The Daily Telegraph - Saturday - Money
Loving risk
Investors are ‘too catious’
I’m not trying to sell you any shares or market any investment product. I have a larger aim: I want to argue for a complete retooling of our investment industry.
Perhaps I should apologise for this naive ambition. We’ve grown used to the idea that fund managers should be measured by their own chosen metrics: outperforming indices and competitors; protecting from “risk”, however strangely we may define it; meeting even more strangely defined regulatory liabilities; and last – but frequently far from least – making a lot of money for ourselves. In the classic words of the past, the customers’ yachts are still rather rare.
But shouldn’t the role of fund management be judged by higher standards? Might it not be that our failings go beyond self-obsession and greed to playing a major part in the stagnation of modern capitalism?
We are tasked with guiding and overseeing the capital allocation of most of the world. If growth and productivity perennially disappoint, if innovation is too often confined to a new app, perhaps the problem lies with us and our preoccupation with safety. That this has not even prevented outbreaks of disastrous financial instability at regular intervals is an irony of little apparent concern.
Perhaps the rise of institutional fund management has been a central if unappreciated cause of the decay of entrepreneurial ambition. Putting your hard-won savings into government debt with minimal or even negative interest rates is unlikely to create wealth; neither is instructing companies to curtail investment for the sake of certain cash generation and supposedly predictable dividends.
How many large companies that are prepared to invest in the future can any of us identify? How many of these, in turn, are prepared to sacrifice immediate earnings to invest in their dreams – let alone ask for fresh capital to fund their visions? But isn’t this the point of equity investing? From epochal Dutch commercial exploration onwards, such was the idea. But now?
The clearest exception in our era of truncated ambition is Elon Musk, the founder of Tesla, the electric car maker.
He ventures into worlds beyond the limit of common abilities and understanding. He commits extraordinary quantities of energy, intellect but also capital to his many projects. It would give us, as a large shareholder in Tesla, enormous satisfaction should this translate into electric vehicles and solar energy replacing the internal combustion engine and fossil fuels, and autonomous cars saving millions of lives.
Yet we’ve never made an investment for which we’ve received such criticism.
From the sharing by hedge funds of detailed rationales for their hostility to emails telling us that we will be central exhibits in the fund management hall of shame, it’s been an interesting journey. Could Tesla fail? Of course – is there any equity investment that is worthwhile (or indeed credible) that cannot? But equally, could it improve the world and continue to multiply the wealth of our clients? Of course.
Perhaps the field that could most benefit from a radical improvement in its sense of purpose is healthcare. We may well be on the cusp of extraordinary medical advances. The foundations of transforming science appear to be in place after long years of experimentation. This applies in genomics, in gene therapies, in immunology and in the application of data to our health.
But if we are to accomplish this great task it will be no thanks to the major pharmaceutical companies, which have – to the cheering of fund managers – abandoned clinical ambition for metoo drugs and billions in marketing expenses. As an erstwhile leader of Novartis proclaimed, his task was to sell drugs like sugar-filled soft drinks. Sadly, this is a sphere in which Britain can claim to be a world leader.
Britain is equally the master of failing to build new enterprises of global scale despite admirable scientific and entrepreneurial resources. This may be natural enough: if finance has evolved in a harmful direction, those cities and countries most devoted to finance are likely to feel the repercussions most severely.
As London offers a large stock of risk-averse asset managers, boasts a cornucopia of hedge funds and harbours a myriad of overly influential investment banks, bad outcomes are almost inevitable. Last year’s takeover of Arm Holdings, the computer chip designer, by SoftBank of Japan demonstrates this Achilles’ heel.
Arm had the chance to become a global technology giant. To do so it needed the willingness to invest at the cost of immediate profits, managers prepared to dream rather than calculate, and supportive shareholders to back this vision. We failed on all accounts. But who cares if the immediate uplift to performance is enough for a bonus?
‘Healthcare could benefit most from improvement’