Investor sentiment

To some extent this solved humanity’s most enduring problem – that of agency. If you need professional advice, how do you know if it is good and in your interest or, alternatively, that your adviser is not ripping you off? Stockbroking profitability depended on numbers of clients, and growth through introductions to their friends, and clients were predominantly concerned with the income generated by their portfolios. This was easily calculated.

This social world changed significantly as a result of the Second World War, followed by several years of financial repression and then high and persistent inflation. Investment became more democratic. All savers needed protection against the declining value of money and first the insurance companies, and later the unit trust companies, offered what appeared to be safe and cheap ways to invest. And in an industrial world that was rapidly changing and merging, the most potent hook to this new market was the promise of capital gains.

The structure of costs

The profitability of investment management today is based on AUM, that is the volume of money being managed, and not successful investment itself. The only importance of that is the public’s belief that any particular management house knows what it is doing, and so adds new funds to those already being managed. To be successful these need to catch the public’s current fad, such as technology, emerging markets or higher than average income.

Such fads have unexpected consequences. Bric (Brazil, Russia, India and China) sounded good, as developed by Goldman Sachs, but now looks bad: Brazil is steeped in corruption, Russia in military posturing, India still hog-tied by regulations, and China desperately trying to manage a transition from investment driven exporting to consumer spending.

Nothing in that is surprising, since both the UK and the USA spent years cleaning up their game, and the Bric countries will have to do the same, assuming that they do ultimately succeed. Reform will certainly not be quick, and probably harder than it might have been.

Short-termism and business decisions

Despite ultra-low interest rates, business investment has not recovered since the 2008 crash. Commodity prices are falling, because world demand is low, and business is not investing because, without demand, CEOs threaten themselves if they invest for the future, and disappoint shareholders this quarter with their profits.

Presidential hopeful Hillary Clinton is concerned with this ‘quarterly capitalism’, a concentration by companies on short-term result over long-term growth. Research co-authored by Andrew Haldane, chief economist of the Bank of England, suggests that most shareholders today are seeking instant gratification in the shape of buy-backs or increased dividends.