A galvanising mix of motherhood and apple pie

Institutional Investment Review; House price indices; SME lending
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The Independent Online

For those that dismiss the Institutional Investment Review as just a common sense mixture of motherhood and apple pie, Paul Myners, its author, has a fast draw response; if it is all so obvious, how come so few pension fund trustees and fund managers abide by the basic standards of professionalism and asset allocation the review aspires to?

For those that dismiss the Institutional Investment Review as just a common sense mixture of motherhood and apple pie, Paul Myners, its author, has a fast draw response; if it is all so obvious, how come so few pension fund trustees and fund managers abide by the basic standards of professionalism and asset allocation the review aspires to?

It's a good question, and to be frank, Mr Myners is much better at analysing and elucidating the nature of the problem than he is at prescribing remedies. His report paints a damning picture of the way institutions invest our savings. Pension fund trustees, he finds, don't on the whole know what they are doing and anyway devote far too little time and resource to the task.

Perhaps worse, they are advised by people - consulting actuaries and the like - with limited investment skillsets and a consequent tendency to herd investment decision making towards a prescribed set of benchmarks, which are often not appropriate to the needs of the scheme. In the with profits, life assurance sector, investment performance is often opaque and in any case it is not the primary competitive force. The herd effect is accentuated again at the fund management level because managers benchmark themselves against each other, thus promoting a consensus driven, lemming-like approach to investment.

The upshot is that asset allocation is much of a muchness across the pensions and life assurance industries, and there is insufficient attention given to higher risk areas of investment such as private equity and venture capital. As it happens, venture capital is no longer such a scarce commodity in Britain as it used to be, nor has the damage done by the technology bubble significantly reduced investor appetite for venture capital opportunities. But the point is well made none the less. Institutional investment is driven by a blinkered, safety first approach which no longer serves the best interests either of savers or the wider economy.

So much for the problem. But what to do about it? Mr Myners has sensibly backed away from recommending legislation or imposing further layers of regulation on the investment industry. No investor should or can be forced by Government edict into investing in a prescribed way. Indeed, where regulation has been imposed, such as the Minimum Funding Requirement, he finds that the effects have been very damaging indeed. The MFR has helped drive pension funds into low returning gilts and hastened the decline of defined benefit pension schemes.

As for the rest, Mr Myners suggests a reasonable enough set of investment decision-making principles, which would be enshrined in a Cadbury-style code of conduct. There's also the wholly obvious suggestion that pension fund trustees get paid for their work, and an American-style duty on fund managers to intervene more aggressively on behalf of shareholders in company affairs. More controversially, Mr Myners proposes that fund management fees include dealing and other commissions, a sensible enough recommendation in principle but one which in practice will probably just further promote the practice of "netting", or paying for stock net of commissions.

All pretty unremarkable stuff, but then the real power of this report is in identifying the fault lines. If Mr Myners' review helps galvanise trustees and others in charge of investing our savings into bucking their ideas up and applying a more vigorous and professional approach to the task at hand, it will more than have served its purpose.

House price indices

Buying a house is the single biggest investment many of us make in our lifetimes. It is alarming, therefore, that no one seems able to tell us exactly how fast the value our principal asset is rising. According to Halifax, prices rose 1.6 per cent last month alone, but over the year as a whole, they are up just 3.4 per cent - a tiny real return when compared with inflation at 2.7 per cent.

If you believe Nationwide, on the other hand, prices fell by 0.8 per cent last month. That looks pretty bad until you read that the average home is worth 8.1 per cent more than a year ago on the Nationwide ledger. Some exasperated analysts simply split the difference and call it 5 to 6 per cent but that approach would hardly pass muster in the bond, stock or currency markets.

The lenders are as much at a loss to explain the divergence as anyone else. If it was ever true that borrowers from the Halifax lived Up North and Nationwide customers Down South, that stereotyping no longer holds good. Deutsche Bank, which produces its own housing activity index, has concluded that a search for perfection in the statistics is "inevitably fruitless". The important questions are in any case nothing to do with the month by month movements, but where the housing market is going and what, if anything, it means for interest rates. The two lenders seem agreed at least on one thing - that the housing market slowed towards the end of 2000 and has picked up a bit since.

Other evidence supports this. According to the Bank of England the number of mortgage approvals is at a 12-year high, while the value of these loans is at a record level in both current and real terms. With wage growth strong, the jobs market tight and the outbreak of a mortgage war promising to drive down borrowing costs, it must be too early to call an end to the house price boom quite yet. Things are beginning to look ominous in the financial markets, but for the time being the trickle down effect of fat City bonuses on house prices in London and the South-east continues unabated.

The Chancellor is still vaguely hoping that his pre-election Budget will be capped with an interest rate cut at the end of the MPC's two-day meeting tomorrow. Don't bank on it.

SME lending

Now there's a thing. The Competition Commission has found that there is a complex monopoly in the supply of banking services to small businesses. It has taken the Commission nearly two years to reach this blindingly obvious conclusion, but still the process isn't yet over. The wheels of progress in Whitehall grind exceedingly slow.

The Commission went overboard to stress yesterday that just because there is a complex monopoly doesn't necessarily mean that it acts against the public interest. The Commission promises to keep us in suspense a while longer on that one, as indeed it does on any suggested remedies.

On the face of it, however, it is hard to see what the Commission might come up with that would adequately address the problem, other than something oppressive, such as enforced branch divestment. The Commission correctly diagnoses the problem as "significant barriers to entry" for small business loans and money management services. New entrants without the advantages of scale and the branch networks of existing incumbents are always going to find the SME market a difficult one to crack.

Even so, pre-emptive action by incumbents continues to look the best way of heading off an over-reaction by policy makers. HSBC's initiative to make account transfer for small businesses that much easier is a start, but more wide ranging concessions may be necessary to stop ministers pursuing the nuclear option.

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