MARKET COMMENT
The Second Guessing Game

By Stuart Watson (TMFTiger)
March 6, 2001

Great Titchfield Street, London -- Today saw the publication of a review on institutional investment in the UK. The review was requested by Gordon Brown and he will respond to the main findings in his Budget speech tomorrow. The report rightly acknowledged that the equity culture here in the UK has significant benefits but there are many areas where it needs improvement. It also says that "savers' money is too often being invested in ways that do not maximise their interests". By savers we mean anyone with a pension or life insurance product, i.e. probably the majority of the adult UK population.

Many of the findings mirror those put forward by the WM Company in its latest report on the performance of managed versus active funds, which was published last week. That report found that many managed funds are just "closet trackers" which are too scared to make any major bets against the market but are more than happy to charge high fees for their services. In fact their approach can be summed up by the quotation on the cover of this latest report.

"Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.

It is not a case of choosing those which, to one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

It is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of public opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

That statement was made 65 years ago and comes from John Maynard Keynes's General Theory of Employment, Interest and Money. Very little seems to have changed. Institutions are still playing the game of second and third guessing and measuring themselves against each other rather than on an absolute basis.

The report concludes that the industry itself should drive forward its own reforms and that legislation is only a blunt instrument of last resort. But considering how long these practices have been taking place you could argue the last resort has looked appropriate for some time.

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