Between the lines: Rushbrook was right – and he will be sorely missed

Published on Monday 13 October 2008 21:53

TODAY it is doubly sad to sit down and write this column. Many in the fund management industry across Scotland and beyond will share my shock at the death over the weekend of fund manager Ian Rushbrook, managing director of Personal Assets Trust.

It is achingly ironic that Ian should have passed away just as his clarion warnings of a massive collapse in global equity prices came cataclysmically true.

Rushbrook reminded us of how vicious and how unforgiving of credit excess financial markets can be. That which he warned of so eloquently, so persistently, so trenchantly, over many years has come to pass, and with consequences here in Scotland beyond our worst imaginings.

As with everyone in the financial services industry, I am still struggling to come to terms with the events of recent days, the sell-off in equity markets and, here at home, the collapse of Scotland's two proud centuries-old banks into effective nationalisation. I have reported it step by step. And still I cannot believe it.

It is an astonishing and galling development. But the intervention of the government to become majority owner in both banks has been essential to protect depositors, business customers and the millions of retail depositors. Ravaged and humiliated, the banks are at least ensured some prospect of survival into a new and different age.

Ian Rushbrook was a contrarian to beat them all. He was a formidable analyst and thinker to a degree that stretched the minds of everyone who came into contact with him. It was my pleasure and privilege to have met him on many occasions. And on every occasion I found that five minutes of his company was worth five hours in the company of most others.

Through an irrepressible humour and mischief ran a most serious mind. I learned so much from him – not enough as it turned out, to overcome my scepticism over the extremity of the warnings he sounded. But in my capitulation is his triumph.

At one point this year, Personal Assets Trust was almost 100 per cent liquid. Ian, and his colleague Robin Angus, who has written a most noble and generous obituary today, showed no fear in taking on the conventional wisdom and, in doing so, exposed its complacency. Angus reminds us of Ian Rushbrook's acid summation of what the problem was: the Federal Reserve was not sleepwalking into disaster; it was walking into it wide awake. Yet many clung to the illusion that, with a modicum of write-downs, the US subprime mortgage debacle could be contained and that markets would quickly recover.

Instead, the subprime lending boom was but a match to a far greater and tinder-dry mountain of debt and highly flammable derivative products. The consequences in terms of wealth destruction in the financial sector can be seen in the chart below from Brewin Dolphin.

This is what he said at the time of the Pat annual meeting in July, when many thought we were past the worst: "The fundamental problem that has threatened world equity markets for some considerable time is this: the real rate of return on financial securities is simply far too low and the consequential level of borrowings far too high.

"As a sensible operating rule, central bank rates should be set at 2.5 per cent above inflation (that is, the real cost of money should be 2.5 per cent]. Anything lower leads to misallocation of capital and economic inefficiency for any economy … nothing will be resolved until the real returns on financial assets are substantially in excess of inflation.

"This will not happen soon. The banking system is a prisoner of its past lending mistakes. It will be forced to favour the hedge fund industry (there being too much at stake there for the banks themselves) at the expense of the corporate and consumer sectors upon which the real economy depends.

"The financial credit crisis is far from over and its consequences will continue for at least another two to three years. Phase One, which principally affected financial sectors (and sectors highly geared to cheap credit) is nearly complete. Phase Two is now under way, with extensive financial deleveraging impacting on the real economy. Phase Three will see the decline and damage to the real economy reverberate throughout the financial system."

Reading through his assessment of Phase One ("nearly complete"), we are brought to a disconcerting discovery: Ian Rushbrook had not taken too pessimistic a view – but rather one not pessimistic enough. We will miss him.

• Obituary: Ian Rushbrook