Myners out of tune on funds

It is almost quaint that City minister Paul Myners still believes in the investor as a power for virtue and that somehow they will adopt his notion of corporate governance and pursue it with vigour for the good of the nation. For more than a year now he has sung the same song, again and again, that shareholders can and must use their influence as the owners of companies to bring about better corporate governance and more particularly, clamp down on excessive bonuses. I say quaint because it summons up a 1950s image of earnest, grey suited money managers taking to task spivvy and profligate company directors. At its heart, Myners appears to be saying that UK investment houses own a sufficiently large amount of the stock market to have some influence. They also represent savers who, by their very nature, must have long term interests. Once upon a time, around 15 years ago, UK life and pension funds owned more than 40% of the stock market. Now it is nearer 20%. The rise of the tracker fund has also meant that much of the growth in investment over the last 10 years has benefited passive and not active fund managers. A report by pension advisers Towers Perrin found that UK pension funds hold 8% of total global pension fund assets, while the US and Japan account for 57% and 14% respectively. So UK funds own only a fifth of the market, are small compared other countries, and have many low-cost funds among their number that follow a weighted computer investment model – no interpretation or meddling in corporate affairs necessary. A lack of power is matched by a lack of will. As I said recently when Peter Mandelson expressed hope that investors would back the UK-based Cadbury against Kraft, most investors, including British life and pension funds, increasingly ignore pleas to back Britain. They need short term gains to make up for severe shortfalls in the recession. Many of the funds that make the most noise about corporate governance emphasise the need of managers to generate ever higher returns. Other considerations are subservient to the needs of profit because it is only through annual dividends and share price growth that investors make money. And increasingly the biggest funds are public sector funds from California, Canada, Norway and the middle east. They have lost billions of pounds in the financial crash and want to make it back. To that end, they employ vast numbers of investment managers sell stock as soon as a profit can be booked. The funds are invested in another venture, again for short-term gain. The timescales of investment have become shorter and shorter in the last 10 years (feeding the appetite of investment banks for trading commissions and fees, and in turn, their bonuses) Myners knows all this. He is not a stupid man. He understands the City very well from his time as a fund manager and senior non-executive director on some of Britain's largest companies. He can point to a couple of fund managers attempting to buck the trend. But the trend is there. Global pension savers, who own the vast amount of the world's assets, want a quick return to boost their retirement incomes. Other considerations are secondary. The bonus payouts and golden hellos at ITV and Marks & Spencer are evidence of that. So we can only assume Myners continues to make a big noise about investor power for a specific reason – to divert attention away from government inaction. If the government doesn't like big bonuses it should do something about it. Arguably the bonus windfall tax, the 50p tax band and block on pension tax relief for those earning more than £150,000 is enough. But if it is not enough, it is misleading for Myners to tell the public the City can, after a little encouragement, sort itself out. If those days ever existed, they certainly don't now. The nature and demands of investment have changed.