E for Election and E for Effort

The UK general election campaign, announced on April 18th, has been rather uninspiring so far. Whether is it a symptom of “democracy-fatigue” following two tight referenda and a hotly-contested, general election in the last 33 months, or an associated lack of funds amongst the political parties, or just the boredom of an election where the result seems obvious, no one seems to be putting in very much effort this time around in order to win it!

Theresa May, whose decision it was to call the election, appears to have decided that all she needs to do to win her expected larger majority, is to repeat “strong and stable government” at every opportunity and be photographed at various stage-managed events where all the questions and questioners are pre-selected. She has refused to enter into any direct debate with other party leaders. She has sought to frame the election as a choice of leader to take Britain through the Brexit negotiations, between herself and Jeremy Corbyn. Given her strong personal ratings and his weak personal ratings, she appears quite happy for media attention to focus on the him and the Labour party.

She has led the production of a vague and uncosted manifesto, particularly around Brexit, she has surprised many by some surprisingly detailed policies that work to the financial disadvantage of a core group of her supporters, the over-65s. All-in-all, she is giving the impression of expecting to win very easily and thus does not need to try too hard to gain votes.

For Jeremy Corbyn, this is the moment he has dreamed of – the chance to put in front of the UK electorate a Socialist manifesto and vision for the UK. However, it appears that his goal is not to win the election, but merely to do well enough that the left wing of the Labour party can say that there is a real demand for their ideas amongst a substantial section of the UK electorate. His campaign strategy has therefore concentrated on appearances in areas traditionally considered solidly Labour. His focus is on getting out that core Labour vote, and very little time of effort is being devoted to taking that manifesto to the rest of the country.

The UK Independence Party, which for many has achieved its original purpose of taking Britain out of the EU, is suffering from internal divisions and a lack of leadership and of money. – they are fielding many fewer candidates in the election, which they are justifying by saying they do not wish to put up candidates against previous strong proponents of Brexit.

Somewhat similarly, the Green Party has stood down candidates in a number of constituencies where they are seeking to promote a progressive alliance, and believe that a Liberal Democrat or Labour candidate would have a serious chance of defeating the Conservative candidate. Sadly for them, apart from in Brighton, the other parties have not acted in a reciprocal fashion.

Only the Liberal Democrats are campaigning at full volume. They have taken Teresa May at her word that this is an election about the Brexit negotiations and are the only party campaigning to remain within the EU’s single market, a very soft form of Brexit. They thought this would open up the possibility of gaining votes from the 48% who voted to stay in the EU, but current polling suggests that half of those now feel that the decision has been made and should be respected. The Liberal Democrats position is not gaining much traction with the electorate.

Maybe the excitement in British politics over the last three years is now over. A dull campaign looks likely to lead to a large Conservative majority as Britain enters the long and tortuous Brexit negotiations. No doubt a normal service will be resumed after it becomes clearer just what Britain will look like post-Brexit.

Inequality – more and less

A World Bank study a few years ago concluded that the forces of globalisation prevalent in the period 1988-2008 led to the first decline in global income inequality since the Industrial Revolution. The key drivers of this were the startling economic growth in the Chinese and Indian economies, both with populations of over one billion people, relative to the growth seen in the developed economies of the world. The increase in the size of the middle classes in emerging economies has been one of the most important growth themes in global equity investing for the last decade, benefitting the share prices of many global consumer products companies.

This reduction in global income inequality has however been achieved at the expense of rising income inequality in the developed world. The same forces of globalisation that have led to the creation of many jobs in the emerging world, destroyed the jobs of many in the developed world. The much lower wages available to employers in Asia saw first unskilled manufacturing jobs move from the West, followed by semi-skilled manufacturing jobs and digitalisation has also enabled many service sector jobs also to move locations. Workers in the developed world with modest skill levels and education have discovered that the global clearing price for their labour has fallen due to the increase in supply of such labour. However, those with the skills to be in the upper management echelons of many international companies found they benefitted from their companies’ larger global markets and higher profitability. Financial market services was one industry in particular that benefitted from these trends. For the top 1% in the developed economies, globalisation has boosted incomes.

Thus income inequality in the developed world has become much more marked at the same time as global income inequality has fallen. The statistic that demonstrates this most vividly is that the real income of the median US household has barely changed from 40 years ago. All the benefits of economic growth in that period have gone to the very richest in that society and national income inequality is back at the peak levels last seen in the 1920s.


Does this matter?

In purely economic terms, with the notable exception of the US economy, Andersen and Maiborn show a positive cross-country correlation between the level of GDP per capita and the rising equality of income in developed economies, in other words wealthier countries have a more equal income distribution, implying that greater inequality is negative for a country’s standard of living.

Perhaps the greater danger though is to politics and democracy. Recent political trends on both sides of the Atlantic show the poorer parts of the population of developed economies to be increasingly unhappy with the standard political approaches and type of politician. Instead more populist political figures such as Trump, Johnson and Le Pen, are on the rise with disguised and undisguised attacks on “others” in society as the source of the lack of improvement in living standards.

In a democracy the economic system must be seen to be operating in a manner that most in society believe to be fair and reasonable. If this is not the case then politicians will have an incentive to propose policies that produce better economic results for most people.

Rising inequality does matter within a democracy, and current levels in the developed economies are back at peak levels seen in the late 1920s. It may be worth a reminder that the 1930s saw the Great Depression and the rise of fascism.


The returns of GARS

This was originally published as an article in Investment Week

SLI Global Absolute Return Strategies (GARS) started life as a retail fund in May 2008 (and has become the largest retail fund in the UK market) though as a strategy available to external investors, it was launched by Standard Life in the summer of 2006. Its investment objectives are to achieve a total return of cash plus 5% (gross of fees), over rolling three-year periods, roughly consistent with the long-term returns from equities, but to deliver this with only one-third to one-half of the volatility of equities.

The team has sought to generate returns from a variety of sources, using both traditional investments in equities, bonds and real estate, as well as currencies, interest rates and volatility. Additionally it uses advanced investment strategies such as relative value and directional returns. By enhancing the number of return sources, they aim to enhance diversification and provide a smoother path of returns.

In their marketing, the team at Standard Life has distinguished between four types of return: Market Beta, Security Selection, Relative Value and Directional, labelling the first two as traditional and the latter two as advanced.

Over the period from July 2006 to the end of 2015,  GARS has generated a total gross investment return (before fund fees and costs) of 71.47% from these strategies. Since 2008 the fund has been invested in between 30 and 40 individual strategies at any one time.

Using data provided by SLI, attributing performance by individual strategy on a quarterly basis since 2006, the individual strategies were classified into each of the four types of return. A fifth type, Other, was created for this analysis,which is essentially the return generated on cash holdings.

  • Within the Market Beta classification only those strategies which appeared to involve being long a sector or market in the equity, bond or property markets were included.
  • Within Security Selection, only the strategy return for security selection provided by SLI was included. Security Selection involves going overweight some securities (relative to an index) and underweight other securities. This is an alpha return.
  • Within Relative Value only those strategies which were described as one asset type versus another; for example European vs US volatility, UK vs German short-rates, German vs French equity were included. In addition, an S&P call calendar spread and various cross-asset strategies were classified as Relative Value. Relative Value trades involve going long one asset and short an equivalent value of a second asset. Returns from Relative Value are also alpha returns with no associated market risk premium.
  • Within Directional strategies in interest rate and currency markets, strategies investing in volatility and dividends and yield curve strategies were included.
  • Within Other cash, liquid instruments and a small unexplained residual, which amounts to -0.2% over the entire period were included.

Analysis of returns by strategy type

  1. Beta returns from investment in equity markets have been reasonable overall at 8.7%. Equity market exposure cost investors heavily in 2008, but fared better in 2009 when a proportion of the 2008 losses were made back. Beta from fixed income market exposure has generated positive returns in every calendar year, with 2009 and 2012 being the strongest years thus far, totalling 20.1%. The team correctly positioned the fund in anticipation of strong performance in the corporate bond market in both of these years. Returns from occasional forays into real estate investment detracted in 2008.
  2. In the original marketing of the GARS strategy, the team’s target was for security selection to contribute about 1% per annum to the fund’s returns. However, the managers have struggled to deliver even 1% of return (0.9%) over the near-10 years since launch. It is this strategy that has been the most affected by the enormous inflows into the fund in recent years.
  3. The returns from Relative Value of 7.6% since launch are less than 1% per annum, although they have been positive in eight of the ten calendar years since launch. The negative contributions from equity and cross-asset Relative Value strategies since launch are disappointing, clearly indicating that the team has struggled to find good alpha-generating ideas in these areas. They have though had some success in Relative Value strategies in rates and bond markets and in volatility across markets.
  4. The greatest generator of returns has been from Directional trades (32.0%), and within those, from trading strategies in interest rates and yield curves (21.4%). Alongside the team’s good calls in fixed interest markets generally in the beta portion of the portfolio, these markets were very fruitful for investors from 2006 until 2011. However, since then only small returns have been generated from these strategies.
  5. Over the last three years, total returns of 7.5% from Directional strategies have been generated almost exclusively from the currency markets, nearly all of which has come from trades where the US dollar was the long position.

Analysis of returns by underlying asset class

  1. FIXED INCOME Performance attribution by strategy shows that the bulk of returns (47.2% from a total gross return of 71.5%) in GARS have come from strategies, both traditional and advanced, in the money and fixed income markets. Combining Fixed Income Beta, Rates & Bonds RV and Rates and Yield Curve Directional as Fixed Income strategies, returns here amount to almost two-thirds of the total return to investors over the period. Well-timed moves into strategies that benefitted from falling interest rates and bond yields in the second half of 2008 were particularly profitable and did much to offset the losses from equity strategies at that time. However, since Q3 2014 returns from these fixed income strategies have been negative. It may be coincidental but the timing of this change in the pattern of returns occurred when Ian Pizer, a key contributor of fixed income duration ideas to GARS, left SLI to join Aviva.
  2. EQUITIES Combining Equity Beta, Equity RV, Dividends and Security Selection as Equity strategies, returns here amount to 9.2%, which since inception is less than 1% per annum. This must be viewed as disappointing given the opportunities that have prevailed for returns from both long-only and long-short strategies over this period of time.
  3. CURRENCIES From 2013 to 2015, returns from currency strategies have formed an increasingly important part of the fund’s total returns. Prior to 2013, currency strategies had generated little in the way of returns. Almost all of the returns since 2013 have come being long the US dollar.


  • Over the history of the strategy to date, GARS has broadly met its long term total return target.
  • These returns have come from both advanced investment strategies (Relative Value and Directional strategies typically used in many hedge funds) and more traditional sources of market return (the Beta and Security Selection strategies). The advanced strategies have delivered 39.6% of gross returns, while the traditional strategies have delivered only 27.6% of gross returns. This dependence on advanced strategies (alongside the large gross positioning that is required to implement some of these strategies) may be surprising to investors who have not looked deeply into the GARS investment process.
  • GARS has generated its returns principally through strategies based on investment in fixed income strategies. It generated good returns from being positioned in corporate bonds in the strong markets of 2009-10 and 2012-13 and positions aimed at benefitting from lower interest rates across the yield curve. However in recent years this source of returns have dried up.
  • Equity strategies have generated only beta-type returns, with little value added from security selection or market timing.
  • In recent years, a correct call on US dollar strength has supported returns as bond and interest rate strategies have struggled to maintain performance.

The BoJo manoeuvre

It is May 2018 and the Prime Minister is in reflective mood, relaxing in 10 Downing Street with a drink. Fortes fortuna luvat was the phrase that sprang to his mind, or “fortune favours the brave” for those not lucky enough to enjoy his classical education. He was thinking of the book he would later write describing how he had emerged not only as the man who saved both the United Kingdom and the European Union, but, more importantly, how he had succeeded where his long-time rival, Dave, had so conspicuously failed. History, he was confident, would be kind to him.

Perhaps brave was not really the best word to describe the fairly straightforward political calculation that, whatever happened in the referendum, as the most prominent Conservative to stand on the Leave side of the debate, he was the obvious choice for Conservative activists to vote for as the leader to follow Dave. The fact that he didn’t himself really believe that Britain should leave the EU had been hidden away in a distant corner of his brain for the duration of the campaign.

There had definitely been a strong element of fortune though. The 50.3% victory for Leave was clearly affected by the torrential rainstorms that hit the UK in the late afternoon of June 23, 2016. The pensioners had been able to vote to Leave in bright sunshine in the morning, but a combination of storms and England playing in the European football championships in the early evening meant a much lower turnout amongst the younger generations, who polls showed were much more inclined to vote Remain.

Though Dave had initially wanted to stay on as Prime Minister, the backbench Conservative MPs quickly made it very clear that his time was up and he announced his resignation the weekend after the referendum. He felt it inappropriate to invoke Article 50 of the Treaty of Rome and start the clock on the two year timetable that would lead to Britain’s exit from the EU, saying that was a decision that should be taken by his successor.

Boris became Conservative Party leader, and Prime Minister, in September at the Party Conference, but the British public had already begun to experience doubts about the wisdom of its referendum decision in the intervening three months. Stock markets, not only in the UK but also in Europe had fallen sharply and a surprisingly large number of businesses announced their intentions to move their European headquarters to somewhere inside the EU – investment intentions and economic confidence had been hit very hard following the vote.

Not surprisingly the global banks such as J P Morgan, Goldman Sachs and Deutsche Bank clearly had well-developed contingency plans and were quick to announce their intention to move jobs from the City to Frankfurt and Paris from 2017 onwards. However what had taken many by surprise were similar announcements from key global manufacturing companies such as Siemens, Toyota and Pfizer and the withdrawal of EdF from the Hinckley power project, on advice from the French government, had left the UK’s long term energy policy in tatters. The number of announced lost jobs directly attributable to the referendum decision was much greater than even the Remain proponents would have dared to suggest in the campaign.

With Donald Trump, the Republican candidate in the November Presidential election, telling everyone how unhappy he was over the his treatment by the Scots over his dream golf course and saying that the UK had no chance of a trade deal if he was President, the UK economy was moving rapidly into recession amid massive uncertainty.

Given this backdrop, Boris also chose not to invoke Article 50, arguing initially that it made more sense to await the outcomes first of the US elections, and then the French and German elections in 2017 – after all there was no point in beginning negotiations with the EU when the two leading nations would not want to agree anything until their domestic political situations were clarified.

The European nations were also surprised by the drop in confidence in their stock markets as investment intentions declined further. The ECB were at the very edge of what was possible in terms of negative interest rates and QE, and fiscal policy remained constrained by German orthodoxy. What Europe had not expected though was the loss of respect from both the US and China, with many very rude comments about their irrelevance in the world without the UK coming from Trump and leading Chinese politicians. The continuing refugee crisis also tested to the limit the desire to maintain the Schengen area freedoms.

The critical factor had however come from Putin, who sensing Europe’s weakness has invaded and occupied Eastern Ukraine and was openly considering its annexation as he had done with Crimea. With the US consumed by its election it was left to Europe to take the lead in responding and they realised they needed to have the active and committed support of the UK.

Both the UK and Europe thus found themselves staring into an abyss in the months following the first referendum and were very frightened by what they saw.

Europe remembered that the initial vision for the EU had been to end war within Europe, and to that end the full-hearted involvement of the UK was now key. Compared with that even the free movement of labour, so beloved by the former Eastern European nations, could be seen as secondary.

So Boris had found it fairly straightforward, once the new German government had come to power, to seize the opportunity and come to a new reform agreement with the EU, which allowed the UK to control which EU residents could stay in the country, and allowed the UK much greater freedom not to implement bureaucratic EU directives. This dealt clearly and satisfactorily with the issues of immigration and sovereignty that had led many in the UK to vote to leave in the first referendum. The second referendum saw a Remain vote of 65%.

He had achieved a rare unity – the English were pleased with him, the Scots were pleased with him and even the Europeans were pleased with him. His place in history was now assured and, best of all, future historians would be able to compare directly the two referenda and prime ministerial performances, one dismal failure under Dave, one major triumph under himself.