18 February 2020
A great deal has changed in 30 years, but much remains the same.
My own 30 years in the finance industry started on a sunny day in September 1989 at the old Eagle Star insurance company. Jive Bunny was at number one, the FTSE 100 stood at 2400 and gilt yields were close to 10% (YES 10%) - thank heaven the first two have changed!
Two years later I moved to Eagle Star’s investment department and since then I have been on a journey of desk junior, researcher, fund manager, co-CIO and now a consultant helping trustees of pension funds. I have spent some time reflecting on what I have seen over those 30 years and wanted to share some observations.
1. This is a world in which things repeat themselves
Or in other words, nothing happens that is genuinely new. We make the same mistakes, often 'generations' apart, and we make money in the same ways. The labels may change, the presentation may use different jargon, but fundamentally things are the same.
With apologies to my colleagues, there are no purely new investment ideas. Yes, new opportunities open-up for a group of investors (like direct investment into infrastructure for non-mega sized pension schemes, or lending directly to SMEs, or derivative-based equity protection strategies – they’re great by the way). But I can’t think of anything that has been labelled 'new' which hasn’t been done before by someone else, maybe in a different part of the investment community, maybe with a different name.
2. There are only two ways to make money
Strip back every investment, even complex derivative structures, and underneath there are two forces driving the returns, for good or bad. In the first, capital is buying something, let’s call it 'equity', and trying to generate a dividend and/or capital growth. In the second capital is being lent, let’s call it 'debt' or 'credit', and trying to get paid some interest and maybe a capital uplift along the way. Yes, I know, insurance-linked securities don’t satisfy this proposition, but are they really investments?
So, all investments are about owning something or/and lending to something.
3. Debt is seen as the bad guy, but is it?
Debt, or lending, has regularly been held up as the cause of problems, be it various sovereign debt crises, US mortgages, etc. But debt per se is not the problem. The problem is the amount of debt, to whom it is lent, and/or the terms upon which it is lent.
When problems arise, it is not just those who have lent who feel the pressure (banks, the IMF, bond holders and now the new breed of 'direct lenders', peer-to-peer lenders etc). It causes more pain for the equity owners involved, who lose their shirts before lenders lose.
And that brings me to a key point - companies (or their management) chose to borrow in order to boost returns to the owners of equity. Doing so makes buying equity a leveraged investment – a fact (and risk) I am amazed is not more commonly understood.
4. A kick to the youth: lived experience matters
Lived experience leads to internalised knowledge and wisdom that can’t be learnt another way. When I cast my mind back over the big events of those three decades - Black Wednesday (in the UK, 1992), the Asia financial crisis of 1997, the 1998 Russian financial crisis, the dot.com bubble bursting (2001-03), the 2008-10 GFC - I realise that 'markets' are just a collection of ever-changing individuals who make mistakes.
And that begs a question - how long is an investment generation? Or in other words, how long does it take markets (or should that be people…?) to forget previous mistakes? In 1997 to 2003 it felt like about 12 months. But now, at the end of a 'crisis-lite' decade, I fear markets are forgetting previous mistakes.
Anyone responsible for investing, be it a fund manager, researcher, consultant or trustee should have an appreciation of investment history, even just of the last 30 years. But there is nothing better in my view than actual experience – the “been there, seen it” which comes with time-served. In hindsight the path that history followed post an event will always seem more inevitable than it really was at the time, while the lived experience captures all the uncertainty, the headlines, the tough trade-offs that needed to be made and the tension in the room when key decisions took place.
5. The rise of jargon!
I simply refuse to believe that the investment world of the 1990s was as riddled with jargon as it is now. And nowhere is this more apparent than in the emergence of a sea of three-letter-acronyms or TLAs – I hope the joke / irony is obvious there. I have already used one above, so shame on me. But now we see many TLAs, FLAs and SLA – yes, six-letter-acronyms. ABS, RMBS, TLB, CRED, CMBS, CLOs, CDOs, SMEs, MAC, DGFs... The pernicious side-effect of this is obfuscation – the confusion of the lay-person, or those not “in the know”, and an unearned mystique around those that appear to know more, making things seem more sophisticated than they really are.
So, with much reflection, I have learnt that there are two ways to make money (own stuff or lend to stuff), debt can be good or bad, equity makes more money than debt in good times, and loses more in bad times. No one has a crystal ball, TLAs are sent to confuse/annoy us, and experience matters. Enough said.
In 1989 I had just seen Jack Nicholson play The Joker in a Batman movie. Recently I saw Joaquin Phoenix give a very different interpretation, but of the same character. How different will the next 30 years be for investors I wonder, and who will play The Joker in 2049?