The Monday Interview: Canny retail investors set to weather City storms

Published on Sunday 7 December 2008 20:03

RETAIL investors are a savvy bunch these days. They are less likely than one might think to be fazed by the double-barrelled shotgun of the financial crisis and the recession.

So says Dick Saunders, chief executive of the Investment Management Association, the body that is the collegiate voice of fund management in Britain.

His views are worth canvassing, given that the IMA's members managed 3.4 trillion of assets in the UK and earned 10 billion of revenues, as of December 2007.

Saunders said that included 500bn of assets managed out of Scotland, "making it the fifth biggest (fund management] centre in Europe, ahead of the likes of Belgium, Holland and Spain".

IMA member firms, including the likes of Barclays Global Investors, Standard Life Investments, Scottish Widows Investment Partnership and Fidelity International, speak for 44 per cent of the UK stock market.

Saunders, who recently attended the annual dinner of Scottish Financial Enterprise, says that following the bombshell of Northern Rock 15 months ago there was volatile investor behaviour. Up to 1bn a month of stock market assets were being traded at that time.

But Saunders says: "That has stopped. We are seeing very small inflows and outflows in some months.

"Retail investors are sitting on their hands, even if there has been a slight shift away from equities. They are not putting money in, but neither are they panic sellers. It is interesting."

Saunders says this was very different from the behaviour of retail investors in the likes of Italy and Spain, "where there has been a big shift out" of the stock market.

The IMA boss believes the phlegm being shown by the Brits is partly due to far more investment product being moved in the UK by independent financial advisers. In mainland Europe, it is done more through banks and, therefore, is more depersonalised. "I think UK retail investors are getting the key advice not to sell at the bottom," he observes.

Saunders believes this small-investor nous would also be shown by a refusal to put the issue of long-term savings aside in order to focus hand-to-mouth on more immediate, recession-linked worries.

"I don't think that's going to be a major issue. People will keep an eye on the long term even if they have to deal with short-term problems as well. I don't think the propensity to save is as fickle as that," he adds. Saunders, speaking in IMA's offices in Holborn, on the edge of the City of London, says he thinks this refusal to take their eye off the long-term ball, despite the economy's current travails, would be partly generational.

"The post-war generation thought the state would provide (for pensions] and that didn't work out," he notes. "The baby-boomers thought employers would do it and that hasn't worked out. The up-and-coming generation will realise they have got to save."

In the wider shape of things, Saunders says the asset management industry was as shocked as everyone else about the credit crunch and associated financial sector crash.

He adds that there still appears to be "no thaw in credit markets", noting that his members have mixed feelings.

On the one hand, he says, they were not as exposed because they did not have the toxic assets on their balance sheets that some of the banks, brokerages and hedge funds had. "That's very important. Fund managers don't have massive balance sheets relative to their capital; they are not in the front line in the way banks have been."

But they are not immune from the volatile financial situation, either. "In the second week of October, the FTSE fell by over 20 per cent and our members' revenue streams are linked to the assets they manage. When the market goes down, their revenues go down," he says.

Cost-cutting had been one response in the industry, Saunders says, but adds that few fund managers "have the appetite for cutting back office (jobs]. People are looking at non-staff costs in the first instance".

Saunders helped oversee the creation of the IMA in early 2002, in the teeth of a stock market downturn.

Much of his earlier career was served in the Treasury and he has that surface emollience many civil servants have. One can imagine him saying "happy to discuss" – classic mandarin-ese – to his members quite easily. But he is undaunted about sticking his head above the parapet when he considers it necessary.

He added the IMA's weight to those calling for restraint in the short-selling of bank shares at the height of the summer banking crisis, even though many of his members would have generally regarded the practice as perfectly legitimate.

But Saunders considered that members needed at that time also to weigh up the paramount need for an orderly market in "unprecedented" times.

Similarly, he is personally in favour of a regulatory shake-up following the banking debacle. He says taxpayers worldwide are having to support the banking system to the tune of hundreds of billions, even trillions, of dollars. "If that's not a regulatory failure I don't know what is. The sort of thing that was seen after the Great (1930s] Depression".

He's also sure it would be a bad thing if the new non-executive directors appointed to banking boards recapitalised by the British government – Royal Bank of Scotland and potentially a Lloyds TSB/HBOS combination – inhibited those banks too much in their commercial decision-making.

Saunders says this would make those banks less attractive to his members as investments when the time came for the government to eventually sell off its holdings.

He reckons those new non- executive directors, the appointment of which RBS and Lloyds have confirmed they will consult the government on, "should not be representing the government. A director of a company is there to serve the interests of all shareholders, not one shareholder. That important principle needs to be upheld."

While being the opposite of publicity-hungry, Saunders also caused a fluttering in the dovecotes when he recently went public with criticisms of certain structured financial products, which he claimed were misleading.

He cited products where it was only in the small-print that investors could learn that, while they would get returns linked to any stock market growth as well a guarantee against capital loss, they would lose out on dividends.

Saunders says: "It sounds compelling. But dividends are historically half the total returns in the stock market. Unsophisticated investors might be unaware of this."

BACKGROUND

DICK Saunders graduated from Cambridge University with a mathematics degree and spent much of his early career with the Treasury.

He served as press secretary to Norman Lamont when he was chancellor (Lamont presiding over the humiliating exit from the European Exchange Rate Mechanism on Black Wednesday, 16 September, 1992).

Saunders also piloted the 1986 Building Societies Act through parliament. He spent two years as head of the economic department at the British embassy in Washington DC and headed the Treasury's private finance unit in the mid-1990s. He left the Treasury for the private sector in 1995.

He told The Scotsman there were big differences between this recession and the one in the early 1990s, such as interest rates being around 9 per cent then compared with 2 per cent now, but there were also similarities.

"The swiftness of the current fall has taken everybody by surprise. And right until the economy fell off a cliff in 1990, the Treasury was forecasting a soft landing," he said.