Outlook: Fund managers
Tuesday 23 February 1999
IN THEORY, there shouldn't be any surprises in the Budget since it was all meant to have been curtain raised in the Pre-Budget statement last November. In practice, the Budget wouldn't be the Budget without some rabbits to pull out of the hat, so the traditional season of pre-Budget leaks (for which read guess work) is already well underway. Without the good ship Charlie Whelan, the Chancellor's former press secretary, to help out, the press is even more at sea than ever.
Strangely, there is a part of the pre-Budget statement that hasn't yet been recycled as today's exclusive. This is the part that deals with the Government's concern over the relationship between institutional investors and their clients. The Chancellor believes that the root of Britain's poor productivity problem lies with its long history of under investment. This in turn may be partly caused by City short termism, Mr Brown believes.
No Labour Chancellor these days would be naive enough to think he could force the City not to be short termist, but Mr Brown does believe much can be achieved by obliging fund managers and pension fund trustees to set out publicly their objectives, how they assess investment performance, and the basis on which key staff are remunerated. On remuneration, the idea would be to establish whether indeed there is an inbuilt incentive in the way fund managers are paid to short term performance at the expense of long term.
All these ideas have plenty to commend them. Anything that can make the process of how our pensions and savings are invested on our behalf by others more transparent must by definition be a good thing. Quite how to achieve this, or whether it would have the desired effect, are rather different questions. The Chancellor would prefer the industry to put its own house in order, and he will be urging fund managers and pension fund trustees to set up something akin to the Hampel committee on corporate governance and executive pay. If they refuse, there's always the big stick of legislation to wave at them.
However, this is difficult territory. It is not clear, for instance, that forcing pension funds to disclose that they do not invest in business start ups will much improve the situation while expected returns from British start-ups are so lamentably poor.
Nor is it easy to quarrel with the three year investment horizon most pension funds apply to the management of their money. Pension fund clients cannot reasonably be blamed for wanting to change their investment manager if after three years he is still underperforming his peers. To allow more grace might be to encourage continuing underperformance. As can be seen, these are complex issues, and they are not likely to be properly addressed by over hasty action.
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