Gordo Got You Down? Try Power 2010!

If you aren't thoroughly disillusioned with UK politics and hell-bent on doing something about it, I don't know how much more mayhem it will take.

The good news is that even Gordon Brown admits he has to unwind his vast public sector binge of the past twelve years. The chips are really down.

But as the great HST himself said, "when the going gets tough, the weird turn pro".

So now is the time to ensure we get to keep and invest in what's important.

Enter Power 2010, a campaign chaired by Helena Kennedy and funded by the Joseph Rowntree Charitable Trust and the Joseph Rowntree Reform Trust.

Like MySociety, Power 2010 uses the internet to enable you to share your thoughts in a way that politicians cannot ignore without being called to public account. It doesn't matter whether Parliament is sitting or not. The internet is always on, 24-hours of disinfecting sunlight shining into the Westminster pit.

So please share your ideas now, at http://www.power2010.org.uk/page/s/yourideas.

Diversification Challenge

Some of us have been discussing the need to diversify more.

There are numerous tips on how to make sure that not all your eggs are in one basket. But they all assume that you have a great deal of time and a pretty sophisticated understanding of finance and financial services.

Like it or not, even with plenty of time on his/her hands, the 'man on the Clapham omnibus' is no financial giant.

So most people need diversification explained as simply as possible, and in a way that enables them to achieve it easily and conveniently.

What is diversification? The eggs in one basket idea is pretty simple, but needs some numbers: you are less likely to have all your eggs broken if you have 10 eggs in each of 10 baskets, rather than 100 eggs in one basket. Following this principle, you become automatically better off every time you add another basket for the same number of eggs. So you’d be much better protected against egg breakage if you had 5 eggs in each of 20 different baskets.

An interesting challenge would be to start with what a truly diversified portfolio of assets looks like, based on using a small amount of money. For argument's sake, one could start with a figure of £10,680 - the most the government allows you to salt away without locking it up til you're 98 years old, or paying tax on the returns.

But such government policy actually prohibits diversification, yet heavily subsidises regulated investments at the expense of alternatives.

That’s because most people with surplus cash should use up their tax-free allowances first, and few will have anything left over. Research cited by the Guardian in June 2011 suggests the average UK person can afford to save £97.10 per month.

The list of asset classes is long, yet the money allocated to those tax-free allowances can't be invested in the full range of potential assets, even by putting their money in the hands of managers who can invest more widely. Generally, you may only invest your tax-free allowances in regulated investments. And all sorts of rules, policies and other restrictions limit the types of assets in which regulated fund managers can invest. So even regulated fund managers are unable to adequately diversify the investment pots they manage. This must necessarily affect the value and performance of the funds they manage. Such effects may be market-driven and/or behavioural.

Then there's the tricky subject of asset correlations: if all the assets you've invested in behave the same way at the same time, then you aren't diversified. Apparently the correlation in the performance of assets has been increasing of late, but may be about to unwind in some cases.

First step along the way to meeting the diversification challenge should be to figure out a reasonably detailed list of asset classes. Then we should modify the regulatory framework to enable people to invest at least their tax free allowance in each of them. The list of assets can divide and divide, but I don't think we start out with a sufficiently granular picture. In reality, I think such a list might look like the following - note that I include different types of 'funds', and separate regulated from unregulated, because their performance can be affected by the differing levels of regulation and permitted classes of investments they can make. However, I'm not including instruments like spread bets, contracts for differences or futures, since these are merely contracts that get you exposure to the various assets. Am I right or wrong?

1. cash
2. savings accounts
3. fixed interest savings/bonds - government, corporate
4. person-to-person loans
5. shares listed on a regulated or 'recognised' exchange
6. shares not listed on a regulated exchange
7. exchange traded funds (ETFs) listed on a regulated exchange
8. ETFs not listed on a regulated exchange
9. regulated managed funds
10. unregulated managed funds
11. regulated hedge funds
12. unregulated hedge funds
13. venture capital funds
14. venture capital trusts
15. regulated funds of funds
16. unregulated funds of funds
17. commercial property
18. rural property
19. residential property (owner occupied)
20. residential property (buy-to-let)
21. perishable commodities (e.g. cocoa, wheat)
22. non-perishable commodities (e.g. oil, gold and other precious metals)
23. art
24. classic cars
25. fine wine
26. currencies

At Last A Bank That's Fair?

At long last one bank has broken ranks with the gang that's trying to avoid having their overdraft fees assessed for fairness by the OFT.

RBS has announced it will halve its fee for paying an item when overdrawn to £15 per day(!), and slash the fee for returning a cheque, direct debit or standing order to £5 (from £38!).

Why it's taken so long to at least make this concession, and why other UK banks with substantial state ownership continue to delay, is anyone's guess. But it's a great start.

Will RBS now refund to affected customers the difference between the revised fees and what it has been charging them to date?

New Firms Best At Leveraging Social Media?

A hat tip to Mark Nepstad for pointing out Chris Perry's article on the challenge for any established business trying to leverage the social media. Just as the military potential of the aeroplane was not fully realised until the challenge was eventually handed over by the Army to a newly created Air Force, Chris suggests that marketing teams need to be re-engineered in order for businesses to realise the potential afforded by a phenomenon as 'revolutinary' as the social media.

But this misses the wood for the trees.

The rise of the Air Force and the success of Google, eBay, Amazon etc. illustrate that leveraging horizontal technological innovations is not achieved by shuffling the deckchairs in the marketing department of established organisations, but by forging new and separate businesses.

That leaves the challenge for the old guard to engage with the upstarts in order to leverage their greater success with the new technology. Time Warner (AOL), NewsCorp (MySpace) and even eBay (Skype) have famously demonstrated that acquiring one of these new firms doesn't necessarily result in successful engagement. So it seems that established businesses should both encourage new businesses to flourish around significant new horizontal innovations, and focus on co-operating with them to serve their customers, rather than outright ownership. Some, including the Wharton Business School, have called this 'coopetition'.

Figuring out how to compete by co-operating shouldn't necessarily entail wholesale reorganisation, especially when deep knowledge of the capabilities and shortcomings of your own business is key to knowing what's needed from the other party. Indeed it might be more beneficial to give managers and staff 'permission' to admit their organisation's shortcomings and figure out where they need help to adequately serve their customers, rather than to drive the organisation through complex wholesale change programmes.

At any rate, the scale of the challenge posed by horizontal technological shifts may at least partly explain why the average lifespan of a major western corporation is 40-50 years...

Madoff Victims Should Not Blame The SEC

Something caught my eye in the FT's coverage of the SEC's inspector-general's report into the SEC's handling of the Madoff saga:

"Jacob Frenkel, an attorney with Shulman Rogers, said the report indicated that some SEC staff, “failed to recognise a blazing fire because they were too focused on the smoldering match in their fingertips.... Madoff investors would have been better off and far more skeptical had the SEC never investigated or conducted examinations.”"

While the SEC has a lot of improvements to make, Mr Frenkel's claim just doesn't stack up. Worse, blaming the SEC will mean that Madoff's victims will continue to behave in the way that got them into trouble in the first place.

In my book, victims really only have themselves and Madoff himself to blame, on three counts.

Firstly, the complaints to the SEC only reflect what was being published by the likes of Michael Ocrant in 2001. Harry Markopolos said it took him four hours to spot the Ponzi scheme in 2000, using publicly available documents. And according to the Telegraph, Goldman Sachs banned its asset management and brokering divisions from dealing with Madoff's funds ten years ago, while "a raft of blue-chip financial institutions have suspected something was wrong for years." So there's no reason that Madoff's victims and their advisors should not have detected these concerns with even a little due diligence.

Secondly, from my own observation of the SEC's approach to potentially wrongful activity (e.g. in relation to Prosper.com) it's obvious that it can take several years for the SEC's enforcement machine to engage and eventually produce a settlement or prosecution. And, of course, such proceedings are subject to the usual vagaries of the appeals process (sustaining the doubt about whether viatical settlements are a security, for example, which has in turn left the status of other instruments unclear). While this is hugely frustrating for investors and competitors alike, it is clearly impossible to draw any conclusion from the fact that the SEC may have investigated something, unless and until the SEC issues a 'no action' letter (which can take a year, no joke), or ensuing proceedings are settled or otherwise concluded. So those who bet on the outcome of existing or potential SEC activity do so at their own risk. And clearly many people do make those bets.

Finally, what really seemed to cause Madoff's victims to invest was the bandwagon effect created by Madoff's skilful recruitment of socialites and other high profile names as key investors. This meant that investing with Madoff was more of a social badge than a financial decision. And that is hardly something that the SEC can be expected to do much about.