The Financial Services Club's Blog

Does the World depend upon China?

I’m off on holiday today so this will be my last post until September 8th. 

The last post? Sounds like we need a bugle call on that one!

Anyways, I normally have a rant or a joke when I’m blogging, but this is a little more serious as it’s a thought piece.

The thought: whatever you think about China, our future is with the Chinese.

I was prompted to do this one because I’ve enjoyed the last two weeks magnificent, opulent, extravagant and exuberant Beijing Olympics. 

We all know that China is an economic force to be reckoned with, and any nation that can spend almost $40 billion on the Olympics is demonstrating its clout. 

I thought the Olympic spectacle was wonderful, the Chinese hospitality magnificent and the opening and closing ceremonies amazing. The only downside is that I’ve had many arguments with my family over the past two weeks, because we sit on two sides of the fence. 

They bang on about China’s human rights record, Tibet, censorship and so on. I respond by saying “at least China is here”.

Yes, the human rights record, Tibet, the situation in Xinjiang with the Uighurs and more are major concerns. I’m not discounting them. 

On the other hand, I cannot help thinking it’s just our media and our world having a go at China for opening up to the world’s scrutiny.

I try to persuade my family that the very fact that China is being called into account on these issues whilst, at the same time, hosting an Olympics and economic revival that will make them the next United States for the 21st Century, means that things are changing.

Slowly, but they are changing.

I mean c’mon, it is less than a quarter of century ago since China started to talk to the West, let alone joining us in competitive Games. A quarter of a century ago, who would have even thought of China being at the Olympics? 

From 1958 to 1980, China boycotted the Games because of the representation of Taiwan. It was not until 1984 that China reappeared at the summer Olympics, thanks to the vision of Deng Xiaoping. 

Deng Xiaoping’s vision was far wider than getting China back into the world stage of sports however, and it is down to his leadership period that China has enjoyed such resurgence economically, politically, socially and generally.

This vision carefully steered China away from an economy that involved central planning and was closed to international trade, into a thriving market-oriented economy that could compete on the global stage and win.

Deng Xiaoping’s Government carefully removed many of the centralised control structures that were central to Chairman Mao’s Communist ideals including collectivised agriculture; fixed prices; centralised taxation policies; the nationalisation, ownership and control of all State Owned Enterprises (SOE’s); and so on. This has led to the double digit growth phenomena China has enjoyed for the last decade culminating in these fantastic Games.

It has culminated in some other interesting phenomena too.

For example, why do the Chinese save so much?

This is a question asked regularly, and is a very pertinent question to ask again. 

During the explosive growth in China from 2000 onwards, hardly any of it has been consumer or debt-driven, unlike the USA and parts of Europe. It has been far more fuelled by exports and investments by the Government.

The Government investments are clear. Just look at the $40 billion spent on the Olympic Games, or the$125 billion spent on 70 major infrastructure projects in Western China from 2000 to 2005, such as the Three Gorges Dam, and the world’s highest railroad, the Qinghai Tibet railway. 

This level of investment is partly possible because the banks of China are awash with people’s savings. Chinese citizens hoard about quarter of their income as savings, allowing the Government to invest a massive amount internally, reaching up to 40% of GDP per annum. This is why the Government has never had a current account deficit. 

Why do the Chinese save so much?

As mentioned, the average Chinese person saves a quarter of their income. Compare that with America where one-third of citizens live paycheck to paycheck.

Why are these nations so different?

Because America’s lived in a society of commerce and capitalism for a century and, with a booming economy, credit was easy to find. The average American carries 13 credit and debit cards for this reason.

Chinese citizens have not seen such an opening of lines of credit but, with a booming economy, this may change. But will it? We all talk about a billion new consumers of credit cards in the near future, most of them in the BRIC economies, but do the Chinese want credit cards, loans and mortgages?

It appears not. 

Chinese citizens would rather hoard their money away and save it. That’s the culture.

This is because Chinese folks worry about more basic issues of health, education, unemployment and similar needs, as the State moves from managed services to privatised services. These were all historically state controlled and managed, but are moving towards self-funding.

It's also because of the Planned Birth Policy.  When China was faced with a runaway population issue in the 1970's, Deng Xiaoping Government introduced the Planned Birth Policy in 1979.  This policy instructed familites to only have one-child. The result is 300 million less Chinese born in the last two decades than would have been if this policy had not been introduced.

With an aging population, and only one child in each family to support them, this has resulted in a mad, keen focus upon saving.  It's to make sure that they can:

* look after themselves if anything untoward happens, such as unemployment or poor health, 
* have one child educated brilliantly, and 
* ensure ageing and unwell parents are well-looked after. 

These things stress most folks out … especially those of us in the UK and America right now.

If, as many commentators are commenting, the Chinese citizen is that worried about all these factors then you have one other stir of the waters at work out there that may just stress them out even more.

Growth.

China’s GDP growth has been phenomenal.

From 1978 to 2003, China's GDP increased from US$147.3 billion to over US$1.4 trillion, with an average annual increase rate of 9.4%; its total foreign trade volume grew from US$20.6 billion to US$851.2 billion, with an average annual growth rate of 16.1%; and the poverty-stricken population in the rural area dropped from 250 million to about 29 million.

If this ceaseless, relentless, juggernaut of growth slows or comes to a stop, then we have a problem. It is for this reason that I believe I am seeing several Western pundits starting to write about China’s growth coming to a halt.

The problem is that America is in the doldrums, Europe seems to be moving that way, and everyone hopes that China and the Asian economies will pull us all out of these doldrums.

If they cannot, then what becomes of us?

So what the global credit crunch really comes down to is a focus upon this new form of Chinese Capitalism, which is carefully managing the transition from a State-run economy to a Commercial economy.

This new form of Chinese relationship, where we encourage with one hand whilst crossing our fingers with the other in the hope that they will do the right thing.

This new form of Chinese Government, who are overseeing the gradual movement of funds from the State to the People, and from Eastern China’s wealthy cities to Western China’s poorest neighbours.

This is the biggest socio-economic reconstruction project the world will ever see and, for all of our moaning about the Chinese record of abuses, we should also consider China’s re-engineering for future glories.

Their vision of a glorious future is a fragile one right now, as they privatize and transition from State to Commerce. I, for one, just watch with amazement at how rapidly it is happening.

How many cards are left in Chip&PIN terminals every day?

The banking industry continually seeks to find cost-effective methods to minimise fraud, although often in a way that creates issues or insecurities with the customer.  A great example is the UK’s implementation of Chip&PIN, with Canada, France and other countries implementing similar programs.

From a personal perspective, the one thing I have noticed is that consumers continually leave their cards in the terminal.  On four occasions this month, I've found someone else's card left in the POS PIN terminal. 

That was at just one PIN terminal in one major store, so I wonder how many cards are left in terminals each day?

I wonder if we should have just separated the Chip&PIN double-act at birth, as demonstrated brilliantly by comedians Mitchell & Webb in this classic sketch:


Read more ...

How much does an Olympic Gold Medal cost?

For those who have enjoyed the Olympics, Yahoo! has posted a fascinating report of the investments Britain made in each sport, and the return on those investments.

As a result we can see a pattern of funding for each medal won.

In the build up to the Olympics, over £190 million of funding was pumped into Team GB sports, which averages out to be around £10 million per Gold Medal and just under £4 million per medal, based upon the fact that we won 19 Golds and 47 medals in total.

Of these, the cheapest medals are for Cycling at just over £2 million per Gold and the most expensive is Athletics at £20 million per Gold Medal.

Generally, the cheapest sport for a medal is Cycling again, at £1.25 million each, versus the £7 million invested to get a Bronze in Gymnastics.

Meanwhile, £7 million in Badminton and over £8.5 million into Hockey returned a zero sum gain.

Intriguing.    

Mind you, it's not a patch on the £10 billion ($18 billion) London is budgeting for the Games in 2012, about half-price compared to China's £20 billion ($36 billion), but more than Athens in 2004 (£7 billion, $13.5 billion).

Where did Sir Callum go?

A recent bit of news has been little reported in August, but it is a fact that has been picked up by satirical journals such as Private Eye.

 

The fact: Sir Callum McCarthy is leaving the Financial Services Authority having been its Chairman since 2003. He’s off to pastures anew and handing over his mantle to Lord Adair Turner, trusted ally of Gordon Brown. Lord Turner was otherwise known as “Red Adair” when he was the former Director-General of the CBI, and the real Red Adair was a renowned fire-fighter … skills that the new Chairman will be in desperate need.

 

Meanwhile, where’s Sir Callum going?

 

The Treasury.

 

In an ‘open competition’ for these new roles at the Treasury, a hard-fought fight saw Sir Callum and Deidre Hutton, former Deputy Chair of the FSA, become non-executive members of the Board of the Treasury.

Nice to see such a genuine search for talent resulted in the right people being placed in these roles.

As Private Eye says: “McCarthy is stepping down from the financial regulator and chancellor Alistair Darling has found the perfect new job for him: as a non-executive director of the Treasury itself. Having been in charge of regulation when Northern Rock imploded, he can now be first on the scene when the entire economy collapses.”

The New Rules of Marketing in the Real World

I'm intrigued to see that the latest methods of marketing are to create real life experiences in the real world with the launch of  "Pot Noodle: the Musical" at the Edinburgh Fringe Festival this year.  A festival that exists, in part, thanks to the benefaction of the Royal Bank of Scotland's sponsorship.

As you would expect with that title, the musical is all paid for by Unilever, the makers of Pot Noodle, with the only rule being that the musical had to be called Pot Noodle.  No other creative control allowed, although the message is clear as the musical is set in a Pot Noodle factory.

Similarly, there's the launch of the new film, Somers Town, all paid for by Eurostar.  That's why the main character is an employee of the Eurostar.  Subtle, but it works as the film has been a major critical success.  I'm not so sure it always works however, as I cannot even find a review about Raiffeisen Bank's movie, "Santa Claus, Tina and Liza"!

And not all real-world sponsorship works, especially if you break the rules and get found out.

Take the example of Omega, the watchmaker, and their sponsorship of Michael Phelps. 

The wonderful Phelps, the greatest Olympian of all time, definitely performed brilliantly at this year's Beijing Olympics.  Nevertheless, some say that Phelps did not win the 100 metres Butterfly, and that his win was 'given' to him by Omega, his sponsor.

After all, he swam in an Omega sponsored lane as an Omega sponsored athlete, and was given the Gold based upon Omega's timekeepers saying he was 100th of a second ahead of Milorad Cavic.

1/100th of a second is the smallest margin allowed to differentiate times between swimmers.

Make your own mind up (Phelps is on the left and Cavic on the right):

Photo from underwater camera at the end of the Olympics final 100 metres Butterfly courtesy of Heinz Kluetmeier/SI

The fear of foreigners

I would like to say it amazes me that Europe’s countries are still very insular and resistant to open access and open borders for open business … but it does not.

This week, it is the Germans who are being accused of protectionism.

On Wednesday, Germany introduced the concept of a law that would outlaw the idea of German banks being controlled, run, owned or even interfered with by Sovereign Wealth Funds.

The law passed by the Cabinet for approval by Parliament, would allow German politicians to reverse any investment in a German business that exceeded more than a 25 percent ownership stake by a foreign investor.

But it may place Germany in a very weak place, according to their business community.

Read more ...

Socially networking with the Hoff

I haven't written much about Facebook lately because we're all familiar with it now, although you may not be familiar with the fact that Wells Fargo have recently launched Stagecoach Island, their virtual world, in Facebook.

But I'm more interested in the fact that David Hasselhoff has launched his very own version of Facebook. 

Why?

Well, here's what the Hoff has to say on his new socially networking homepage:

"In my travels round the world I have always been surprised that no matter where I go people recognize and know me, from Europe, Australia and India to the Philippines and the Zulu Nation in South Africa. This got me thinking... I realized that while two people from two entirely different countries and backgrounds may seem to have nothing in common, the only thing they might have in common is me... So I decided to start a network where people from across the world might come together and get a conversation started over me. Where it will lead, I don't know but the world would be a better place if everyone talked a little more to each other...

"So here is HoffSpace. There are videos and photos of the adventures of my life (THAT NO ONE ELSE GETS TO SEE) and also from the lives of other members. Read the discussions or start a forum on a topic that interests you. Check out Hoff TV, where I go live often. Chat with other members from around the world and make friends. Design your own home page. Add music and share your lives with others. Send me the weird, wonderful and wacky things that are happening in your life. Tell me the stories of how you are making a difference in your life and, if you need my help, ask... One man or woman CAN make a difference."

Excuse me whilst I go and sign up as this is far too good to miss, dontcha think?

Money for nothing, and my ticks for free

BATS recently extended their market data feeds into free real-time feeds for AOL and Yahoo! Finance users. In recognition of this move, NASDAQ OMX now delivers free real-time market data to Google, the Wall Street Journal, CNBC and Xignite.

Real-time market data for free on public websites for millions of consumers at home to access.

No delay. No fees. No hassle.

I like it … by the way, how much do we charge for real-time market data in the EU?

Read more ...

eBay and PayPal's Australian challenge

Is it just me, but the news today that eBay are trying to force all Australian users of its website to use PayPal seems to be a bit of a strange strategy. 

Don't they remember that PayPal succeeded because it was available across all sites and did not have the same restrictive practices or usage that eBay's own payment service, Billpoint, had?  That was the reason PayPal succeeded and why eBay acquired them. 

Harking back to 2002, when eBay abandoned Billpoint and acquired PayPal, here's just one paragraph of commentary from CNET that they should bear in mind as they talk to the Ozzies:

"Meanwhile, Billpoint had something else going against it: its association with eBay. While some analysts saw that as an asset, many sellers worried about eBay extending its dominance in auctions to online payments as well. Many were reluctant to rely even more on eBay than they already did and rejected eBay's more heavy-handed attempts to promote the service, such as last fall when it required require sellers to use Billpoint in its Auction for America charity effort ... that could spell problems for eBay after it acquires PayPal. Already some sellers are talking about abandoning PayPal, worried that with it, eBay will become too powerful."

MiFID starts to really bite

As 2008 progresses, some organisations are realising the true meaning of the Markets in Financial Instruments Directive, MiFID.

First you have the new upstarts: Chi-X, Turquoise, BATS Europe, Equiduct, NASDAQ OMX Europe and more circling to take advantage. All of these Multilateral Trading Facilities (MTFs) have low latency, low price and low cost streamlined operations, and are trying hard to cash-in on the pan-European cash equities trading opportunities that MiFID has created.

Then you have the incumbent cash equity exchanges, led by the big boys of Deutsche Boerse, Euronext and the London Stock Exchange (LSE), and they're struggling with share prices down by half this year as a result of these new competitive threats. 

Deutsche Boerse and Euronext have certainly seen the impact in their cash equities business with Chi-X, the first MTF launched last year by Instinet, peaking at a 15.08% market share of the DAX30 and 9.39% of the CAC40 on certain days of June. Luckily, Deutsche Boerse and Euronext have a balanced business with global diversification and large-scale derivatives operations in Eurex and LIFFE respectively.

Then you have the LSE, and it’s not been so easy for them.

You only have to look at their share price which is down by almost two-thirds, far more seriously impacted than the Deutsche Boerse and NYSE Euronext



After a rock and roll ride on the share price from 2004, with various predators circling to buy their business, the LSE is now languishing at a lowly 745 per share today. Mind you that’s still well up on the just over 316 per share you would have paid in 2003, but nowhere near the high of 2002 earlier this year.

What’s going on?

MiFID’s going on.

Chi-X has been the first to shoot holes in the LSE’s business model, peaking at over 20% of FTSE 100 trading last week.

Similarly Turquoise, which started live trading last Friday, believes it could take up to half the liquidity away from the LSE. That would be due to the strength of the liquidity pool represented by the nine firms who created Turquoise: BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale and UBS.  These firms have guaranteed Turquoise's liquidity from day one.

Now you have BATS announcing yesterday that they aim to take at least 15% of the FTSE 100 share trading operations by the end of 2009.

With PLUS Markets nibbling away at the mid-caps; MarkitBOAT and Chi-X stealing nearly a third of all trade reporting activities; and Dark Pools appearing from all directions; it’s no wonder that everyone is wondering what the LSE are going to do.

What they claim to be doing is becoming aggressively competitive with TradElect providing low latency and their fee structures slashed for high volume traders. However, with around 450 staff in London and a spend of over £40 million on TradElect, the LSE has a more serious issue. After all, BATS have six staff in Europe right now, and Turquoise and Chi-X around forty each. Their spend on technology has been a fraction of the LSE’s and yet, between them, they will be running anything from a half to three-quarters of the FTSE100 liquidity pool by the end of next year, and deepening their waters into the FTSE250 and more.

Therefore, low latency, low price, low cost trading facilities are the way of the future, not low latency, low price, high cost. That’s unsustainable.

Meanwhile, LSE’s joint venture with Lehmans to open their own dark pool, Baikal; the acquisition of Bourse Italiana; and extending the operation of the derivatives exchange EDX, are critical parts of their survival plan. But I’m looking for a few more pieces of the strategy before I’d think about buying into their shares today.

That Was The Week That Was

Absolutely nothing to do with banking but, as I think of this as a dialogue, I wanted to share a few stories with the Finanser community that made me smile this week, as well as made me proud to be in Europe.

First was the Swedish court case against Apoteker, the state-run pharmacy.  Two chaps claim that the firm is in breach of Sweden's equal opportunities legislation for stocking lady's sex toys, and are quoted as saying that the pharmacy chain "had a misguided and untrue view on sexuality where a woman with a dildo is seen as liberated, strong and independent, whereas a man with a blow up plastic vagina is viewed as disgusting and perverted."

Only the Swedish!

Then there's Giles Smith, in the Times, who writes a lovely little piece about the World Sauna Championships.

"It would be a shame if the Olympics completely overshadowed the World Sauna Championships, which took place in Finland last weekend. The host nation cleaned up, producing the champion in both the men's and women's competitions, the male winner managing an impressive time of 18min 15sec at 110C.

Great Britain, one noted, was nowhere to be seen, which was both disappointing and slightly surprising. After all, what is a sauna, if not a kind of shed? And didn't the British pretty much invent sheds, and sitting in them? Obviously British sheds are generally unheated, as they stand, but that could be sorted out simply enough with a bit of lottery investment and a commitment to a national improvement programme. The grass roots are in place and it wouldn't take much, surely, to end the hurt, restore some pride and break these long years of Finnish domination in the sauna."

Only the Finnish!

This was followed by the lovely story of the bouncy church in Italy designed to attract Italian Catholic holidaymakers on the beach to still ahve their religious moments. 

The church is 30 metres long,and comes complete with an altar and confessional.  So, for all those on the Campomarino beach in the Adriatic, god bless.

Only the Italians!

Finally, there's another giant inflatable story, but this time in Switzerland. 

Artist Paul McCarthy's latest piece caused mass hysteria in Berne when his giant, inflatable dog poo:

broke free from its moorings at the Paul Klee Centre museum and flew over the town. 

The Turdzilla, which is the size of a house, brought down a power line and broke a window, before coming to rest in a children's playground ... probably where it belongs?

Only the Swiss!

How I love being European.

How recessions change financial behaviours, Part 2

We use the word crisis to mean danger and opportunity, and yesterday I blogged about what that means for local communities, who are using the current crisis to create local currencies.

Today, it's time to take a reality check regarding property. 

For some, buying a house is an investment, for others it is a home, and for some others again, it is both.  Well, for those who enjoyed property investments over the last decade, crisis now means the danger of losing your home or the opportunity to pick up more property on the cheap.

For example, I’ve heard of foreclosure tourists for a while now, but find the idea of personally going on a ‘Foreclosure Tour’ a bit sick. The idea is that you go over and get on a tour bus that takes you around the depressed homes of families who have had their houses repossessed. On the bus is a property expert, a banker, a lawyer – all you will need to sign over the deeds of the house there and then.

Times are desperate.

Just how desperate?

Let's have a look.

Read more ...

Do recessions make banks redundant?

In times of crisis, there is danger and opportunity, and this is no truer than when there is a recession, stagflation or war.

In the 1920’s for example, during the runaway hyperinflationary times of the Weimar Republic, Germans started to create alternative economies using local currencies. This is because the national currency was effectively worthless and the national economy was out of control, so citizens turned to local focus to survive.

Similar trends have been seen with Zimbabwe more recently, and are now appearing in other parts of the USA and Europe as the credit crisis tightens.  Should such systems really take off then Bankers, we have a problem.  The problem is that these systems are locally focused and usually operate outside the banking system.

Luckily this is not a major concern as most local currencies, also known as complementary or community currencies, appear during the crisis and then disappear afterwards, with only Switzerland's WIR surviving long-term.  The WIR was created in the 1930’s, has its own WIR Bank, and is used by 1 in 6 Swiss businesses for commerce and trade today.

Maybe this might be changing though as, taking my own locality of the UK, there have been two significant examples of local currencies launched in the past year.

The first was the “Totnes Pound”.

Launched in March 2007, the Totnes Pound aims to encourage local spending on local produce by local people to the benefit of the Totnes locality. These local currencies are often outside the banking system, and intended to be inflation-proofed by not being tied to external commerce, but to local community interests.

As the Totnes (a town in Devon) website states:

“The benefits of the Totnes Pound are to: 
• build resilience in the local economy by keeping money circulating in the community and building new relationships
• get people thinking and talking about how they spend their money
• encourage more local trade and thus reduce food and trade miles
• encourage tourists to use local businesses.”

So I was intrigued to hear over the weekend of the launch of the “Lewes Pound”.

Lewes is another town in Britain, launching their own currency on September 9th.

As the founder of the Lewes Pound, Oliver Dudok van Heel, states: “studies show if there is more than 12 per cent unemployment in a community these systems become very popular”. With growth slowing, unemployment and inflation rising, and credit about as easy to find as Gordon Brown’s personality, times are hard. Hence, the launch of local currency schemes.

However, when times are good again, these schemes could just as quickly disappear for, no matter how many of these schemes are created – reports of over 9,000 such local currencies exist arond the world – the difficulty is that those who travel outside the locality, as many of us do these days, cannot take the currency with them. It is useless currency, unless it is used in Lewes or Totnes. So a Lewes Pound cannot be used in Totnes and vice versa.

This is why so many local currency schemes close down when times are good again,and why they are usually of little interest to us commercial bankers.

But all of this could be about to change as Barclays Bank are involved in the Lewes scheme, and will accept Lewes Pounds into accounts for payments.

This could be very significant as a friend of mine, Bernard Lietaer, has been trying to create a way to organise a global local currency for years*. The idea would be that, in a similar system to Airmiles, you could bank your local community activity in an online system and exchange it for value elsewhere.

So I bank a few hours of work on my neighbour’s lawn as being worth the value of 5 Lewes Pounds to the local community. I could spend that locally, but I want to buy a few hours’ worth of time in Totnes, where my mother lives, to have someone mow her lawn.

Via Barclays Bank, if they supported the Totnes scheme as well, then I might be able to do this.

Why is this important?

Because you could see the emergence of a dual system: a commercial system that operates in commercial currencies for commercial trade and activity; and a local system that operates in local currencies for local trade and activity. The former is subject to all of the economic turmoil of the world, the latter to the economic turmoil of the town.

And banks could play a key role in enabling this to become a global system, by recognising and possibly even issuing, local notes for local trade, alongside commercial notes for commercial trade. The exchange system guaranteed by a bank, purely means that those who want to support localities can do so through a system of trust in the same way as we do through commercial systems.

The result is a whole new way of looking at finance and trade.

It just leaves me wondering whether the creation of the world’s local currency infrastructure should be by the world’s local bank?

* Bernard works with other leaders in this field, such as Margrit Kennedy

You can't hide anything, Part 3: U2

Following on from previous entries, U2 are now the subject of a scandalous lack of privacy when their new album, No Line on the Horizon, was filched by a tourist in the South of France.   

The tourist happened to be walking past Bono's house just as Bono stuck the demo cuts on the iPod, stuck up the volume to 100% and rocked the house.   The happy-go-lucky bozo walking by, heard the music and recognised the band but not the tracks ... so he recorded them and stuck the recording on YouTube (sound has been disabled since).

Whoops.

Do we really need Fund Managers? Continued …

Yesterday I asked the question, “Do we really need Fund Managers” and there were a couple of interesting comments which, rather than responding individually, I thought it worth writing a follow-on note.

One was from Matthieu de Heering who says: “If you're trying to do as well as the market, then tracker funds (spiders) are probably a better ‘bet’.”  This goes to the heart of another debate: whether it is better to use a passive or active fund manager.

This was a question I researched in 1998 for a report where I interviewed a range of firms, including Gartmore, Virgin, Norwich Union, Legal & General, Foreign & Colonial and 30 other fund mangers, on the future of fund management.  The debate had risen back then about active versus passive funds, as tracker funds were doing very well. Here’s a few comments from way back then:

• “Retail companies that major on investment performance are going to be wiped off the face of this earth”
• “If you have been a dog, you are likely to be a dog.”
• “Indexation is not the only solution.”
• “Most active houses say they give better performance. There is a lot of evidence to prove differently.”
• “Trackers do not make decisions.”
• “The marginal return between active and star is not worth it.”
• “If you eliminate the fund manager, who is going to drive the index?”
• “You can never automate the whole process.”
• “Index tracking does not require 21st century tools.”

And yet active fund managers haven’t died. 

In fact, we now have a new class of fund manager: the hedge fund manager, and they’re thriving. 

This year’s highest paid hedge fund manager, according to Alpha Magazine, is John Paulson with a mere $3.7 billion take home pay for 2007. Here’s a few other items of note from this year’s list:

• Five of the managers on this year’s list each made more in 2007 than the $1.2 billion JP Morgan agreed to pay for   Bear Stearns. 
• When inaugural list was published in 2002, George Soros was at the #1 spot with $700 million; in 2007, that would have gained him ninth spot
• In 2002, a hedge fund manager had to earn $30 million to break into the top 25 whereas, in 2007, he or she would need to earn at least $360 million. 
• The grand total earned by the top 25 in 2003 was $2.8 billion which, in 2007, was less than the earnings of each of the top three managers, and under a fifth of the earnings of the top ten put together ($16.1 billion).
• This year, the list length was increased from a Top 25 to a Top 50. Even so, folks like poor old Mark Kingdon of Kingdon Capital Management missed the cut, despite making $200 million as this year’s minimum earnings to break into the top 50 was $210 million.

The reason for such stellar earnings is given away by the name of the magazine, Alpha. The search for alpha - high returns with lowest risk - is the search for the holy grail, andsome firms believe that having the fund manager who can deliver alpha is worth millions, or even billions.  This is because having a stellar, stock picking, fund manager, is critical to differentiate in the institutional investment business. Just look at Greg Coffey and GLG if you need a good example.  A strong fund manager will make or break a fund.

Nevertheless, I do agree with some of the thinking that a star trading active fund manager is hard to find, and even harder is finding one who is consistent. It’s a gift for those who are the best, which is why the Warren Buffett’s, George Soros’s and Ken Heebner’sare so revered. 

It is also why the general masses of fund managers are viewed as being no better than a stock-picking monkey, and here’s a monkey just to prove it.

This particular monkey is 36 years old, is called Adam Monk and works for the Chicago Sun Times. Adam has consistently picked stocks that outperformed the S&P 500 index for years, so you make your own mind up, 

Now moving on to the other comment by Ron Clarke, who states that rather than Fund Managers, my target should have been Independent Financial Advisors (IFAs) and the other middle men who broker business.

A comment I might have agreed with twenty years ago, but not today.

The reason I said that I would agree with it twenty years ago, is that I forecasted the end of the IFA in 1990 and yet they’re still around and business is still booming. 

I forecast it back then because I could not see how their business could be sustainable when the Financial Services Act, a law introduced in 1986, made it clear that business would polarise between firms with direct sales forces, and IFA’s who must be able to advise and sell all insurance firm’s products. With the introduction of technology, call centres and other capabilities, we all said IFA’s with their higher fee rates would be dead.

It didn’t happen.

We then forecast that the internet and ecommerce would kill the IFA.

It didn’t.

We then said that comparasites – the websites that compare all insurance product prices through a single aggregated window on the web – would kill the IFA.

They haven’t.

The IFA won’t die, long live the IFA.

Why won’t they die?

Because people do not trust their own decision making.  Nor do they trust a bank or insurance firm to advise them. They suspect the latter will just stitch them up with whatever product makes the most margin.  That is why we go to independent advisors, believing that they will offer ‘best advice’. Some IFAs do, although many just sell whatever product makes the most commission, something the FSA is trying to crack down upon.

Just to prove that they won't die, I delved around to find some charts.

Here’s a chart I was using in 1996 to forecast distribution trends in insurance for example. 

This comes from Data Monitor’s research reports, and shows that brokers (IFAs) represent 35% of sales distribution, slightly declining over time.  We thought back then that they would disappear by the end of the decade because of the internet.

Then I read a paragraph from Aviva’s, one of the largest insurance firms, annual report in 2004:

“Independent advisers continue to be our largest source of new business (for long-term savings), providing around 47% of worldwide sales. Bancassurance is important, generating 23% of the group’s business, and is the dominant sales channel in a number of our markets. Direct sales represent 26% of the total and partnerships with non-banking organisations provide the remaining 4% of sales.”

And a chart from LIMRA, the Life Insurance and Market Research Association, showing American sales of fixed price annuities (pensions) in 2006 shows that the lion's share of sales (44%) is through independent agents.

For all the research I read and all the presentations I listen to, IFAs are as strong as ever.

So no, I wouldn’t forecast their demise just yet.

Where does this take us therefore?

Fund managers stock picking is no better than a monkey’s, but we trust their decision making better than our own.  

Equally, IFAs are trusted because they come out and have a face-to-face meeting with us at home and claim to be 'independent', so we trust their decision making better than our own, or those of direct sales and agents.  

Because we cannot make decisions ourselves, we will always use advisors to assist us. That is why fund managers, brokers and IFAs thrive and survive, regardless of how much technology we try to deploy to decimate them.

 

 

Investing 2.0: do we really need Fund Managers

As most of you know, I’m always messing about with internet applications for social networking, virtual worlds, future tech, gadgets, games and so on and so forth. There’s always a reason for this, as in it’s fun, but I like to think it’s all work-related fun of course.

So I was messing around with social finance applications, and focused on those to do with investing.  After a while, it made me ask the question: do we really need fund managers?  The reason being that social investing gives me a far richer investment experience than investing through a remote advisor.

Social finance has been around for a long time, with Yahoo! Finance being a first generation.  Today, there are many more.

Read more ...

We're not all doomed

According to the media in Britain this week, it's all doom and gloom in the financial markets.

Unemployment numbers up, inflation rising, house prices tanking, the euro sliding and oil and gold prices sunk.  The press are even forecasting that China and India’s economic boom is over and the whole world is slipping into recession.

Woe is us.

It's all claptrap media scare stories of course.  We're not all doomed and, between all the morose media musings, I found two reports yesterday that intrigued me more.

First was a report from the Federal Reserve titled: “The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices”.

Aha, I thought, this would be interesting. And it is.

Read more ...

It's banking, but not as we know it

Some brands are fairly ubiquitous.

I have a Sony TV, Sony Mobile, Sony Laptop and Sony Games.

My friend has a Virgin Mobile, Virgin Media with Virgin Broadband and Virgin Television, and flies with Virgin Atlantic.

Another shops with Tesco online using Tesco broadband, they use their Tesco mobile whilst shopping in Tesco stores.

These brands are trying to be all encompassing and have another thing in common: they all own and operate their own brand banks.

Their banking services are not as successful as some of their other services but they could become core.

They could become serious contenders.

They could knockout current banks from their core customer proposition.

How?

Read more ...

Social networks and the future of money

Social networks have created new forms of money already and, as I spend more time playing with these virtual currencies, I can see how they may become the future of money, from a retail and consumer viewpoint anyway.

For example, last November, I wrote about the threats of money laundering in virtual worlds. At the time, most of the threats were emerging, and were represented by figures such as $9,999 paid on eBay for a virtual weapon in the online game of World of Warcraft.

More worrisome was the Chinese government’s efforts to stamp out virtual gambling and other illegal activities which, so far, seem to have failed. The capability came around thanks to the virtual QQ currency of Tencent Holdings.

Anyways, I decided to have another look at QQ, in part prompted by the start of China’s Olympic Games, and as I started to spend more time thinking about it, I am convinced that this is a model for the future of retail payments. 

Read more ...

RBS results not so bad, so hire some mortgage advisors

After posting the rumour that Royal Bank of Scotland (RBS) were going to record the biggest losses in banking history earlier this week, they actually announced a pre-tax loss of £691m for the first half of this year.  That's almost £1.1 billion less than the Times guessed, but what's a billion here or there.

Meanwhile, to celebrate such a great result, RBS are hiring lots and lots of mortgage advisors for their UK NatWest and RBS branches. 

Obviously the credit crunch hasn't worried them too much.

Mind you, there are many commentators who have picked up on the fact that RBS, Fortis and Bank of America have all suffered the curse of the ABN AMRO acquisition.