John Kay, the quick and the dead
By Matthew Gwyther Monday, 23 July 2012
Our editor, Matthew Gwyther, considers Professor Kay's view that the City is too obsessed with short term gains.
It’s hard ever to find fault with what John Kay writes. (And, as he is a contributor to MT, you’d expect me to say that.) He consistently provides one of the wisest voices in UK business. Today the economist and LSE Professor is releasing his review of equity markets and long-term decision making which was commissioned by Business Secretary Vince Cable last September. Here it is.
As expected, and doubtless to Cable’s pleasure, Kay attacks the City's obsession with short-term profits and argues that the current insistence on "making the numbers" is wrecking Britain's recovery with its focus on instant gains without much regard for a healthier long term view. He wants action on fat cat executive compensation, and an end to the "tyranny" of quarterly company reporting.
Taking a swipe at the spivvier side of investment banking and its casino culture when interviewed yesterday in The Sunday Times Professor Kay said: ‘Trust relationships were replaced with trading relationships. If you don't have trust relationships, people don't have confidence in what's promoted to them.
’In an ideal world we’d all have our pension pots looked after and grown steadily by cuddly, wholesome long-term horizon types like Warren Buffet. But the old-fashioned investment industry in the UK – for which read many of the pension funds – have not exactly covered themselves in glory in recent years. Not only are their returns often poor but they fill their boots with outrageously high charges many of which are semi-visible to the punter.
I was thinking about this last week when reading an interview with Hugh Hendry in the FT. Hendry is the Mouth Almighty of the hedge fund world and famously when appearing on Newsnight back in 2010 told the Nobel Prize winning economist Joseph Stiglitz, "Um, hello? Can I tell you about the real world." The Glaswegian Hendry has been lying low recently with his $800 million Eclectica fund. Some feel he grew a wee bit high profile for a game that likes to keep its vast earnings discreet.
Hendry doesn’t care how he makes his fund pile grow larger. He is an opportunist who would doubtless short his granny given the chance. What does matter is that last year his $460 million flagship fund grew by 12.1 %. It has returned a compound annual growth rate of nearly 10 % since it began back in 2002. How many of us would not mind a piece of that? Hendry believes strongly that speculation plays a vital role in a market economy. He’s not likely to be heeding what much of what John Kay says.
Hendry is currently busy shorting the equity of Chinese state owned enterprise and using credit default swaps to bet against Japanese companies such as Toshiba. Should we care morally about this? Hendry is no steward, who guards his flock of holdings like a latter-day shepherd. There are times at the moment with the global economy looking such a mess that you could be forgiven for thinking it’s just one big crapshoot. You trust Hendry to the extent that he delivers and if he doesn’t you get your cash out. And whether you’re a teacher with a pension pot that needs investing or simply a fat cat after making your pile even larger, you want to be in with the smart guys who can help you survive. Not the also-rans with their legions of back office clerks in Basildon and Edinburgh who often appear too slow to catch a cold.
Kay should not be used as an excuse to defend the poor performance of many of the old-fashioned mediocrities out there who continue to peddle bad companies and bad investment plans to the rest of us.