How we all love watching our competitors wash their dirty laundry in public. Hardly surprising, then, that the court wrangle between Unilever’s pension fund and its former investment manager over alleged fund mismanagement has elicited such excitement in the City of London. In an investment industry where many cock-ups get brushed under the carpet or dealt with behind closed doors, this spat between Unilever and Mercury Asset Management – now folded into Merrill Lynch Investment Management – is a breath of fresh air.
Of course, male bastion that the City is, much of the original attention focused on the fact that one of the investment industry’s most powerful women, Carol Galley, was on the witness stand defending her company. But while the old guard nudged each other in an I told you so kind of misogyny, they failed to focus on the uncomfortable possibility that Unilever might win its case. How on earth, posited many commentators, can you be sued for fund underperformance? Ridiculous, they harrumphed.
Yet while this painful notion slowly began to unravel, the UK investment industry was receiving another very public slap in the face. And this on top of a number of high profile slaps in recent times. In November, the Boots Pension Fund announced it was switching its investments out of equities into bonds. Not just a slight reallocation but a total switch, putting some £2.3 bn of assets into debt on the basis that the greater risk of equity investment was no longer being outweighed by higher returns.
As with the Unilever case, the initial reaction from the City was one of outright derision. John Ralfe, the Boots trustee and head of corporate finance who masterminded the switch, has since noted that he was ‘ignored, certified as mad, then labeled as dangerous.’
Only time will tell who is right on either the Unilever or Boots issues, but investor relations officers should already be sitting up and taking notes. Regardless of the eventual outcome of the Unilever case, pension funds are gaining increasing power in their willingness and ability to question the investment decisions of their designated fund managers. With trustee muscle growing, fund managers have to produce greater justification for investment risk or opt for the easy way out – by reducing it. That means selling out of equities à la Boots.
We’re unlikely to see many pension funds blindly follow the Boots example anytime soon, but with UK equities routinely surpassed by gilts and corporate bonds in recent years, the shift toward debt will probably continue. Many UK investment managers are already halfway there, with today’s equity allocations hovering around 65-70 percent compared to 75-80 percent in the mid-1990s. As baby boomers gear up for retirement, the equity markets could well take a further allocation hammering in the years ahead.
All this may be depressing news for IROs who learned their trade in the bull markets of the late 1990s and were happy to bask in the ample amounts of corporate largesse brought on by rising stock prices. Times change, however, as do capital raising rules. With corporate debt issuance rising relative to equity, it may well be that the most successful IR practitioners over the next decade will be those well-versed in debt IR. Search a few corporate IR web sites for detailed debt information and you soon realize that this type of IR executive is a rare breed indeed.
