DISCUSSION Why we need slow finance

by Yolanda Villafuerte _______3rd December 2012
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High frequency trading means that equity is now held for as little as a few microseconds. It is worrying that 84% of all stock trades in the US and 77% of all the transactions in the U.K. were executed by high-frequency trading account this year. Fund managers now hold stock for an average of seven months – in the 1960s it was seven years.

The short-termism in the city has been heavily criticised since the financial crisis, and many people are still grappling with the answer to a more sustainable financial industry. Yet, in 2011, MAM Fund’s Gervais Williams put together a blueprint that would create a more resilient industry which does not depend on speculation.

Gervais argues that the fund management industry and big business have been riding the wave of a credit boom that has been going on for the last 25 years and been kept buoyant by quantitative easing. Now with the stagnation of property and equity prices, there is a need to return to value investing as an investor can no longer rely on growing volumes of capital.  It is the principles of good investing that Gervais returns to- stick to what you know, invest in potential and look for companies that are undervalued.

His argument, to reinvest dividends for the long-term success of one’s investment, encourages a return to the purpose of investment – providing capital. Reinvesting dividends will give great stability to companies with good long-term growth prospects and will go a long way towards strengthening the UK economy.

The investment miles and small business approach that Gervais maintains are probably the most contentious part of his book. However, Gervais addresses any concerns of risk and there is good evidence for his approach.  China’s GDP has ranged from 7-10% per annum since 1985 but the stock returns have been about 2-3% per annum. An IMF report on China this month warned about excessive capital-to-output ratios, potentially severe internal economic imbalances and a rapidly increasing cost of capital supporting the investment-trap analysis of developing countries that Gervais puts forth in his book.

Gervais also argues that by taking relatively small positions in smaller companies, it is possible to create portfolios that are robust. In his book, the numbers tell a compelling story.  A dollar invested in 1929 in the best small-cap value stocks would have become a mind-boggling $24,044,586 by 1997. A pound invested in the RBS HG1000 in 1955 would have returned £7,393 by 2010, compared with £620 in the FTSE All-Share. And, if you invested £1 in the DMC MicroCap index in 1955 you’d have £14,210 today.

Ultimately, Gervais’ book is about creating value through better capitalism.  ‘Slow Finance’ seeks to address the separation between savers and investments, and engage investors and savers to take a more active role. He sets out clearly and convincingly the business sense in investing locally and thoughtfully, with a focus on smaller companies that have the potential for growth while considering good timing and diversification.

To listen to Gervais Williams’ speech at our Tomorrow’s Finance lecture followed by panel discussions involving Edward Bonham-Carter, James Featherby and Richard Sermon, please visit the CIMA website. Gervais’s keynote address includes a greater analysis on investment timing and possible future financial trends.

To purchase Gervais Williams’ book ‘Slow Finance: Why Investment Miles Matter’, please visit Amazon.com

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