who can now look forward to some security in retirement.

'Ministers deserve praise for finding the resources to fund this pledge. It now means that every member of a salary related pension fund is protected either by the Pensions Protection Fund or the Financial Assistance Scheme - protection that was resisted by previous Governments.'

Saturday 15 December 2007

Unison trustees to raise Burma issue

From the Unison capital stewardship site:

Your pension fund can help the Burmese people

Do you contribute to your employer's pension fund? If you do then you will be able to take part in a global campaign to help the Burmese people achieve democracy.

Your pension fund may have shares in companies that trade with the military dictatorship. The Burmese trade unions want you to tell your fund trustees or reps to stop investing in companies that trade with Burma.

UNISON is supporting a call for trade union members across the world to get involved.

And this is how you can do it.

Write or send an email to your pension fund administrator - go to your employer's web site to find out who this is or ask your UNISON branch if they know.

You should ask your pension fund board of trustees or pension committee to request that they or your investment managers report to you on:

• what shares the fund holds in companies with ties to Burma

• their assessment of the financial, legal and political risks this may pose to your savings and the reputation of the fund

• their strategy for addressing such risks

Remember, your pension fund is your savings. You have a right to know how this money is invested, and a right to ask if investing in companies that make money from a military dictatorship is putting your savings at risk.

Since 2000, the international trade union movement has called on all companies with business links in Burma to sever those links and withdraw from the country.

In October 2007, the International Trade Union Confederation asked its affiliated organisations to engage in a shareholders' campaign which may include disinvestment from companies linked with Burma.

This position supports that of Burma's democratically-elected ruler, Aung San Suu Kyi, as well as the Federation of Trade Unions-Burma, which operates clandestinely inside and outside the country.

Foreign companies play a pivotal role in maintaining a steady flow of capital to the military dictatorship, and by extension, in upholding the country's brutal regime.

Military rule and repression has led to massive and systematic violations of human and workers' rights. In particular, the military regime oppresses and exploits its population through the widespread use of forced and compulsory labour.

For more information on UNISON's capital stewardship programme, go to or email Colin Meech on

A dramatic diversion

A bit off-topic but I liked this passage from Kenneth Burke about the nature of reality. He developed a theory called dramatism which is similar in approach to the Narrative Paradigm that I have posted about before. I think it really puts the nature of our belief systems in perspective.

"Can we bring ourselves to realise… just how overwhelmingly much of what we mean by "reality" has been built up for us through nothing but our symbol systems? Take away our books, and what little do we know about history, biography, even something so "down to earth" as the relative position of seas and continents? What is our "reality" for today (beyond the paper-thin line of our own particular lives) but all this clutter of symbols about the past combined with whatever things we know mainly through maps, magazines, newspapers, and the like about the present? In school, as they go from class to class, students turn from one idiom to another. The various courses in the curriculum are in effect but so many different terminologies. And however important to us is the tiny sliver of reality each of us has experienced first hand, the whole overall "picture" is but a construct of our symbol systems. To meditate on this fact until one sees its full implications is much like peering over the edge of things into an ultimate abyss. And doubtless that’s one reason why, though man is typically the symbol-using animal, he clings to a kind of naïve verbal realism that refuses to realise the full extent of the role played by symbolicity in his notions of reality."

Friday 14 December 2007

A sensible fund manager speaks

Maybe it is because he is from a a predominantly passive house, but I've always thought Lindsay Tomlinson talks a lot of sense. In this interview on Thomson he has a pop at hedge funds, in particular because people are paying a lot of money for beta (market performance):

AMSTERDAM (Thomson IM) - The current market crisis will unmask hedge funds's true investment structure and show that investors have often bought significant "unexpected" beta at a high price, according to Barclays Global Investors (BGI) vice-chairman Lindsay Tomlinson.

Tomlinson said: "Events will reveal their (hedge funds) true position, we do not even have to wait long."

"August was a horrible month for hedge funds and in November every single hedge funds had negative returns, beta exposure is becoming manifest as we speak. This is a case of misunderstood, overpaid beta," Tomlinson told delegates at the Multi Pensions 2007 conference here.

Stressing that he was giving a personal view, rather than that of BGI, Tomlinson compared the typical hedge fund to an iceberg, where investors could only see a small aspect of a larger structure. Alpha, he argued, is the tip of that iceberg.

"Ninety pct of it is beta and it is what most of us can't see," he said.

"You pay through the nose when you can get beta in other ways. Beta is cheap, it can be bought at lower costs than 2 pct and 20 pct," the average hedge fund's management and performance fee structure, he told delegates.

"The amazing thing, almost the unforgivable thing is that these mistakes have been made before, 20 years ago with long only managers. People used to think that if the market returned 20 pct and the long only manager 19 pct it was still a good job.

"Amazingly, the same thing has happened in hedge funds and most people have not understood that," he said.

Tomlinson also criticised the trend to invest in private equity and other illiquidity assets. He said that in principle it makes sense for long term investors such as pension schemes to tie up resources for a long time and be rewarded for it, but he argued that schemes are now being "pushed" because of their obligation to demonstrate solvency against marked to market assets.

While investment in liquid assets must be measured against market conditions the value of illiquid investments can only be assessed through models, what Tomlinson called "marked to make believe".

He urged investors to "hold illiquid assets for the right reasons [and] not just because the marked to market valuations will be less volatile," as he forecast a slowdown in business, especially in the private equity field.

"Six months ago this was the new paradigm; private equity needs public markets and vice-versa. It was the new 'new thing'. It is a symbiotic balance, but where is the balance?

"Now it is very quiet, private equity managers are in their bunkers awaiting the big bust," he said.

Speaking to Thomson Investment Management News on the sidelines he said: "One of the main issues is that investors worldwide may not know what they have bought, and it is likely that there will be a risk appetite reappraisal."

"Probably people did not have the risk appetite in the first place and bought stuff where they did not understand the risk implied. If they had fully understood the risks they would have not bought them in the first place," he said.

This expected risk reappraisal, however, will not bring an abrupt halt to allocation to alternatives, he said.

"Hedge funds will carry on growing but they way we think about them is going to change. They will be thought of more in terms of stripping alpha from beta and when [investors] start thinking in that way they will find that there is much less added value in the industry than it has been represented in the past," he said.

"Investing in beta and investing separately in alpha is the right paradigm," he said.

"Those who will prosper in the long run are people who will be able to add value, that means by pure alpha. There is a trend globally of increasing speed and transparency and it perpetually flushes out the elements of the system which are only cost with no value, that is going to continue to happen," he added.

Ole ole ole ole, Pablo… Pablo

Last weekend I was unlucky enough to watch the Tractor Boys crash and burn at Charlton. I should have known better. We haven’t won a single game away from home this season. A few days beforehand I asked my mate Phil, who runs the ace Ippo zine and website Those Were The Days, whether we were likely to score, let alone win, and his reply was simply “no, not really”.

It was, to use the cliché, ‘a game of two halves’. We were shocking in the first half, and were 2-0 down within half an hour. At which point Jim Magilton brought on Pablo Counago, our tricksy Spanish striker who is back with us for the second time. Much as I loved Pablo when he played for us first time around, I was a bit wary of his second stint with us as it looked like a bit of desperation on Magilton’s part. But Pablo can be great on his day, the ball just seems to stick to him, and he’s one of those players that manages to lift the crowd.

Unfortunately Pablo’s entrance wasn’t enough to change the flow of the first half though and (typical isn’t it?) ex-Blue Darren Ambrose score his second and Charlton’s third shortly afterwards. Town went off at half-time to boos from the away support.

Realistically, 3-0 down at half time is usually game over. But, thank Christ, Town came out for the second half (with two substitutions) looking like they had a point to prove. And almost immediately we had a chance to turn things around. Just a couple of minutes in Pablo was fouled in the area and the ref awarded a penalty.

Frustratingly, presented with an opportunity to get back into a game that had looked well and truly over, Alan Lee hit a shot that was easy for Nicky Weaver to parry, and then slipped over before he could get to the ball to put the rebound in. It was clearly wasn’t going to be our day, and not much later Danny Haynes hit the bar with a close-range header.

But with 20 minutes left to go there came a moment of pure brilliance. The ball was crossed in to Pablo, who looked like he was going nowhere with his back to the goal and Charlton defenders on top of him. But he managed to make himself a bit of space and then, out of nowhere, back-heeled the ball into the net from about 10 yards out. The crown went wild, and the Pablo chant that is the title of this post rang out around the Valley.

I’ve posted before about how football supporters are bad for developing ‘narratives’ and therefore lack objectivity. But of course that doesn’t really matter. And where is the fun in being objective about your team? When Pablo scored I didn’t think “he was lucky” and “we’re still two goals down”, I thought “that was genius” and “we can still get something out of this”. Ludicrous really given that we had already squandered two excellent opportunities, and didn’t have much time left. But that’s what happens when your team plays with real purpose and a talismanic player scores a really inspiring goal isn’t it?

Reality unfortunately crept in, and despite going looking for another goal, it finished 3-1 and there was even a bit of a brawl, with a Charlton player getting a red card after the final whistle. But even though we lost I actually enjoyed the game overall, because we at least had a proper go in the second half. And that goal! It’s already up on YouTube but the picture quality is very poor. It’s going to be one I remember for a long time.

Here comes the political bit. I don’t try to be very objective on this blog, because I think it is far more important to try and get people interested and enthused by the possibility of achieving change. So I think I’m playing a similar role to my mate Phil and his Ipswich Town website. And I hope what I post gives some people some confidence that they can make an impact in the financial system if they are willing to take a stand, and be persistent.

Maybe one day we will even have our own Pablo equivalents in the field of UK labour movement activism in the financial system - people whose talent and commitment to the cause give us confidence when they get stuck in, and who can lift us all when they execute a winning strategy with skill and precision.

Thursday 13 December 2007

A letter to Fidelity: the sequel

Round two. This letter has gone in the post tonight -

Dear XXX

Thank you for your letter of 6th December. I appreciate the time you have taken to respond.

However I feel I am not much clearer about the issues I raised. Firstly, and most importantly, I am no clearer as to whether Fidelity intends to make further donations to the Conservative Party.

We took out our ISA with Fidelity with a view to it helping pay off our mortgage, and therefore intended to be long-term customers. To be completely honest we would really rather avoid the aggravation of having to change fund manager if at all possible. However, as I hope I made clear in my previous letter, this issue will affect our decision about whether to continue to be a Fidelity customer. As such it is something about which we need to have a clear and unambiguous answer.

Secondly, I understand and accept that Fidelity undertakes public policy work, including engaging with politicians and civil servants, in order to influence the political and regulatory environment for financial services. However I find the suggestion that partisan political donations are part of Fidelity’s engagement programme unconvincing.

If the donations to the Conservative Party are purely part of this effort, then why have donations been made solely to the Conservatives and not the other major political parties? (I have checked on the Electoral Commission website to confirm this) The Conservative Party is not currently in government and as such has far less influence over the legislative and regulatory framework affecting financial services than the Labour Party. Looking more widely, the Liberal Democrats sit on key committees such as the Treasury Select Committee. So if these donations genuinely were part of Fidelity’s public policy engagement work, rather than partisan political support, I would expect to see donations to other parties too.

Thirdly I continue to believe these donations create a significant conflict of interest when Fidelity is seeking business from local authority pension funds which have Conservative Party representatives on their pension panels.

Finally, I genuinely think this is something Fidelity should be much more open about with its customers. I can honestly say that we would not have taken out an ISA with Fidelity had we known about these donations beforehand. Yet I can find no mention of these donations on the website or in any of the documentation we have been sent over the past 6 years.

If the company is a partisan supporter of the Conservative Party, and intends to continue to be so in future, this should be made clear to clients and potential clients in order that they can make an informed choice about whether to do business with Fidelity.

To sum up, I am simply trying to understand why these donations are being made, and whether they are going to continue, in order that we can decide whether we wish to continue as Fidelity customers. So I will try to make my questions as clear possible -

1. Why has Fidelity only made party political donations to the Conservative Party?
2. Does Fidelity intend to make further donations to the Conservative Party in future?

I look forward to hearing from you.

Yours sincerely

Long-term investing

This is a bit of a plug from Watson Wyatt but it has some interesting bits in it. There seems to be support amongst trustees for the idea that long-term investing is actually better at creating value. Have a look at the stats in the 'notes to editors' bit here.

Investment Beliefs Influence Equity Strategy Decisions, Watson Wyatt Study Reveals

Hong Kong, December 2007 – Institutional investors expressed their investment beliefs in equity strategies and favoured Long-Short ("L/S") and Long-Term Long Only ("LTLO") strategies among non-traditional equity strategies, in a recent Watson Wyatt Investment Consulting poll.

Around 50 fund trustees, sponsors and managers attended at a recent Watson Wyatt Ideas Exchange seminar. The seminar explored six different equity strategies and demonstrated the importance and influence of investment beliefs in investment decisions. Participants discussed how they would need to allocate capital across the six different equity mandates within equities, to be consistent with their conviction in the underlying investment beliefs.

Although respondents still expressed preference for a significant exposure to traditional active and passive equity strategies (23% each), the main outcome of the discussion showed an 18% allocation on average both to L/S and LTLO (see tables in "Notes to the editors" below). However, the low (5%) allocation to 130/30 strategies was perhaps surprising in contrast with the higher allocation to L/S, given the hype and market attention being given to 130/30. The remainder (13%) was allocated to Beta Primes such as fundamental indexes.

Anthony Chan, Principal Investment Consultant, said: "Managing equities through L/S or LTLO requires adequate fund governance. In addition, the quality of underlying investment beliefs is critical in implementing and assessing these strategies. For example, funds that claim to have a long-term time horizon should ask themselves whether their decision-making behaviour and the way they monitor their managers truly reflects a long-term time horizon."

Watson Wyatt also asked the audience to vote on their views of a number of belief statements. In general, the majority of respondents agreed that "The ability to short expands a manager’s ability to generate alpha" and "There is more opportunity to add value in long-term investing than short-term investing" (see tables in Notes to the editor below. The feedback from the participants was consistent with their allocation decisions supporting L/S and LTLO.

Said Chan: "Investment is essentially about making judgments and decisions, which are based on underlying investment beliefs about how the investment world works. Investors will provide themselves with a solid foundation to make better quality decisions if they understand the role of beliefs in decision making, take the time to develop better quality beliefs and stick with those beliefs particularly in times of high pressure."

Politics is no fun

The ongoing Continuity Respect/Real Respect split has been really interesting for a lot of reasons. Quite aside from the comedy value, and the incredible self-delusion of some of those involved (I have seen more than one person compare it to the Bolshevik/Menshevik split) what really comes across is people's political priorities, ie what really matters to them.

As lots of people have pointed out, news reports and blog postings about the split are far more popular than those about more mundane issues. People are extremely passionate about the political battle lines of a faction fight in an organisation that has a membership in the low thousands and considerably less council representation than the BNP. The organisation itself (both wings) is clearly obsessed with 'big' political issues (principally the Iraq war) rather than focusing on local issues. That probably explains why they have been unable to break out of their small local strongholds.

To me it reinforces the point that too many people on the Left are principally theorists. They have developed a theoretical understanding that 'the system' needs changing and then go looking for cases that prove it. You can see it too in the way that Trots operate in the unions. For example lots of effort gets put resolutions passed about foreign policy issues that UK-based trade unions have very little influence over. They seem to see unions as a vehicle to achieve political ends. This is an over-simplification, as we all know Trots who are very effective union activists, but their big political agenda never seems to be far away.

This is, in my view, the opposite to the process that led to the formation of unions, and ultimately the Labour Party. In that case genuine, immediate concerns felt by working people led to the creation of unions as a vehicle for self-defence and collective self-interest. In turn the Labour Party was created to given the unions political expression. Modern day Trots, in my view, have it all back to front.

I think this is why they have so little political success. People can almost smell on them the fact that they see individual issues that you may care deeply about as merely a stepping stone to their larger, and more important, political goals. I can't be the only one to have spotted that when SWP people do 'angry' at meetings it just doesn't ring true. It's like they are switching it on.

More broadly I think this type of politics is a cop-out. I think it is actually easier to get stuck into 'big' issues because there is very little practical you can do about them, and what you can do can be enjoyable (rant on a blog, go on a demo etc). I imagine it can be quite fun having a conspiratorial view of history and economic relations, and a revolutionary programme to sort it all out. But it also means that most of the time you don't have to do anything practical. Hence the endless debates about what Trotsky said to a cabbie in 1924 and its implications for Tower Hamlets in 2008. It's more of a parlour game than anything else.

This is by no means limited to Trots. I was really disappointed when I was talking to a Labour councillor who was in his 20s a few years back. He said he didn't like it much because he was more interested in 'national' issues. Then why stand as a local councillor? And I'm not free of this affliction myself. I enjoy talking, writing and thinking about politics. I also like theorising about political strategies to achieve change. And, obviously, I'm interested in how a Left perspective can be developed in the financial system. But I know a lot of this achieves very little, and as such in a way it is more about me deriving pleasure from politics than me being actively 'political'.

But as a paid up member of the reactionary enemies of the working class I occasionally get called upon to deliver Labour leaflets in my local neighbourhood. I don't enjoy this. Where I live most of the houses are split into flats so it involves a lot of going up and down a lot of stairs. And being a total coward I am always worried that someone is going to shout at me or something (though it hasn't happened yet). It's not fun. But I recognise that a) it needs to be done and b) it provides a link between the party and its councillors and the local population. I hope at some point someone has read one of the thousands of leaflets I have delivered and maybe, for example, got one our councillors' numbers off it and called them up. It is a trivial, but practical, political act.

Basically I don't think real politics is very enjoyable. It can be boring, frustrating, demoralising and all the rest of it. In my experience of public policy work for example if you are going to be any good you really need to get into the detail and become a bit of an obsessive. And even then you might not win. But at least it is real. Genuine political activity is a sacrifice that may sometimes be very rewarding. But fun it ain't.

They ARE gonna come for your pensions

The Tories that is, and maybe the Lib Dems too. I met a public policy person who does a lot of work on pension reform recently and we were discussing the politics surrounding the reform process. He said that the one thing that the Tories always mention when he meets with them is public sector pension schemes. He said his impression was that if the Tories do get back in then 'reform' of public sector pensions will be high on their agenda. He reckons they would go for a straight shift to DC. But he also said the Lib Dems talk about this quite a bit too, which I find surprising as I imagine quite a few of their supporters are public sector workers.

We should prepare for the possibility of a Tory, or Tory-Lib Dem government coming in and attacking public sector workers pensions. They are likely to portray public sector pensions as expensive luxuries that come at the expense of the taxpayer, so the counter arguments need to be developed. They may suggest paying the same contribution rate currently paid into DB schemes into DC schemes instead. This would actually make them very generous DC schemes, as most employers in the private sector have used the shift to DC as an opportunity to cut their contributions right back. But if that did happen I wouldn't bank on the contribution rate staying at that level (especially as Personal Accounts will only get a 3% employer contribution).

Don't say you weren't warned.

Wednesday 12 December 2007

Why remuneration consultants don't rock the boat...

I think this is the sort of issue for which the phrase 'no sh*t Sherlock' was invented. According to a report for the US House of Representatives Committee on Oversight and Governance Reform, the remuneration consultants that advise companies on executive pay are highly conflicted. This is a complicated issue, but I think a nuanced and tentative interpretation might be... if you are paid a lot of money by a company, you are unlikely to tell the directors they are paid too much, let alone find ways to reduce their remuneration.

I'm being a little bit simplistic (no really) but the report does set out some pretty stark messages. Namely that remuneration consultants are hideously conflicted because they typically do other work for the same companies that has far more value (therefore are they going to upset the applecart on remuneration issues when this means it could jeapordise other, more valuable, consulting work). Particularly interesting is the suggestion that the greater the conflict, the less pay restraint at the company concerned -

There appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay. In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interest was 67% higher than the median CEO salary of the companies that did not use conflicted consultants. Over the period between 2002 and 2006, the Fortune 250 companies that hired compensation consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants.

I'll chuck in my obligatory warning about muddling up correlation and causality, but surely this one deserves further scrutiny? Something similar in the UK would be a good start.

Tuesday 11 December 2007

Shareholder engagement research round-up

A list of all the reports I am aware of that appeared in 2007 which look at how the UK's instititional shareholders deal with governance and social responsibility issues, both policies and practice.

FairPensions fund manger survey.
FairPensions pension scheme survey.
IMA annual engagement survey.
LAPFF voting disclosure survey.
NAPF pension fund engagememt survey.
TUC fund manager voting survey.
UKSIF local government funds survey.

Monday 10 December 2007

More City donations to the Tories - UPDATED

I've had a look for any institutions' voting decisions on Caledonia Investments' proposed £60k donation to the Tories back in July (see previous blog). I've only been able to find two voted on it so far. Co-operative Insurance voted against (you'll need to search here). They argued:

"We do not consider that the payment of political donations is an appropriate use of shareholder funds, except in exceptional circumstances."

But surprisingly Insight Investment voted FOR it (it's resolution 15).

UPDATE - F&C voted AGAINST. See page 849 of their report here.

Most of the handful of shareholder voting records that are in the public domain are updated infrequently. The most recent reports I can find for many managers relate to company meetings in Q2, whereas the Caledonia AGM was in July. I'll update and repost this if I find any more info.

Second thoughts about stockmarket efficiency

I'm going to own up to be a duffer. Ages ago I plugged this essay by Alfred Rappaport. At the time I said the following about it:

One key insight that I drew from it was the idea that stockmarkets can be 'efficient' (or not) in more than one sense. Markets might exhibit ‘informational’ efficiency, with all known information factored into share prices, in turn meaning investors are unable to outperform the market over a prolonged period. But the market may also demonstrate ‘allocative’ inefficiency because decisions regarding capital allocation are not being made on the basis of sound valuations.

Think of this in terms of the tech stock bubble of the late 90s early noughties. Share prices were informationally efficient - because they reflected all available public information and market views - but were allocativley inefficient because the valuations were way out of line with the reality of the underlying businesses.

At the time I thought this was a good way of looking at the way that stockmarkets work, and in a sense I still do. But on reflection I've come to the conclusion that it is effectively an elegant statement of the irrelevance/meaninglessness of stockmarket valuations. My more critical reading of it now is "rubbish in, rubbish out". If investors are making decisions that aren't based on sounds valuations (whatever they might be) then the share price doesn't tell us anything meaningful, it's just the broad consensus of views.

Moreover I'm not sure that we can even really say that share prices are informationally efficient except in an extremely basic sense - namely that they exist! We can't know what information investors have or to what extent it influences their investment decision-making. All we can say is that some investors are using some information to guide their investment decisions and the result is the current share price, but this could be miles off target in terms of reflecting the underlying reality. And if that's efficiency I'm not impressed.

Default funds again

Here's a bit from Watson Wyatt that confirms the same story you always hear about fund choices in DC schemes - the more choices the less people choose (and hence most end up in the default). I keep banging on about this as I think it is a really important insight into how 'choice' actually works - rather than how the Right and economic text books would have us believe it works.

The fact that the UK's biggest investment consulting is saying it should indicate how mainstream this thinking is becoming amongst service providers. Yet most politicians still seem to think that more choice is an unquestionable good. So there is work to be done...

Anyway, Watsons say:

"[E]xcessive investment choice can lead to members making wrong fund choices and unintentionally taking on inappropriate risks and cost. When it comes to the number of investment options, increasing choice does not necessarily mean improving choice."

And, commenting on the high number of punters who end up in the default:

"This demonstrates a perverse situation where greater choice of investment funds leads to a greater reliance on the default option."

Notably they find that contract-based DC schemes (eg group personal pensions or stakeholders) typically have far more fund choices than trust-based schemes.

Full release is here, but the interesting stuff is tied to a product plug.

Sunday 9 December 2007

Fidelity replies...

I received the reply below from Fidelity yesterday. Just to recap in my letter I asked them three questions -

• What is the rationale for making donations to the Conservative Party?
• Does Fidelity intend to make similar party political donations in future?
• Does Fidelity disclose these donations when this is a potential conflict of interest (ie when presenting to Conservative-controlled local authority pension funds)?

I've read through the reply they have sent several times and my view is that they have answered the first question, but in a rather disingenuous way. They say the donations are part of their efforts to ensure "that the political and regulatory climate in which we operate enable us to give our clients the products and services they need in the most effective way possible."

This suggests that they see making party political donations (as opposed to incurring expenditure through lobbying) as a way to influence "the political and regulatory climate" which is a bit of worry in itself. But secondly even if this were true surely it would make more sense to make donations to all the major parties, particularly the one in government? Why would you not make donations to the party in power which is actually in a position to significantly shape the regulatory environment? It doesn't make much sense.

The second question I asked is clearly the most important since I have told Fidelity that we are thinking of moving our savings if future donations to the Conservatives are going to be made. From my reading of this letter they haven't answered this question at all. So I am left in the same position I was in before - not knowing if this is an ongoing situation that requires me to take action.

On the third question they state that they don't believe that there is a conflict of interest. So presumably this is why they don't answer my specific question about whether such donations are disclosed when they are pitching to certain potential clients. In fact the more I think about this the more I think they should disclose their donations to ALL clients (and potential clients). I had no idea that Fidelity was a Conservative Party donor when I set up the ISA. There is no way I would have set it up if I had known. A listed company would have to put such donation to a shareholder vote. So I think it is fair to ask that they disclose party political donations clearly somewhere in their marketing materials to give people the same choice.

So I am going to write again seeking some further information before I decide what to do. The bottom line is that I want to know if these donations are going to cease as this affects whether I want to remain a customer or not.

Separately there is the question of institutional clients - primarily pension funds. I am not at all convinced that there is no conflict of interest when they are pitching for business to politically-controlled pension funds. I know from having trawled council minutes in the past that councillors have to disclose potential conflicts and will even absent themselves from panel discussions in some cases. How can there NOT be a conflict of interest when Fidelity is pitching for business to a pension fund that is controlled by a political party to which they have given £415,000?

Finally it's worth mentioning that what has started off as a personal irritation (we would rather not have to move our savings simply because it's a hassle and we still think Fidelity are a decent outfit) is taking on a bit of life of its own. Obviously my wife and I have been talking to friends and colleagues about this and to date not a single person has come back with a "yeah, but". Everyone we have been speaking to about it has shared our disbelief that a company you go to for financial services products adopts a partisan political stance. The word that has come up most often when we have told people the story is "arrogant", which I assume is not something a company particularly wants to become known as. Their written reply, which comes across as cagey and dishonest, does little to dispel this impression.

I will post up our reply next week.

Dear Mr XXX

I write further to your letter which we received on 6 December 2007 with regards to Fidelity's donations to political parties.

I understand that you are concerned that a fund management company such as Fidelity should make donations to a political party. I can assure you that the donations were made from Fidelity's own resources and did not come from our clients' money.

Fidelity always acts in what it believes to be the best interests of its clients. In common with many companies, we have an active engagement programme with politicians and civil servants in the UK as well as with key European Union institutions. The principal aim of such activity is to ensure that the interests of our clients are fully represented to people and organisations that influence or determine policy in areas that affect financial services.

In doing so we seek to ensure that the political and regulatory climate in which we operate enables us to give our clients the products and services they need in the most effective way possible. The recent donations to the Conservative Party were an element of this much wider initiative.

The UK faces a significant problem in that people are not saving enough for their retirement. Our approach is to seek to encourage individuals to make better financial preparations for their retirement by encouraging appropriate incentives from government for people to save throughout their working lives. This would help to prevent future generations from subsisting on an inadequate income in retirement. Fidelity International has long pursued strategies that encourage long-term savings and we are supportive of any moves that would help close the retirement income gap.

Donations to political parties have to be disclosed by law and all our donations are appropriately disclosed on the website of the Electoral Commission. Its register of donations is freely accessible to all. There is no connection between such donations and any investment decisions made on behalf of our clients, so we do not believe there is any potential conflict of interest.

I hope I have provided you with an insight into this issue. I understand you are considering removing your holding with Fidelity over this issue, and I am most sorry to hear that. However, if you do wish to move your holdings elsewhere, we will make every effort to ensure the closure of your account is completed with a minimum of inconvenience to you.

If you are dissatisfied with my response you can refer your complaint to the Financial Ombudsman Service (FOS); howvere, if you choose to do this you must do so within six months. You can contact the FOS at the following address:

Financial Ombudsman Service
South Quay Plaza
183 Marsh Wall
E14 9SR

I enclose a copy of the Financial Ombudsman Service's explanatory leaflet for your attention.

If you require any further assistance, please do not hesitate to contact me on Freephone XXX. My extension is XXX and I am available Monday to Friday 9am to 6pm.

Yours sincerely

Customer Relations Executive

Friday 7 December 2007

Hermes on Northern Rock

Just a quickie. Some interesting comments from David Pitt Watson of Hermes in this report. I liked this bit:

"Take Northern Rock for example, how many fund managers had conversations with board directors about Northern Rock about the risks it was running; how many asked to speak to their non-executive directors? All these sorts of responsibility issues are the ones that pension funds should be asking their fund managers about."

He's absolutely right of course, but have any trustees been asking these questions? Fund managers these days all claim to take corporate governance and ownership responsibilities very seriously. So what were they doing in relation to Northern Rock? All you have to do is ask...

Lambeth pension fund facts & figures

I’m a Lambeth resident so I keep an eye on what my local pension fund is up to. Like many local authority funds, Lambeth is far more open to scrutiny about what it does than a typical private sector fund and there is a dedicated section on the council website here. Below are just a few excerpts from the agenda report for the latest meeting of the pensions panel.

The scheme has the following managers –

• Aberdeen Asset Management (multi-asset mandate and a bond mandate)
• Alliance Bernstein Asset Management (balanced mandate)
• UBS Global Asset Management (global equity mandate)
• Majedie Asset Management (UK equity mandate)
• RREFF (property)
• Adam Street Partners (private equity)

Aberdeen, Alliance Bernstein and Majedie outperformed. RREFF hit their benchmark. UBS underperformed.

The private equity investment is, at £6.5m, actually pretty small in the context of a fund with over £750m in assets. That doesn’t mean, by the way, that I’m going to be lobbying the fund to increase its allocation. The internal rate of return on the investment to date is 22.05%.

The report has this to say about fees –

Fees for quarter to June 2007 were: - Aberdeen Asset Management, £82,334.69, UBS £114,088.09, Alliance Bernstein £240,026.40, Adam Street Partners £127,007.66 and Majedie Asset Management £105,651.56. The total fees paid for the quarter was £669,108.40.

Which means the fund management fees for a year will be around the £2.5m mark. It would be interesting to see what this represents as a cost per scheme member. According to the DCLG’s most recent SF3 data the average across all local authority funds is £58.17, but for inner London funds it is a hefty £123.75.

I have one moan - there isn’t any voting or engagement information available (not even copies of fund manager reports) which is a shame.

Personal Accounts politicking

It's all getting a bit nasty in the debate about Personal Accounts. The Tories have called for Paul Myners to step down as chair of the Personal Accounts Delivery Authority after he had a bit of a go at Cameron and his buddies on Question Time. I think he was probably a bit unwise, but to be honest he is a shoot from the hip sort of person, and as he has pointed out he had a couple of digs at the Government on the same programme. So I hope he stays put.

What is a bit worrying for anyone who actually wants to see progress in pension reform is the extent to which the Tories are willing to play politics with Personal Accounts. As noted previously they have threatened to pull out of the cross-party consensus on the system. As I have mentioned I think this is in part because the Tories want to get the insurers onside, and they have used very ABI-like language in some of their recent comments.

One of these arguments is that low-paid employees who end up auto-enrolled into the scheme may be 'mis-sold' the pension, because it might disqualify them from means tested state benefits (ie they might have been better off doing nothing). I admit I am not up to speed on this but a) surely the inclusion of an employer contribution will mean it will be a no-brainer for most people and b) there must be a way of addressing the means test question.

In general it is good to see the industry that mis-sold approximately 1.7 million pension products - typically by encouraging people to leave occupational schemes to take out personal pensions when this was very obviously a bad deal - seems to have learnt its lession. But it is perhaps not in the strongest position to lecture.

Finally, I can't resist a bit of a bitchy dig myself. When the serious lobbying over the shape of Personal Accounts (or the National Pension Saving Scheme as it was called then) was taking place over the last couple of years, the ABI proposed something called a carousel (which became known, briefly, in policy circles as the 'carousel model'). Under this model if an individual did not pick a pension provider they would be assigned one from the carousel of approved providers.

I always thought it was a rubbish name for a proposal because it implies fun. Maybe this was intended to reflect the enjoyment the provider would derive from seeing thousands of guaranteed new customers randomly assigned to their pension product? But perhaps it was a more appropriate name than I realised. A carousel is, of course, where people pay to get taken for a ride.

Trustee decision making

This is an oldie from 2005 but I think worthy of a plug. It's a bit of research done by the cademic Gordon Clark into the way that trustee makes decisions. It looks at things like their attitude to risk (both personal, and as a trustee), discount rates they apply, how susceptible they are to confirmation bias and so on. So, as you've no doubt guessed, it has a strong behavioural economics element to it.

Here's a good bit from the introduction about rationality:

Within Western philosophy, substantive rationality is given pride of place and is commonly defined as the capacity to draw logically correct conclusions from a given set of premises (ie. reasoning by deduction). In the social science disciplines that privilege theory over empirical evidence, there is a high premium attributed to deducing the logical implications of a set of propositions thought to characterise economic and social processes. For example, if "All people maximise utility" and "Pension fund trustees are people" then "Pension fund trustees maximise utility". By implication, if "Pension fund trustees are responsible for investment strategy" and "Venture capital investments produce higher rates of return" it follows that "It would be irrational not to invest in such opportunities".

Three objections can be made to the status attributed to substantive rationality. First, even if we agree that rationality is a natural trait of human beings it is unlikely that human beings are equally endowed with the ability to exercise rationality in practice. Just as some people can run faster, some people can jump higher, and some people can swim further, we should expect performance in logical reasoning to vary a great deal amongst human beings. Second, logical reasoning may give rise to false conclusions. In the real world, it matters both whether the underlying premises are correct and whether the reasoning process is valid. Third, substantive reasoning may be vulnerable to systematic anomalies. Thus, those that study the psychology of reasoning have been very concerned with how and why people are seduced by "plausible, but fallacious conclusions" (Wason and Johnson-Laird 1972). Moreover, it appears that many people whatever their socio-demographic status and educational qualifications are risk-averse (Kahneman and Tversky 1979).

When the report came out I was a bit worried by it as I thought it might add to pressure to 'professionalise' trusteeship with a big P. I have two problems with this. First, whilst professional trustees are often a useful addition to a board I don't think they can ever have the same member-focused instincts that MNTs do. And secondly, I think everyone employs flawed decision-making - as the research suggests. So the danger is that we would end up paying for trustees who are less worried about scheme members, and just as bad at judgment calls.

Anyway, with a bit of distance (and trustee bashing having died down in the UK) I now think the report is simply a useful bit of research. You can download it here.

Thursday 6 December 2007

Traffic counter

As you may have noticed, I have a traffic counter on my blog. This is enables me to torture myself about the pitifully low number of visits I get. Helpfully it also provides some info about visitors, so I’ve been very flattered by the traffic I’ve had in recent days from a certain fund management company (including visits from offices outside the UK). Even more helpfully, the counter enables me to see referring URLs. That means that today when someone from that fund management company clicked straight from a Google search to my blog I was able to see that they had Googled the name of their company, the name of a political party, and the name of my last employer (presumably because they are doing some sort of background check on me). So if you need any more information about me - just ask. Anything to help speed a reply to my recent letter. Let me know via a comment on this post what would be helpful.

And thanks for reading!

Pensions Bill & de-regulatory review

It was a bit rubbish of me to not mention the Pensions Bill yesterday. You can download it here, and the GMB reaction is here.

Also published was the Government's response to the deregulatory review which is here. TUC response is here.

I've heard contradictory views on the deregulatory review. One, from the union side, is that it was a relatively successful damage limitation exercise. The other, from the employer side, is that it didn't go far enough to make life easier for those employers running good schemes. I do try to listen with an open mind to what the employer lobby says. Rather controversially I don't think company directors spend entire their working day plotting ways to do over their employees (I mean they must have to spend at least some time counting all their money and smoking cigars).

However on this occaison I am not convinced for a number of reasons. Any changes that would have been a significant cost saving (significant enough to make employers think twice about shutting a scheme) would have had to come at the expense of members' benefits. There is a trade-off to be made for sure, but I think any big savings would have been controversial. Secondly I kind of think the damage is already done. Most DB schemes are shut and, more importantly, the finance directors are now in control. I think they are going to be more bothered by risk than cost. And unfortunately I think that many will simply conclude that the risk of DB far outweighs any deregulatory changes that lower the cost - especially if competitors have shut their schemes. DB is largely over in the private sector, and the deregualtory review was never going to stem the flood, let alone reverse it.

Finally, and rather traditionally, I simply don't agree that there should be a significant further shift in the balance of power between scheme members and companies in favour of the latter. Companies promised to pay certain levels of pensions and they should honour that as far as possible. These promises were cheap when markets were good, now they are expensive - that is risk for you. Why should employees pay because companies ended up losing the bet? We have taken a major hit on pensions in the private sector, to give employers even more room to cut back just doesn't seem right.

IUF report: Private Equity Workshop Advances Union Bargaining Agenda

This is excellent. This is exactly how the unions should be addressing private equity now. The 'asset-stripping' headlines got us so far, but what is needed now is rigorous, evidence-based analysis and strategic thinking.

I'm a bit of a geek about capital markets for a trade unionist (in the UK at least), so I rarely find that when I read union commentary about these things that I think 'I hadn't thought of thought that' or 'I must check out the things they are referring too'. More often I think 'that isn't quite right' or simply 'Doh!'. But some of this stuff shows a much better and deeper understanding of private equity than I have.

Really encouraging.

Private Equity Workshop Advances Union Bargaining Agenda

While unions internationally continue to push for regulatory measures to curb the funds, and while they explore discussions with the funds and management of their portfolio companies to secure trade union rights, buyout funds are now major national and transnational employers. Unions need to adapt their collective bargaining practices to the changed financial and management imperatives that a leveraged buyout imposes. Following on the successful international conference held in November 2006, IUF, IMF and UNI organized a workshop in Nyon, Switzerland on November 14 focusing on concrete organizing, bargaining and negotiating tools for unions.

In the first of two presentations, the IUF's Peter Rossman reported on new trends in the buyout business following on the global credit crisis set in motion this summer with the collapse of the US subprime loan market. Despite the credit crunch, investors, including employee pension funds, continued to invest in private equity. Buyout funds had already raised over USD 263 billion in the first 10 months of 2007, more than for the whole of 2006, and there was no indication that pension fund money was retreating significantly. While the big leveraged buyouts were temporarily off the agenda, the funds continued their activity in the food sector with buyouts of small and medium size companies, often consolidating them into substantial companies with manufacturing and distribution on a wide scale and big payrolls. The danger for employees was the vulnerability that comes with the heavy leverage taken on with each successive buyout.

Buyout funds, while waiting for the credit pipeline to free up, would also be acquiring significant shares in listed companies. Unions had to be aware that in such cases the funds were not simply another activist investor in search of "shareholder value" but a structurally aggressive investor. To take their large profit on the deals as "carried interest", they had to beat the "hurdle rate", or profit threshold, agreed with investors in the funds. The IUF presentation gave examples to illustrate the shift in focus of buyout activity from the credit-strapped North American and European markets to the Asia/Pacific region.

Elaborating on the implications of the credit crisis for unions and collective bargaining, Rossman pointed out that credit markets were now incapable of financing big secondary buyouts and the large-scale debt refinancing which had permitted many private equity-owned companies to be pushed to the point of insolvency while still serving as cash cows for the funds. Exiting investments through a return to public stock markets was also problematic in the current situation. Private equity funds would therefore be managing their portfolio companies under even tighter cash flow constraints than originally anticipated. Unions would have to develop appropriate bargaining strategies to withstand these additional pressures.

In a second afternoon session, the IUF elaborated on the ways in which private equity ownership - and in particular the weight of massive debt (leverage) on the portfolio companies' balance sheets - fundamentally altered the context of collective bargaining. Unions engaged in collective bargaining with private equity-owned companies were essentially negotiating with a bundle of debt; understanding and unpacking that debt was fundamental to the bargaining process. Unions would have to press for full disclosure of the total amount of debt incurred in the buyout process (including fees etc.) as well as the types and maturity of the bonds and debt securities, the rates, the loan covenants etc. Negotiating a collective agreement, however, was only the first step. In order to detect cash being pumped out and new debts being assumed, unions would have to press for ongoing access to verifiable financial accounts in order to continuously monitor debt- and dividends-to-earnings ratios!

Unions would also have to monitor asset management, including the selloff of real estate and "intellectual property" (trade marks, brands etc.) and understand their implications for cash flow management in order to secure ongoing investment as a bulwark against asset stripping. Defending company pension commitments was also a strategic imperative, and could be used in some cases to block a buyout.

The IUF presentation was complemented by a presentation from the IMF's Ron Blum, who explained the ways in which degrees of leverage led to changes in management cash flow strategy with immediate implications for workers. Learning to Identify these management techniques was an essential task for collective bargaining under private equity ownership, and crucial for securing employment and investment commitments. The presentation included concrete examples drawn from the metal industry in Europe and North America.

Stephen Lerner and Michael Laslett of the North American SEIU stressed the importance of union pressure on pension fund trustees. Despite their legal obligation to deliver maximum returns, pension fund trustees were in fact susceptible to various forms of pressure. Unions had not yet learned to exercise this pressure strategically, and many unions were in fact not even informed of the extent or the details of their own pension funds' investments in private equity. The SEIU had been able to turn up political pressure on the funds by campaigning for them to disclose the fiscal impact of potential buyouts - another useful campaign tool.

One of the main conclusions of the presentations and discussions was the need for more educational material to assist unions in campaigning against the funds and their buyouts and to prepare unions to negotiate with them more effectively. The IUF will be producing new educational material to supplement the Workers' Guide to Private Equity Buyouts.

Wednesday 5 December 2007

Default funds again

There was a supplement in the FT last week titled 'long-term investing' (although it didin't really have much on that subject in it) which included some discussion of default funds in defined contribution (DC) schemes. This is becoming another area of geeky interest for me as I think it will become very important because a) occupational schemes in the UK will be overwhelmingly DC in future and b) Personal Accounts will be a huge influence.

There was a good interview with Joseph Stiglitz in there. He said some interesting things about choice in pensions which are below (you can find the interview here):

"The economic theory of rationality is really informed by the notion that people learn from experience what their preferences are. How do you decide if you like red lettuce or green? You taste them and you find out. If red lettuce is more expensive, you decide whether it is worth that to you. After repeated buying, maybe you see you made a mistake.

"But the nature of the decision on saving for retirement means that that is no longer an option. You can’t go through your life and say: “I’ve saved too little; I’ll save more in the next life.” There’s no way that people can learn. It’s even impossible for people to learn from their parents or from society. Social learning isn’t going to work because the world today is so different from the world of our parents. The social security system in the US is stronger. In other countries it’s weaker. Longevity is different. Markets are different.

"That makes this decision very difficult."

The FT supplement was tied to a conference which is reported on by There was another interesting comment from David Laibson, Professor of Economics at Harvard University, defending the idea of defaulting people into funds:

"Matching contributions are a socially expensive way to achieve very little… financial education is a very expensive and weak lever for making changes."

I think this is exactly right, and just the sort of argument the unions used in the pension reform debate in the UK in favour of compulsion.

Personally I am very much of the opinion that the decision of the Government to go for a quasi-compulsory approach to pension saving in the UK has really important political ramifications that haven't yet been understood. It is an implicit acknowledgment (in my view) both that the financial services 'market' doesn't work very well (see the Sandler report for more details....) and that people do not make economically 'rational' decisions in relation to their finances.

This is big stuff, but this doesn't seem to have been realised by many on the Left. As a Treasury official once commented to me a decision about choice in pensions has an impact elsewhere. If the Government acknowledges that people do not need a choice in pensions (or that choice isn't actually that good for them) why do we need to give them a choice of mortgages?

Danish pension body backs SRI

I missed this one last week. Hat-tip to Peter C.

Danish pensions body deems ESG safe - 30 November 2007

DENMARK - An official report in Denmark has concluded pensions institutions can take an ethical stance on investments while still fulfilling their legal duty to get the highest possible return.

The report conducted by Denmark’s outgoing Pension Market Council also forecasts the Danish pensions industry was likely to become more involved in the process of investing on environmental and social governance (ESG) ground, than it is at present.

“An examination of the foundation of law shows it is possible for pensions institutions to apply an ethical profile to their investment choice,” the report concluded.

“It is vital to ensure the legal requirement to get the highest possible return is met, when ethical considerations are taken into account at the same time. Pension schemes that take ethical considerations in their investment behaviour expect at least a return corresponding to the market.

“Internationally, interest in ethical considerations within investment policy is increasing. This suggests that there will be an increased involvement in this area among Danish pensions institutions,” the report said.

The Pension Market Council is a body set up a decade ago to contribute to the debate on transparency of pensions institutions’ investment policies. Its report on ethical investment was put together by a working group led by Søren Kolbye Sørensen, director of the Danish Engineers’ Pension Fund (DIP).

The ethical investment report is the last task to be undertaken by the Pension Market Council, which is being replaced by the Money & Pensions Panel, a new body given the task of sharpening consumer awareness of financial products.

The Council noted introducing ethical considerations into investment policy faced pensions institutions with a range of challenges, as the report said: “There is no single answer for how these challenges should best be met.”

It pointed out there was no clear-cut definition for the concept of ethical investment. “The report highlights that ambiguous terms for 'ethical investment' are used at random - and that this can give rise to misunderstandings,” it said.

The report was produced to shed light on four main topics:

The relationship between the ethical behaviour of companies and that of their suppliers;

* the need for ethical investment policies to be well-documented;
* how a fund should act when businesses fail to live up to guidelines, and
* the possible unintended consequence of ethical guidelines.

Looking at the ethical priorities of Danish pension funds, the report included data from industry association Forsikring & Pension, which showed 32 funds had stated environmental considerations were important to them.

This was followed by recognition of the importance of human rights with 29 funds, and of upholding international conventions with 27 funds. At the other end of the scale, avoiding investment in tobacco was supported by just eight funds.

Tuesday 4 December 2007

Will Personal Accounts increase saving?

An interesting briefing from the Pensions Policy Institute was sent out today looking at the possible impact of the Personal Accounts on levels of pension contributions. I have been very sceptical about some of the claims made about 'levelling down' amongst employers already running schemes, and such stories tend to overlook the rather important issue of 'levelling up' amongst employers who currently make no pension contributions.

However this briefing does give some grounds for being a bit concerned about savings rates. In three out of the four scenarios for the possible impact of Personal Accounts on savings levels they actually go up, and quite substantially. In the other possible scenario (which the PPI describe as 'extreme') the total actually goes down because all employers are assumed to auto-enrol staff on minimum terms. However in one of the other scenarios (which is based on a survey of what employers say they will do) although there is a net increase in total saving there is a significant drop in saving into existing schemes.

Anyway, worth a read. The report can be downloaded here.

A letter to Fidelity

The letter below has gone in the post this morning. My wife and I have been with Fidelity for about 6 years now. We have an ISA we set up to help pay off our mortgage, so we were intending to stick with them for the long run.

We are therefore both really p***ed off that we may have to go through the hassle of changing fund manager because the one we chose prioritises making partisan political donations over the concerns of its customers.

I hope they reply saying they are going to halt the donations. But if they won't stop doing it we feel we have no option but to move our savings elsewhere.

Fidelity International,
Oakhill House,
130 Tonbridge Road,
TN11 9DZ

My account Number: XXX
My Adviser: XXX

I was concerned to learn from the Electoral Commission website that Fidelity International has donated £95,000 to the Conservative Party so far during 2007.

I am not a Conservative Party supporter, but I do not believe that a fund management business like Fidelity should make donations to any political party.

As you are no doubt aware most institutional investors will vote against resolutions at companies’ AGMs where authority is sought to make party political donations. Indeed party political donations are rare amongst listed companies these days. It is therefore somewhat surprising to see an institutional investor make such donations itself.

As a long-standing Fidelity customer I am very concerned by these donations. I would therefore be grateful if you could answer the follow questions.

• What is the rationale for making donations to the Conservative Party?
• Does Fidelity intend to make similar party political donations in future?
• Does Fidelity disclose these donations when this is a potential conflict of interest (ie when presenting to Conservative-controlled local authority pension funds)?

I also wish to make clear that if Fidelity does intend to continue making partisan political donations I am likely to move my family’s savings to another fund manager.

Yours sincerely


A Christian Perspective on Corporate Governance and Executive Pay

A super quick plug for an interesting and well-argued piece on Patrick Gerard's blog. There's a good section questioning the assumption of the use of pay to align directors' interests with those of shareholders:

The first problem is that it presents an extremely pessimistic view of human nature. The human being (even those human beings at the very top end of our society) are unable to look beyond their own interests. This is much more pessimistic than mainstream business thinking which, when considering motivation, often refers to Maslow’s triangle of needs and the “self-actualizing” needs of top people.

A second problem is that it interprets good corporate governance as a balance point between the different vested interest groups which creates incentives for managers to deliver good outcomes for those vested interest groups. This implicitly accepts that corporate governance is a power struggle in which executives, investors and investors’ representatives seek to optimise their own position. In reality the Combined Code does appear to be more the outcome of a power struggle between institutional investors and directors than a principle driven exercise to optimise outcomes for the underlying investors. In this power struggle trust and co-operation are replaced by red-tape, regulations and controls.

But the biggest problem here is that individuals and institutions are expected to use their talents and powers solely to further their own agendas. This generally means maximising their own power and their own proportion of the wealth created by business activity. This creates a tension in which power and money are pulled towards those people who already have the most power and money, and away from those who are least able to defend themselves.