Friday 30 November 2012

Mark Carney - Next Bank Of England Governor

Earlier this week it was announced that Canadian born Mark Carney is due to take the helm at the Bank of England When Mervyn King steps down at the end of June next year.  He is the first non-Briton to be appointed to the role since the bank was established in 1694. As well as taking on King's role at the bank he will be given extra responsibilities as the bank's remit is expanding to include responsibility for regulation.

Carney has a solid CV, he worked for Goldman Sachs for thirteen years with high level experience in various departments, including sovereign risk and emerging debt capital markets. Through Goldman he was also involved in work on the Russian financial crisis in 1998.
He also has 9 years experience working for the Canadian department of finance and the Bank of Canada (Governor 2008- present) and is the current chairman of the G20's Financial Stability Board.

In short this man is no stranger to tackling debt issues.

He is well respected for his work at the Bank of Canada, and it is notable that the Canadians have emerged from the financial crisis in arguably better shape than the UK.

Personally I will be glad to see the back of Mervyn King, as you will see from previous blog posts I've written such as...

The Global Debt Crisis - Whose Fault? (Jan2012)

UK Residential Housing, The MPC & Interest Rates (Aug2012)

Western Debt Junkies (Aug2012)

I think he has done a poor job at the bank, and that a big portion of the blame for our current situation should fall on his shoulders for excessively loose monetary policy during the boom years.

Interestingly I was talking to David (Danny) Blanchflower (Ex MPC member, and more importantly Cardiff City fan) yesterday via twitter and I asked him how he rated King's tenure at the bank. 3 out of 10 was the answer, because he ''Missed recession and double dip, (was) taken by surprise by bank failure and slayed dissenters.''

By his ''slaying dissenters'' remark he means (I think) getting rid of MPC members who don't agree with him, thus defeating the whole object of there being a voting system in place.

The press articles I've read thus far seem to paint Mr Carney as having a more hawkish outlook (advocate of higher interest rates) than King, hopefully this means an end to the QE madness that is ruining our bond markets. That would be a great start. Returning to monetary normality however wont be an easy task without upsetting our fragile economy.

I wish him the best of luck for all our sakes.

Wednesday 28 November 2012

Investment Trusts

There have been quite a few articles in the UK financial press lately about Investment trusts.  These are closed ended funds that are traded on the stock exchange as public limited companies.

Investment Trusts do not rebate commission to third parties, so at the moment are generally ignored by financial advisors during the advice giving process. The reason for their recent press popularity is that rebating commission is effectively being banned from January 1st with the advent of new RDR (Retail Distribution Review) rules in the finance industry. Theoretically this should lead to higher sales of this particular product as there is no longer any reason for de-selection by advisors.

I've been a fan of Investment trusts for quite a while. They have many advantages over other types of funds such as Unit Trusts and OEICs but also a few disadvantages.

From a fund manager's point of view they are very flexible compared to other investment vehicles. They are allowed to invest up to 15% in any one company as opposed to a maximum of 10% for a Unit Trust or an OEIC, this allows the fund manager to have a much more focused approach. If he likes a particular company or sector he can give it larger weight in the portfolio with greater ease. Also Investment Trusts are allowed to borrow money to gear their portfolio, a useful tool when managers believe share prices are cheap, thus compounding profits (or possibly losses).

This added flexibility means that the ability of the fund manager will have a bigger impact on the fund, which is great if the fund manager is good at his job. Not so good news though if the fund manager is poor, (remember most fund managers underperform the market!). Therefore it is vital to look for a manager with a good long term record of out performance.

As an added bonus, Investment trusts have generally lower fees than Unit Trusts and OEICs, placing them somewhere in between these and tracker funds on the fee scale.

There is one notable downside. As Investment trusts are companies that are floated on the stock market, their share price moves independently of the net asset value (NAV) of the fund. This means that they often trade at a surplus or discount to NAV depending on market sentiment, however it can be argued that this factor could be seen as an upside to the discerning investor looking to snap up a good quality fund at a discount.

To sum it up, Investment Trusts almost certainly carry more risk due to their more flexible nature, but in my opinion that extra risk is worth it in the correct hands. If Carlsberg made investment vehicles.....