What are capital markets for? What do those employed by organisations called fund managers actually do?
The conventional answer to these questions is that financial markets exist to provide the money to build and develop productive and profitable companies so assisting economic progress. Fund managers are presumed to assess the prospects of each venture and determine whether they are worthy of such backing. Such is the theory. But it isn’t true. It is dangerous and self-indulgent cant. Until this changes for the better, dynamic economic development is most unlikely. We are a significant problem for the global economy.
So many descriptions of capital markets and the economy start from an idealised picture of markets providing capital that it is hard to focus on the reality.
So many descriptions of capital markets and the economy start from an idealised picture of markets providing capital that it is hard to focus on the reality. But a combination of facts and experience ought to carry some weight. The total amount of new capital raised in US Initial Public Offerings last year amounted to $22bn. This is considerably under the amount traded every day the NYSE alone is open. Meanwhile established companies continue to pay out far more in dividends and buybacks than they raise in new investment capital. This is accomplished whilst the most successful companies are piling up cash by the tens and then hundreds of billions, without any evident plan for utilising their riches. Indeed formidable companies such as Alphabet (Google) don’t even deign to explain their capital allocation.
Before this is taken as an assault on American values it’s clear that the situation in Britain is far more grotesque. In Britain we don’t just clip dividends insouciant of future competitiveness but we sell out our brightest and best at the merest hint of an immediate profit. I wonder what ARM would be worth after even just a year of progress towards an omnipresent and omniscient position in semiconductors? Lucky Mr Son.
We still need to be braver and more ambitious in financing and supporting the companies that generate economic progress.
But most of this comes about because it is what fund management firms desire. My own experience of over 30 years of the industry is that the situation is dire. I see no evidence that fund managers in the cold light of every day see their job as funding or nurturing innovative or worthwhile businesses. I do see every evidence that the daily ambition is to demonstrate superiority over their competitors and the almighty index, over punishingly short periods of time. This in turn is driven by a desire to earn bonuses or even merely to guarantee further employment. Consequently this has enabled the fund management industry itself (and other intermediaries) to make lots of money and attain its very own capitalist nirvana. Where indeed are the customer’s yachts? But where too is the educated risk taking that creates new companies? Usually left on the cutting room floor of risk reports and deviation from indices.
Whilst as part of a traditional partnership with clients (such as the Vanguard) and independent company Boards such as that of Scottish Mortgage, we have some checks on the self-rewarding circle of preoccupations that undermines the industry, there’s also an element of mea culpa here. It took me far too long to see the problems. We still need to work to lower fees further or provide more value for the current fees. We still need to be braver and more ambitious in financing and supporting the companies that generate economic progress. To do this we first need to acknowledge that this isn’t remotely what capital markets currently do.
The views expressed in this article are those of the author. Its express purpose is to highlight areas of intellectual thought and debate which inform the investment philosophy that underpins Scottish Mortgage, in the hope that they may be of wider interest. The author(s) therefore make(s) no suggestion that this article constitutes independent investment research and it is not subject to the protections afforded to such.
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