Training Tips

I spent much of the Christmas holidays digesting Joe Friel's The Triathlete's Training Bible, now in its third edition.

Having plodded my way through various multisport events since 2005 with only sporadic assistance from search engines, I've found myself at a bit of a performance plateau. So I figured I need to get more scientific if I'm to wring any more improvements out of my limited schedule. Although daunting in size, I've found Joe's bible has the right balance of science and practical tips to confidently tweak the training plan. He does a thorough job of explaining the latest research into physiology and diet, and recommending different workouts that contribute endurance, strength and/or speed depending on your needs (all of the above). Hell, just reading about training is a morale boost in itself.

Already I can report an increase in velocity, although times may have been wind-assisted by brussel sprouts.

The Great Aussie Firewall - The Game

The Guardian reports on the latest response to the Australian government's efforts to control the internet.

E-invoicing Integrated With SME Finance Platform

Alternative trade finance for small businesses is beginning to snowball - at least in the US. Early this month, the Receivables Exchange announced its integration with the Ariba Network, a leading provider of spend management services.

The press release says the integration will enable SMEs "to seamlessly transfer their invoices from the Ariba Network to the Exchange’s proprietary trading platform for auction. Leveraging a cash optimizer tool embedded in the latest release of the Ariba Network, suppliers can calculate their cash needs as compared to their eligible outstanding invoices and select the invoices they want to sell to help them optimize their working capital management and improve their cash flow."

This is virtually the same model Zopa and various collaborators took to potential UK clients and partners in 2008. Marketing was the only (major!) hurdle, and we were in talks with someone very big and friendly to support it. But, as is often the way with these types of services, there were simply too many interim integration steps competing against higher core priorities for the service to go into development.

Full credit to the Receivables Exchange for getting this launched - although I still think they need a bigger brand name that is already well-known to all SME's if they are going to get real traction against the established sources of trade finance. I wish them luck.

Maybe it's a signal that Zopa and its partners should dust off their plans...

Simple, Low Cost Financial Services

It's been helter skelter this month, so no time to post. But a recent financial regulatory conversation has prompted me to draw together the threads from a number of earlier posts this year.

The current "problems" in the financial services markets - excessive fees and bonuses, lack of transparency, poorly understood products, the credit and pension crises - are, ironically, the result of existing regulation. To solve them, the clear objective of the regulatory regime should be to deliver simple, low cost financial products that are accessible to us all.

Excessive banking/investment fees, and related compensation ("fat banking"), are the result of funnelling investment opportunities and funding into a zone in which relatively few firms are permitted to operate. Of course, even within that small group of firms, there are a dominant few who get to charge even more for their services. Products become increasingly complex, less transparent and less well understood as these few firms struggle to get an edge on the 'competition' and quote 'stellar' returns, until risk becomes highly concentrated and there is actually very little effective competition at all. In this scenario, fee caps and taxes will be ineffective - the huge flows of investment funds and opportunities will always incentivise ways of getting round the curbs, or the practicalities of getting anything funded at all will sweep them away. As a result, funding costs will continue to rise, as will the incomes of the staff working for the annointed few.

One way to challenge this trend is to open up the investment 'funnel', and make the financial markets accessible to us all. That in turn means vastly simplifying the process for the average individual to invest/save in a fully diversified way. To meet that challenge, successful investment firms would have to race each other to demystify and simplify the funding/investment experience. Today, even 'thin' intermediaries, like discount brokers, still leave too much work to be done for the average person to engage with the financial markets. We speak of 'fund supermarkets', but these are Bond Street boutiques, not Sainsbury's.

Diversification is critical yet remains a black art. The list of asset classes is long, yet most assets cannot be invested in by the average person, even by putting money in the hands of managers who can invest more widely. All sorts of rules, policies and other restrictions limit the extent to which individuals as well as pension and other fund managers can diversify, and this must necessarily affect (and correlate) their performance. So our regulatory regime actually prohibits diversification, and creates a scenario where too many investors effectively adopt the same or very similar investment strategies. Instead, we need to make it very cheap and easy for each of us to 'buy' non-correlated assets from all asset classes so we don't blow our long-term savings on the same bunch of poorly-informed investments.

Individuals have spent the past decade using the internet to gain control of many consumer experiences, from holidays to entertainment. Low cost 'facilitators' have allowed us to unbundle flights and hotels, music tracks and other one-size-fits-all products to create our own personalised, lower cost alternatives. Similarly, we should be striving to produce a financial services market in which any person can add individual stocks and shares to a shopping cart that tells them the extent to which the selection is high risk and poorly diversified, either on its own or when compared to the buyer's existing portfolio.

Effectively pegging firms' reputations to their ability to estimate risk in this way, rather than generate 'stellar' short term returns on complex products, would in turn act as a further constraint on complexity and poor risk management.

Mezzanine CoCo Means Even Fatter Banking

Two recent funding initiatives not only fail to introduce openness and transparency in the credit markets, but also add complexity, shroud risk and perpetuate the enormous fees and bonuses inherent in the 'fat banking' model that many are complaining about.

Of course, I'm referring to the new form of 'contingent convertibles' or "CoCos" issued by Lloyds Banking Group and the 'mezzanine' product to be offered by the "Growth Capital Fund".

The £7bn worth of new "CoCos" issued by Lloyds Banking Group pay interest, but convert into equity if the bank's core tier one capital ratio falls below 5%. The tier one capital ratio is itself under a cloud, given its lack of predictive value in 2007 and recent analysis by Standard & Poors that "every single bank in Japan, the US, Germany, Spain, and Italy included in S&P's list of 45 global lenders fails the 8pc safety level under the agency's risk-adjusted capital (RAC) ratio." Furthermore, the ABI says it doesn't like these CoCos being included in bond indexes, because this would "effectively require some bond investors to buy these instruments and subsequently to become forced sellers if and when they convert into equity." It's worth noting that the UK government has had to invest £5.7bn (net of underwriting fees) just to avoid dilution of its 43% shareholding amidst the wopping £13.5bn in new shares. That underwriting fee must be enormous, no doubt made more so by the complexity of the new instrument.

CoCos are a type of convertible bond and are not really new. They started life as bonds that paid interest, but converted into equity if the issuer's share price hit a certain number. Apparently they were first issued by Tyco in 2000. They were popular because CoCos were not included in the diluted earnings per share calculation. However, their favourable treatment was removed and they more or less died out. Some also expressed concern about adequate disclosure of the risk that the contingency would occur, and the future impact of the conversion into equity... seems nothing has changed.

Meanwhile, Messrs Brown and Mandelson have also welcomed the recommendation for new "Growth Capital Fund" to allow medium sized businesses to publicly offer "mezzanine" debt - lending that is often unsecured, and ranks behind bank debt but ahead of equity on insolvency. Apparently, this product "would help address demand side aversion to pure equity, and provide a return above regular bank lending to reward investors". You can guess the reason for the premium to regular bank lending, and why it ranks behind banks. The Growth Capital Fund is designed to plug a "permanent gap" existed for up to "5,000 businesses" looking to raise between £2m and £10m in growth capital." It is noted that "neither banks nor equity investors were likely to fill this gap in the near future." They know that where you rank in an insolvency without security is largely academic, and there remains the very real issue as to how to effectively monitor the ongoing creditworthiness of a mid-tier company. Perhaps the proposed 'single fund manager' might find a solution. But I'll bet it will just sit there gathering money and sending statements to forlorn investors confirming the steady deduction of its fee as a percentage of gross funds under management. Already, Lloyds bankers say they are interested, no doubt hoping to recover some of their recent underwriting fees.

So it's clear that neither of these relatively complex instruments do anything to promote openness and transparency in the financial markets, but instead continue to funnel investment opportunities to intermediaries who can rely on their privileged regulatory position to charge enormous fees.

There are alternatives. At Zopa, for example, we helped figure out an invoice discounting process that is an easily understood, low margin alternative for SME trade finance, open to all - as is the Receivables Exchange. The challenge is marketing such low cost alternatives to busy SMEs amidst all the noise of the usual banking and investment marketing. Low margin financial services providers can't afford fancy advertising campaigns or to arrange open endorsement by Messrs Brown or Mandelson. Yet, to put an end to 'fat banking' and concentrated, poorly understood risk, we need to promote such open investment marketplaces, using instruments that are more easily understood and widely accessible.

Surely that's a challenge the government could help address, rather than lining bankers' pockets.