Racing for growth

A trade surplus in car exports bodes well for Britain

The XF Sportsbrake is Jaguar’s new ‘Tour De Force’. The new estate can be seen running parallel to this year’s Tour De France winner Bradley Wiggins on his quest for the yellow jersey. The estate is the latest in a range of fancy new jags to be produced at the Castle Bromwich assembly centre in Birmingham, shepherding in an extra 1000 jobs.

The Tour de Force Jaguar  follows Wiggins 

Jaguar Land Rover (JLR) isn’t the only one revving up their UK operations. Nissan and GM are both upping their capacity, expanding their Sunderland and Liverpool plants respectively.

This accelerating sector of the UK economy exports some 80% of its wares. This has helped rein in a whopping automobile trade deficit of £7.5bn in 2007, and even produce a small surplus of £212m today. 

This reversal in fortunes is now being touted by Britain’s Prime Minister, David Cameron, as a symbol of UK manufacturing prowess. He may like to thank India’s Tata group or Japan’s Nissan for it.

A couple of decades ago the car manufacturing industry stood for something rather different. Plagued by shoddy design coupled with a overpaid and pampered workforce, the assembly line was more likely to be run by shop stewards than managers.

If car manufacturing was a UK symbol, it was of “British Disease” typified by Triumph’s Speke plant in Liverpool, notorious for its poor quality and a combative unionised workforce.

Today Liverpool’s automobile industry is shifting into second gear. A far cry from the 1980s, JLR are expanding their Halewood plant to make room for more Range Rover Evoques. This was the same factory which made the dull Ford Escort in the 90s and was almost closed at the turn of the millennia.

Britain’s car industry owes its renewal to foreigners. Not only does the UK sell over 1 million of the 1.25 million it produces to them, the firms which have rejuvenated Britians bumbling brands hail from Germany, the US, Japan and India.

Tata and Toyota are just two of a menagerie of foreign firms which now dominate the British automobile industry. While doing wonders for operational efficiency, many have kept the British allure. BMW continues to make hay with the Mini brand, squeezing out efficient motors while maintaining some sixties charm.

Car Manufacturers’ are often said to be representative of the wider UK economy. In the early 1980s a sclerotic industry needed a total revamp much like the overburdened state. In the boom years of the later 2000s, excessive deficits in the automobile trade demonstrated how Britain had failed to keep pace, importing German motors, living on borrowed money and hiding inefficiencies behind superficial growth.

The industry now finds itself shifting from a trade deficit to a surplus as despite the shadow of the Eurozone; sales are up in key emerging markets such as China and India. UK PLC will be hoping that the car industry will once again prove to be a reliable barometer of British economic fortunes. 

UK Dairy farmers squeezed as the global market price for cream hits a new low, exacerbating local problems.

Tanking wholesale cream prices hit a $1020 low from their $1800 peak

Not many industries display the friction between global markets and local practices as plainly as the UK dairy market. Processing conglomerates and a small set of supermarkets purchase vast quantities of raw and pasteurised milk from a widely dispersed group of dairy farms. Arla foods, a milk processing firm, source raw milk supplies from over 1400 local providers.

British farms have become increasingly inefficient relative to American peers

This large but diffuse group of local farmers is now under stress from a menagerie of factors. Weak bargaining power, inefficient production methods and a tanking world market price for much of their produce has culminated in many British farmers losing out on every litre of milk produced. Dairy Co, a trade body, prices the cost of production at 30p a litre while the average price the farmer gets is thought to be nearer 25p.

The burden cannot squarely be placed on powerful buyers. The price of cream globally has plummeted from its high of $1800 in June 2011 to a new low of $1020 as recession weakens demand in previously buoyant emerging markets such as China.

Cream is particularly prescient for the dairy farming industry as the high demand for this more lucrative commodity allows farmers to offset losses from the falling price of milk. Due to the steep fall in cream prices, processing firms are keen to pass further losses down the supply chain to dairy farmers.

These global forces are exacerbated by local inefficiencies. Eastern European and US farms typically operate on a much larger scale. This allows them to benefit from economies of scale, better technology and greater bargaining power. By contrast, British farms operate on a much smaller scale making production inefficient relative to US farming behemoths. 

Changing industry dynamics favour consolidation as larger producers are more capable of dealing with increased market volatility, whereas smaller farms find it difficult to cope with even small falls in prices.

Yet there remain significant disagreements in Britain over how dairy farms should be structured. The agriculture secretary, Caroline Spellman, has made calls for a “fair price” for farmers. However with global prices falling it is unclear what this will mean.

British farms operating with a small herd of cows tend to produce at a cost level above what is now seen as globally efficient or profitable. This has been apparent in the number of small farmers leaving the industry. Over the last 10 years, the National Farmers Union (NFU) reckons that 40% of small dairy farms in the British Isles have become insolvent.

Milk prices will continue to be a sensitive issue as farmer protests in the UK tend to attract public sympathy in a way which is likely to spur jealously amongst passport control officials. With the Olympic opening ceremony due to commence Friday 27^th, ministers will be hoping for a quick resolution to the latest milk price protest. 

“Turn these games into gold”, maybe for the IOC Mr Cameron, but not for Britain.

When Britain first held the Olympics back in 1908, the event was of a more modest sort. White City Stadium was chosen in Shepard’s Bush as the Franco-British expedition offered to fund the event in return for 75% of ticket revenues. Needless to say, the Chancellor of the Exchequer was not contacted.

The only people certain to profit from the Olympics, The IOC

With a government budget of £9.3 billion, the modern day event bears little resemblance to its humble origins. Prime Minister Cameron has promised to “turn these games into gold for Britain”. While the games are likely to bring the spotlight to Britain, it’s not entirely clear they will bring much else.

Some argue that the velodrome or the aquatic centre will pay off long term, this looks misguided. While the swimming stadium is impressive, the people of East London don’t really need an Olympic pool, they’d rather a couple of splash pools for kids. Those mass stands look equally suspect; swimming isn’t really a spectator sport, especially not in Stratford. With a price tag of £269 million, the aquatic centre hardly looks a bargain, indeed it is emblematic of the whole games: immense and exuberant but ultimately inefficient and exorbitant.

Still, the payoff to the International Olympic Committee (IOC) is assured. The emphasis on amateurism allows the committee to get their main product for free; athletes. Rather than be paid, athletes merely receive a medal and a bouquet; and that’s the lucky ones, most go back to fairly innocuous lives, not much bettered by the games.

This amateurism, coupled with distaste for ‘crass commercialism’ has given the games a hint of exclusivity which has served the IOC well. Big brands aren’t allowed to blemish the arena, hence they advertise frantically outside, providing the IOC with a great marketing tool. Yet it is unclear how the barrage of branding facing the consumer, from washing tablets to fast food, is entirely related to the Olympics or of any clear benefit to anyone other than the IOC.

When Mount Vesuvius erupted, Rome was in no position to host the 1908 Olympics; Lord Desborough, spotting an opportunity, made the offer to host the Olympics in London. Like his counterpart today, Desborough had some luck and showed certain ingenuity in getting the Olympics to London.

Desborough saw the games as a place where nations could compete in place of the battlefield. His legacy was sadly scuppered by the more tragic events that followed; he became disillusioned with the whole movement.

Lord Coe has shown equal cunning and serendipity in bringing the games back to London. Yet his hopes for an Olympic rejuvenation of Stratford looks like another legacy which may not stand the test of time. 

Coconuts and subways

Running a business in times of uncertainty can have its benefits

Businesses need to plan for uncertainty; however they shouldn’t be so concerned with predictions. Large firms have scores of economists and statisticians analysing data, busily trying to forecast events. It seems that the more uncertainty is created, the more experts seek to predict. Yet one struggles to see a positive correlation between proliferation and prescience.

A benign coconut event for its founders

Indeed, it is during times of uncertainty that experts begin to get things quite wrong. Public statements from the IMF back in April 2007 reckoned, “not withstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and 2008”.  By October 2008 this had changed to, “The world economy is entering a major downturn in the face of the most dangerous financial shock since the 1930s”

The IMF is not alone in their flimsy forecasting; individual businesses are equally shoddy. Google for instance tried to sell itself for $1.6m in the late 90s. This would have been a shame, the firm’s now worth around $230 billion.

The credit crunch and the rise of Google are what Insead’s Makridakis calls ‘coconut events’, rather than ‘subway events’. We are terribly good at predicating the latter and hopeless at the former. The analogy comes from a man who predicts how long it will take him to get to work via the subway. The times follow a normal distribution and hence the average journey on any given day can be estimated.

Coconut events by contrast are unpredictable. The same man whilst on vacation is struck by a coconut; such an event is unpredictable like the rise of Google or a major economic downturn.

Humans struggle with this type of event. It prevents key decisions from being made; it can scupper even the most reasonable investment decisions. Hence, we see businesses sitting on piles of cash, factories running at maximum capacity and workers taking on overtime all while the unemployment rate rises and the purchase of new equipment remains shelved.

Yet this is making firms more efficient whilst opening up opportunities for the brave. Since 2008 businesses have been doing more with less and corporate profits have been up at firms like Volkswagen and Pirelli. These companies are supposed to be struggling with Eurozone uncertainty, but instead have used a weak euro to their advantage.

Businesses should get used to it. Rather than trying to predict the future, they should become adaptable. This will happen anyway as those companies which make the investment in spite of uncertainty reap the benefits over timid competitors.

The Eurocrisis can no longer be blamed, it has become the norm; those operating within the zone should look to Germany’s Mittelstand or France’s luxury consumer firms. Sections of the Eurozone economy are prospering.

Forecasting is a mugs game, planning for uncertainty is not. Predicting the next event is fortunately impossible, it is the wonder of free enterprise that it adapts to such uncertainty while the central planned economy flounders. Firms should be flexible and ready to move, rather than trying to anticipate which coconut will fall. 

Quantitative Wheezing

Division within the monetary policy committee (MPC) demonstrates the need for a different sort of stimulus

Counter factual arguments are a policy makers dream. Regardless of how dire the current state of affairs may be, just imagine if such assertive action had not been taken. This is the argument made in favour of another stint of monetary stimulus. Like the policy itself, the argument suffers from diminishing returns.

The Bank of England’s (BoE) statisticians reckon that the first round of quantitative easing (QE) raised GDP by 2%. Conveniently for the bank, we will never know if this is true, it is merely a complicated guess relative to a counter factual argument of how things might have been.

Still, there are two pieces of simple data not premised on econometric modelling, which should make one suspicious of the effectiveness of the latest round of QE. Since the BoE’s first round of stimulus back in 2009, bank reserves are up 58%. Yet lending has barely risen, up a paltry 0.2%. If ever QE did work, it was never reflected in increased lending to businesses.

This opinion is not limited to the blogosphere. Spencer Dale, the BoE chief economist is sceptical of another dose of QE, voting against the latest £50bn injection citing that the “conditions are not right” for more printing. Indeed the MPC was divided on the issue, with several key figures voting against the measure.

Two things can be gleaned from this. Firstly, that like everyone else, the BoE does not know what the correct course of action is to avert recession. Secondly, without confidence, banks will not lend to businesses no matter how much cash they are given.

The banks, fragile and anxious, borrow cheaply from the UK government; the UK government, delicate and nervous, receives cheap financing from the banks. The analogy of two drunks being propped up by one another is depressingly apt.

Osborne and Hester?

Stop Wheezing, start fracking

Fracking is the bane of environmentalists everywhere; it could be a boon for the UK’s economy and energy mix. Regulation prevents effective exploration of this lucrative market. It should go ahead with vigour. If the country is serious about rebalancing the economy, then this high tech engineering industry cannot be neglected.

Shale gas exploration could cause pollution, it may underwhelm, most importantly; it may fail to spur the economy.

Still, fortunately for your correspondent, the counterfactual, of how awful things would have been without such bold measures, can always be used in defence. 

Liberal Arts and the Art of Business

A new book by Philip Delves Broughton emphasises the simple logic of Peter Drucker

One sale leads to another

Today’s business world can seem focused on the minutiae, blindly pursuing seemingly important deadlines whilst missing the bigger picture. In many ways Drucker’s career was about bringing humanity and simplicity into the realm of management science. According to the great guru there are only ever two important aspects to business: innovation and sales. The rest is mere detail.

While the first of these is positively revered; the latter is often sniffed at. Broughton’s book, life’s a pitch, tries to fight for a noble view of the salesman. In a fashion reminiscent of Drucker, the author opts for engaging anecdotes rather than facts. Broughton draws on history and psychology to explain management puzzles in place of cold empiricism.

A young Drucker, attending a conference at Cambridge University delivered by the eminent economist John Maynard Keynes, quickly recognised he didn’t fit in with conventional thought.  “I suddenly realized that Keynes and all the brilliant economic students in the room were interested in the behaviour of commodities,” writes Drucker, “while I was interested in the behaviour of people.”  

This observation typifies Drucker’s view of macroeconomics: complex, impressive, but ultimately mistaken. Drucker felt that the macroeconomist didn’t incorporate the human aspect into his theories, hence making shrewd forecasting difficult.

However Drucker’s own prescience proved remarkably accurate on a number of fronts. The rise of the knowledge worker, outsourcing and Japanese industrial power were all recognised by Drucker in the 1950s. Instead of rigorous empirical analysis, Drucker drew on the simplicity of relationships. Consider his irrefutable logic on the rise of outsourcing:

As employees of a college, managers of student dining will never be anything but subordinates. In an independent catering company they can rise to be vice president in charge of feeding the students in a dozen schools; they might even become CEOs of their firms. If they have a problem, there is a knowledgeable person in their own firm to get help from. If they discover how to do the job better or how to improve the equipment, they are welcomed and listened to.

This demonstrates Drucker’s commitment not only to more efficient business, but to improving the lot of individuals by participation in capitalism. It is interesting that Drucker saw business as a noble enterprise whose main role was to serve its customers rather than make profit.

Though Drucker wasn’t fond of Keynes, another economist, Joseph Schumpeter had a lasting effect on him. A friend of Drucker’s father, Schumpeter introduced a young Drucker to entrepreneurship, a running theme throughout both men’s great works.  This helps to explain why Drucker saw entrepreneurship, simplicity and ‘real life’ examples as vital ingredients to a good business book. 

Broughton’s own work seeks to emulate this tried and tested formula, applying it to the salesman. Providing provocative anecdote rather than hard facts, the reader is introduced to the culture and historical perspectives of salesmanship. From classical Greece to medieval France, Broughton ties seemingly uncorrelated happenings.

Perhaps Brougthon’s greatest insight stems from his analysis of the resilience of the salesman. Given the choice between closing a sale 9 out of 10 times and 1 in 10 times, a salesman worth his salt would opt for the latter. Why? It is due to what Broughton terms, ‘the hero’s journey’. This is the battle that by virtue of wit and charm combined with remorseless energy, the salesman brings home the deal.

This refreshing take on the human psyche is reminiscent of Drucker. Business is often perceived as a hardnosed aspect of life, a necessity which needs to be carried out, but not something to enjoy. This somewhat British view of enterprise has become ever more entrenched since the onset of stagnation in the developed world.

Still, the cultural aspects of commerce are enlightening. From the negative sentiment surrounding the salesman to the engineer placed on capitalism’s pedestal. Drucker and now Broughtons’s, multi-faceted approach to the discipline of management not only makes for more interesting tales, but more insight.

Don’t bet against Mr Miliband just yet.

Worryingly for the coalition, Ed Miliband is starting to look prime ministerial.

Less a policy wonk, more a future prime minister

Tony Blair called it the most stressful, nerve racking event of his political career. Some see it as unnecessary, at best a distraction, at worst a futile slanging match with no opportunity for real policy discussion. Others reckon its the most fascinating part of British politics, giving the astute viewer an insight into the battle between the prime minister and the leader of the opposition.

Prime Minister’s Questions, or PMQ’s as it is commonly referred to, has always divided opinion. While some may dismiss it as only of interest to those caught up in the Westminster bubble, a poor showing at the dispatch box, on either side of the house, can quickly transcend into fidgeting backbenchers and a lousy press.

So it proved for Mr Miliband. Narrowly elected over his more commanding brother, Mr Miliband managed to sneak through in the leadership contest with backing from the trade unions, despite his brother winning more votes from MPs.

Hence the labour leader has had to face accusations of being in the ‘pocket’ of special interest. Such claims were fully exploited by the Prime Minister, David Cameron, brandishing his opposite number as “Red Ed”.

Struggling to challenge the lucid and elusive Cameron, unable to face down claims of overt backing from unions and an appearance closer to that of policy wonk than prime minister, Labour big wigs and backbenchers alike found themselves wondering if they had ended up with the wrong brother.

What has followed has been nothing short of complete transformation. At the final PMQs before the recess, Ed Miliband embarrassed the coalition, displaying confidence and enjoying his time at the dispatch box. The BBC’s political editor, Nick Robinson, described the performance as “inconceivable a few months ago”.

This should worry the government and excite Labour. The public, up until recently, preferred Labour to the Tories, but Cameron to Miliband, such clear disparities are no longer apparent. Also, the government is dealing with its own internal squabbles. Backbench rebellion over House of Lords reform has exposed Cameron as inept at controlling his own party. The irony will not be lost on Mr Miliband

Yet the Labour leader should tread carefully. Voting for the principle of Lords reform only to vote against “the means by which it could be enacted” was branded as “utterly pathetic” by an unmistakably stirred prime minister.  

Cameron’s words may resonate with the wider public. While attempting to embarrass the government and oppose almost all legislation is part and parcel of the British parliamentary system, indeed, the very structure and formation of the House of Commons encourages it. (The incumbent sits directly opposite, provocatively facing the opposition party) The public are unlikely to thank Mr Miliband for helping to bring down a government at a time when stability is so highly valued. 

Implementing the Vicker's report

Britain’s prosperity and morality are tied up with banking reform

Mansion House, in the heart of the city of London, is located a stone’s throw away from the Bank of England. Together on bank junction, these grandiose Victorian edifices, overlooked by tall glass offices, provide the passing pedestrian with an insight into Britain’s past as banker to the world, and future, as home to global banking.

At least this was the view up until recently. The aftermath of the financial crisis has left banks asking whether it still makes sense to be in Britain, and the British electorate asking whether they still want them there.

At a cross roads in more ways than one

The changing mood was apparent in the chancellor’s annual speech at that historical emblem of capitalism, Mansion house. Instead of congratulating the city, as was common up until 2008, the Chancellor took the speech as an opportunity to describe how risks taken in the capital, “spilled out onto the high street, putting taxpayers at risk”. Osborne went on to advocate the government’s whitepaper on banking reform, largely based on a blueprint put forward by Sir John Vickers, as the solution to grumblings over banks.   

The reaction to the government’s white paper emphasizes the gravity of the reforms. Some argued that they don’t go far enough leaving Britain vulnerable to another crisis; others insisted that they would hamper an already stuttering economy and extinguish the city.

As is often the case in finance, the outcome of policies may not fit well with original predictions. Those calling for investment banking to be ring-fenced seem to follow a sensible logic that we should separate, ‘casinos from retail’. Yet those banks which first ran into trouble, turned out to be in rather dull areas of retail banking. Northern Rock and Bradford and Bingley operated in a world a million miles from collateralised debt obligations and credit default swaps.

The frustrating and frightening truth is that no one is entirely sure what the solution is. Economists talk omnisciently for the implementation of ‘obvious’ reforms. Yet, such calls were not made when it mattered. Furthermore, each crisis is unique, and the regulation of one area often pushes the shady aspects of finance elsewhere, rather than removing it.

Britain is a special case, as the chancellor outlined, the country faces a “British dilemma” where trying to “protect taxpayers and being home to global banks” often runs in contrast to one another. As a country which depends heavily on finance for its prosperity, getting the balance between sensible reforms and satisfying the electorates’ calls for stringent changes, will undoubtedly prove a thankless task.

The implicit subsidy which has allowed unscrupulous bankers to gain large bonuses, while the wider economy flounders, riles the average Brit like nothing else. Banking reform is more than a question of efficiency. Doubts have been raised over the culture and morality of the industry. Cynics reckon increased regulation will merely lead to more box ticking and fat fees for city solicitors.

This may well turn out to be the case, either way, the government should tread carefully. Public opinion is fickle; the chancellor can incur the wrath of the public now and still recover in time for a May 2015 general election. Britain’s role as a hub for banks is more fragile than many realise. While drastic reforms will be a popular move amongst red tops and the general electorate, future historians may well take a dimmer view, seeing draconian reforms as the beginning of the end for London’s status as the hub of global business. 

The problems of being first

Barclay’s LIBOR scandal demonstrates the need for better media management in the finance industry 

No longer in the hot seat

 
Rather than discuss the morality of bankers or the reasons why one shouldn’t rig financial benchmarks; both of which are well documented elsewhere (often in an increasingly angry yet dull manner), this article discusses why the bank, which has proved itself so capable of adapting and profiting in adverse conditions, has failed so miserably in public relations. 

Barclays is one of many banks which have manipulated LIBOR. The tragic irony for Barclays is that had it been the only one fiddling the rate, they might have got away with it. If the other banks had presented honestly how much they were paying to borrow, Barclays’ shenanigans in manipulating borrowing costs would have been viewed as a mere outlier and left out of the average used by the British Bankers Association (BBA) to set LIBOR. 

Equally frustrating for Barclays is the contrast in PR management between themselves and the Bank of England (BoE). Though history may well take a dimmer view; seeing government institutions as often implicit in bad banking behaviour and even sometimes directly culpable; the British public have made up their mind. Scorn for big banks, indifference to the BoE. 

Barclays has suffered from being the first to admit involvement in the scandal. Agreeing to co-operate fully with regulators, before any of it peers, may have struck the bank’s PR team as a boon. It wasn’t. They should have recognised the negative public sentiment towards the industry. Being the first to come out almost always means incurring a disproportionate share of the nation’s wrath. 

Yet for all Barclays’ bad luck, it is difficult to see where the inauspiciousness ends and the ineptitude begins. Steve Gosset, writing in the Harvard Management Communication Letter, reckons once hit with a scandal, you have to “convey empathy”, or in layman’s terms, you have to act like you give a damn.  

For all their experience, CEOs of global companies have often proved themselves surprisingly incapable of doing this. Consider Tony Haywood’s pleas to have his life back after the BP oil spill; muse over Lloyd Blankfein’s comments that he was, “doing God’s work” at Goldman Sachs. 

Both Barclays’ ex-chairman and CEO can be added to this list. The resignation of the group’s chairman was rightly seen as a ploy to shade Mr Diamond from the heat of pubic animosity. The PR team should have thought this through strategically. Rather than being seen as a sacrifice, it was perceived to vindicate calls for Mr Diamond to go. If the chairman was leaving over this, then surely, the man responsible for the investment banking arm, the part of the bank that did the manipulating, should follow? 

Nothing added up, it further damaged the bank’s and its CEO’s reputation, already seen as toxic before the blunder, and ultimately, Mr Diamond’s subsequent resignation proved somewhat inevitable. 

It could be argued that no man has been quite so instrumental to building Barclays global credentials than its now departed CEO. Coming into the firm in the early 90s he masterminded the rise of Bar Cap. 

Not many would dispute Mr Diamond’s credentials as a banker, but as a CEO, he has not paid enough attention to the importance of public image. Mr Hester, boss of a rival firm, RBS, has managed to sculpt himself into an image of a fixer, here to set the wrongs of the credit boom. Understated, firm yet humble with critics, Hester has turned down bonuses and kept himself out of the public sphere. This has won him public indifference, which in the current climate, can be viewed as the highest possible assessment of any banker.  

Empathy and a low profile, Mr Diamond sorely missed. An American from the Investment banking division, the board should have seen it coming. Better to have kept him out of the limelight and making a killing at Bar Cap. 

Barclays is often said to have had a good crisis. Since 2007 it has managed to avoid a potentially disastrous takeover of ABN Amro, something RBS know all about. The bank also managed to make the most of Lehman’s demise, buying the defunct firm’s prime real estate and establishing itself as a global player. These achievements were realised by a combination of good luck and good strategy. Recent events suggest the bank may now be lacking both.  

The rise of the SPAD

Cameron’s calls for a cut in party political advisors may not materialise.

A convenient cover for any SPAD

One would be forgiven for believing that ‘Number 10’, were a living thing. Number 10 believes this, or Number 10 denies that, is a common line. Yet, the house remains merely of bricks and mortar. Those relaying messages to the media, often under the ubiquitous umbrella of ‘Number 10’, are usually SPADs.

Straddling the line between politics and civil administration is a constant and timeless battle for most ministers. All parties of government have shown impatience with the self-protective nature of the civil service. For instance, Harold Wilson, Labour prime minister of the late sixties, appointed “guardians of the manifesto” in an attempt to prevent the apparently Tory leaning civil service from stalling the new government. The modern day SPAD was born.

A SPAD, the acronym refers to a Special Political Advisor; although one would be forgiven for associating it with a rather unappetising and embarrassingly British tinned meat; shapes policy and manages media relations in a way civil servants are either ill prepared to do, or are prevented from doing.

Although SPADs come in all shapes and sizes; from individuals who truly shape government policy such as the now departed Steve Hilton, to the rather large pool of innocuous characters who assist lowly ministers in staying in a job; many tend to be young, ambitious and determined to get into the higher echelons of politics. Some deride this, and the wider role of the SPAD in government. Yet as long as previous SPADs keep popping up in later years as senior political figures, expect many more bright young things to follow this treacherous path to a career in front line politics.

It is tempting to bash SPADs, but consider the difficulties that would arise without them. Civil service neutrality can leave ministers aloof to party politics. This is dangerous for the minister. Also, the 24 hour news cycle means constant scrutiny of government policy, ministers who have busy schedules would be at a loss without the well organised and media savvy SPAD. Media relations, although when done well appear effortless, often require meticulous planning and attention to detail.

Many cite the democratic deficit as a case for SPAD reform. SPADs with access to ministerial work can quite easily inspire jealously amongst backbench MPs. Why not have backbenches act as party political advisors? Yet the office of MP is one of a public face, the special advisor is not. Indeed, when a SPAD does become a public face, it is often a sign of an impending fall from grace à la Adam Smith, the culture secretary’s former advisor.

It is sometimes considered a wonder why anyone would even consider taking on the job. The role is volatile, and often short lived; Duncan Brack, advisor to Chris Huhne, was informed of the termination of his contract via email a mere 5 hours after the former energy secretary’s resignation. SPADs are also poorly paid relative to the amount they shape government policy, or what they could earn outside of it. Nevertheless, for those looking to climb the perfidious political pecking order, the role of SPAD is a tried and tested method.  

Voters are becoming increasingly aware of the power these unelected advisors can wield. The perception of the special advisor remains that of a mysterious figure shaping policy in the shadows. Yet the dilemma between accountability and party loyalty inherent in government inevitably requires such a figure. Do not expect the number of SPADs to drop any time soon. 

Holding the big four to account

A break up of the large accounting  giants  may occur naturally, rather than by legislation.

Too big, too concentrated and unable to spot the emerging problems on financial institutions’ balance sheets. These are some of the accusations levied against the big four accounting firms. Indeed, it strikes many as odd that audit, tax and a range of related consulting services, should be concentrated in a mere four firms. Not least, Michel Barnier, the European Internal Market Commissioner, who has put forward a range of proposals to help reduce the dominance of the big four. These include compulsory rotations, joint audits and more frequent competitive tendering amongst a wider range of accounting firms.

Barnier may be on to something; the average audit tenure of FTSE 100 companies is forty-eight  years, this and the fact that all but one of these firms is audited by the big four, suggests that this industry may be closer to a cosy oligopoly than a competitive market.

The one organisation which doesn’t have its beans counted by the big four, Randgold Resources, is audited by BDO Hayward. BDO and other middle market firms are often considered too small to compete for global audit work. According to BDO’s managing partner, Simon Michaels, “audit is the only industry where five billion revenue and presence in fifty-one countries, is considered too small”

The dominance of the big four is a fairly recent phenomenon. Readers will remember the big five, prior to the collapse of Arthur Anderson, and the big six before that. Yet the consolidation of audit services to a mere four firms was a fairly natural transition. David Tweedie, IASB (International Accounting Standards Board) Chairman, reckons that the number may also expand naturally as China continues to develop its own accounting principles and qualifications.  

Tweedie believes that China’s growth will continue to impact on the market capitalisation of firms globally. Already we see the US market cap shrinking from over half of listed companies to a third globally. This is having some interesting effects on an industry which is often derided as a little dull. Middle market firms are already punching above their weight in China and could well become the Anglo American arms of future Chinese accounting goliaths.

This is buoyed by the fact that accounting firms are run as local partnerships rather than global companies. Each partnership in its respective jurisdiction has limited liability to the rest of the wider global partnership. Auditing firms are closer to networks of independent partnerships rather than large multinationals. This should make it easier for Chinese firms to grow and form links with existing western firms.

Yet there are reservations over Chinese expansion in audit services; hardly unexpected in an industry where prudence and conservatism are at a premium. Some objections smack of protectionism and seem quite hypercritical. For instance, the requirement that Chinese qualifications are taken rather than the ACA or CPA (British and American accounting qualifications respectively) is similar to what many countries have imposed in the past.

Other requirements are more contentious. China wants local partners to dominate local offices by 2017. With a string of recent accounting scandals in China, many see this as premature. Inexperienced local partners could well be more sympathetic to government officials which is unlikely to put shareholders minds at ease.

Coming to an amicable solution is difficult. Ideas such as joint audits make accountants and shareholders equally uncomfortable, yet other remedies to the big four dominance prove either illusive or just as unpalatable.

Regulators should hold back. The emergence of China will bring vitality and competition to the audit industry. However if the big four prove capable of dominating Asia as they have the West, expect more grumbles from regulators.

The rise of GARS

Hedge funds are being pushed out of the alternative asset space

Before 2007, hedge funds raised capital at their discretion. Yet the recession has exposed many funds which appear to have raised returns in the good years by increasing risk rather than by generating the ‘alpha’, i.e. above market returns with the same or less risk, which their glossy marketing brochures purported.

Still, the investment industry is nothing if not adaptable. While the profile of hedge funds may be plummeting, its less racy cousin, the absolute return fund, continues to grow in popularity. Standard Life, a leader in this area, has seen investors scrambling to enter their alternative asset fund known as GARS.

While finance may not have lost its taste for opaque acronyms, institutional investors may be losing their appetite for risk; GARS, which stands for Global Absolute Returns Strategy, claims to offer more consistent and modest returns than its hedge fund competitors. (Though one wouldn’t necessarily infer that from the title).

The rise of absolute return investing presents hedge fund bosses with a headache. Institutional investors have historically looked to hedge funds to provide diversification and a little extra return on the market index. Yet while a few hedge funds recognised and profited from the housing bust and subsequent recession, most missed it and found themselves unable to live up to their alpha aspirations, or even match the benchmark. The few who did profit in the downturn have often proved themselves one trick ponies, incapable of repeating good performance. Consider Paulson & Co.’s miserable returns since the fund made a nice profit shorting bad mortgages.

All this has left institutional investors sceptical if not openly hostile to the prospect of investing in hedge funds; something the more traditional investment management companies have looked to capitalise on. Whereas hedge funds are often distinct entities, absolute return funds can quickly be thrown together in house under the auspices of ‘alternative strategies’. This has resulted in the proliferation of funds from the traditional investment firms looking to get involved in this high fee area. Both Schroder’s and Investec offer rival absolute return funds which match Standard life’s GARS fund both in investment strategy and the absurdity of the funds’ names, the dynamic diversified growth (DDG) fund and the global tactical asset allocation (GTAA) fund respectively.

While the naming of such funds leaves something to be desired, investors have been flocking to them in droves. Some of the main benefits of these funds have been the decent returns, low correlation to equity markets and, and this really sticks in the throat of hedge fund managers, lower fees. Whereas hedge funds typically charge 2 & 20, that is a base fee of 2% of assets regardless of performance and 20% of any returns above the benchmark, Standard Life’s GARS fund charges a flat fee of 0.5%

Investors seem to be waking up to the reality that hedge funds, while at an individual level may outperform the market, have collectively failed to match their respective benchmarks. Investors have been coaxed into investing in such funds by promises of alpha, dud investment consultants and arbitrary performance reporting, and non-reporting for that matter.

Absolute return funds seek to provide investors with equity like returns without the associated risk; yet as something similar was previously promised by the hedge fund industry, investors shouldn’t hold their breath.