As many people have said: you don’t want to waste a good crisis. So, academics and practitioners have stepped up their work on the broader issues facing investors, specifically, and markets, more generally, in the wake of the global financial crisis. In his latest work on systemic problems with markets, which include the impact of agents in the financial system, funds managerturned- academic Paul Woolley has proposed a list of remedies for both pension funds and regulators to consider. Woolley’s views and recent work came together in July with the publication of a series of papers sponsored by the London School of Economics under the title: The Future of Finance. Woolley’s chapter in this tome included what he termed A Manifesto for Giant Funds.
The manifesto consists of 10 policies which large pension funds are urged to introduce to both improve their long-term returns and also help stabilise markets. They are, in summary: 1. Adopt a long-term approach to investing based on long-term dividend flows rather than momentum-based strategies that rely on short-term price change. 2. Cap annual turnover of portfolios at 30 per cent, because there is no better way to force managers to focus on long-term value. 3. Understand that all the tools currently used to determine policy objectives and implementation are based on the discredited theory of efficient markets. 4. Adopt stable benchmarks for fund performance – funds should set a target of GDP growth plus a risk premium for investing in credit and equities.
5. Do not pay performance fees – trying to assess whether a manager’s performance is due to skill, market moves or luck is near impossible. 6. Do not engage in any form of ‘alternative investing’. 7. Insist on total transparency from managers regarding their strategies, costs, leverage and trading. 8. Do not sanction the purchase of structured, untraded or synthetic products. 9. Work with other shareholders and policy-makers to secure full transparency of the banking and financial service costs borne by companies in which the giant funds invest. 10. Provide full disclosure to all stakeholders and for public scrutiny of each fund’s compliance with these policies. Woolley says: “Those in charge of the giant funds have been concerned [by] the poor performance of their funds but have felt safe from criticism because their funds were suffering the same fate as their peers. The stakeholders, who have been the ultimate victims, mostly fail to grasp what is happening and see themselves without franchise and powerless. “The giant funds seem oblivious to the depredations caused by the principal/agent problems.