Note what happens in a downturn. When the markets first start to slide, everyone denies it is happen...
Note what happens in a downturn. When the markets first start to slide, everyone denies it is happening. Then they attribute it to a sector-specific or uncontrollable factor, maintaining it will be short-lived. As all these theories unwind, there is grudging acceptance that the 'blip' is spread across many sectors, and that it is here to stay for some time.
Markets were disappointed that the US Federal Reserve cut interest rates by only 50 basis points, not 75. They are still feeling insecure. Now, instead of just two quarters of a slight slowdown we are looking at perhaps one year. The longest surviving market guru, Warren Buffet, has advised investors to hunker down. Recession may be with us for some time.
Yet only two months ago, hedge funds for the retail investor were bursting out all over the place. People were feeling rich and bold enough to try them out. Ethical funds were similarly on the rise. There are opportunities for socially responsible investing all the time, but when you are feeling comfortably wealthy, you might as well flaunt the label.
Already that munificence is fading. Investors are getting hard nosed again. At precisely the moment when the mass affluent decide they are ready to participate in the longest bull run in history, the professionals start to hang up their gloves. John Bogle, the icon of the US mutual fund industry, who started the huge Vanguard fund, says openly that a "golden era" is at an end. In the UK, veterans Stephen Zimmerman and Carol Galley at Mercury (now Merrill Lynch) are "retiring", no doubt partly because they have seen the writing on the wall. Many other experienced hands are slipping away with less fanfare, leaving the field open for the young and ambitious. In the new era, a few will win glory with one right call; most others will go down with their funds.
Alongside market uncertainty, the consensus that has supported the investment banking industry for years is rapidly breaking down. What was regarded by a previous generation as irksome "politically correct" practice is now taken as commonly moral behaviour. Most agree that insider trading has greater implications than just tipping off your old chum but new global corporate governance standards are evolving with difficulty. There is an altogether more fractious air among the famously incestuous investing community. Paul Myners, chairman of Gartmore, is now vilified as a poacher turned gamekeeper, a charge he and his team vigorously refute but in vain. His latest recommendations have shaken everyone up, as they were intended to. His targets complain they were not given due notice of his line of attack, particularly on the treatment of brokers' commissions.
But the code was broken long before. The Barings saga blew the old order wide open. The Lever Brothers pension fund suing Mercury Asset Management was another landmark. As squabbling grows over who should pay for research, some houses are restricting disclosure of stock recommendation changes. Not very friendly, but hardly surprising.
The turbulence on so many different fronts means it is getting harder for managers to concentrate single-mindedly on running money, especially if their own survival is at risk. Many are tempted to switch on the auto-pilot and walk away. If they stay, they have two main options. Find a global institution that looks solid enough to ride out the volatility, or beat a strategic retreat to a relatively sheltered niche. Investors have more or less the same choice.
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