Tuesday, August 31, 2010

Sparking creativity at work: Michael Rennie

 From Life Matters on ABC Radio National

The modern business environment is anti-creative, says Michael Rennie, but every business wants to be more innovative, more creative.

And creativity makes us feel happy and productive. So why are so many workplaces the antithesis of buzzing, creative environments?

Why is creativity generally associated with the arts, not with business?

A conference in Melbourne next month called Creative Innovation will try to bridge these worlds, by bringing poets, musicians and thinkers together with business leaders.

One of the speakers has already crossed that bridge. He's Michael Rennie, Managing Partner of McKinsey and Company in Australia and New Zealand.


Taking Out the Middle Man

 Jim Parker, Vice President, DFA Australia Limited

One of the great benefits of the global internet is the scope it gives investors to test the veracity of media coverage by going straight to the source. Now, one canny consumer is taking this disintermediation a step further.

The structural crisis in commercial media has been cited before in this column, but boils down to the death of its traditional business model as advertisers and readers migrate to the web. The upshot is the media is left with fewer journalists to fill ever expanding amounts of white space and empty air time.

Some in the media are responding to this crisis by heading down-market. Essentially this means they are seeking to make a virtue of their lack of imagination and resources by sacrificing good information and context for public relations spin, circus-style entertainment and unadulterated opinion.

This is why TV business programs regularly feature people shouting over the top of one another and making a mountain over issues that really have little bearing on investors’ long-term returns. Overlooked amid all the sound and fury is the need for solid, independent reporting that adds value for readers and viewers.

One possible response to this noise is to go straight to the source. You can do that in the internet age. Instead of relying on second-hand and often inaccurate reports of, say, the International Monetary Fund’s global economic forecasts, investors can read the institution’s own summary on its website.

Smart consumers of media can also, using modern technology like RSS feeds and Twitter, follow the writers, bloggers and commentators they trust. Google Alerts provide another way to filter news of interest from the flotsam and jetsam.

In many ways, what is happening to the mainstream media is analogous to the crisis that started hitting the recorded music industry a decade ago. The old distribution model has been made redundant and consumers are empowered to access and customize the information they need directly.

One noted UK blogger and comedian, Tom Scott, has taken this trend of disintermediation a step further by designing amusing “journalism warning labels” that are attached to newspapers to alert consumers about the content therein.

Among the individual labels are “Warning: Statistics, survey results and/or equations in this article were sponsored by a PR company.” This is not surprising, given that one 2008 UK university study, based on 2,000 articles in five major British newspapers, found 80 percent of the content was second-hand. Most of it came either from public relations material or agency copy.

Taking note of this trend, Mr Scott has another warning label for newspapers that reads: “This article is basically just a press release copied and pasted.”

The growing dependency of journalists on media and publicity agents for softball interviews is highlighted by a fourth warning: “To ensure future interviews with subject, important questions were not asked.”

But probably the most salient warning label for investors is the one that reads: “Journalist does not understand the subject they are writing about.”

The fact is so much of what vexes investors comes from media content generated by journalists so pressured by deadlines and so desperate for content to fill the gaps between the ads that they really have little grasp of the often complex issues they are called to cover.

That’s the bad news. The good news is the very idea of the “media” – the thing that stands between consumers and events – is becoming rather quaint. The unadulterated information is there if you know where to look.

Friday, August 13, 2010

Broke and Broker

Each day, terabytes of broker research clogs the email inboxes of money managers. But how reliable are these multitudes of forecasts? New research in the Australian and the US markets helps answer that question.

Ploughing through broker calls is a professional hazard for those money managers who base their value proposition on the notion that they can make consistent returns for their clients by exploiting perceived market mispricing.

The hope is that among the volumes of forecasts will be the gem that will earn investors big money. But it seems there is growing disillusionment among forecasting-based fund managers about the quality of the broker calls.

Australian financial markets research specialist East Coles regularly surveys fund managers about the research they receive. Results of its most recent Best Broker poll featured in The Melbourne Age.1

The overwhelming impression left by the findings was that managers’ reliance on analyst recommendations has diminished over the years, in part because of concern over inaccurate forecasts and in part due to the perception of potential conflicts of interest between analysts and the investment banking and brokerage businesses of their employers.

"We rely on it [research] a bit,” one fund manager is quoted as saying, “which is unfortunate because it has been wrong throughout 2009."

Fuelling the cynicism was an absence of warnings over a number of high profile corporate collapses in Australia during the financial crisis, including the failures of Allco Finance, Babcock & Brown and ABC Learning Centres.

For instance, in September 2007, an analyst at a major investment bank reaffirmed his ‘buy’ rating on ABC Learning Centres after the company announced plans for further global expansion and said it would lift fees.2

ABC Learning at that time was one of the world’s biggest listed operators of child care centres, with more than two thousand centres operating in Australia, New Zealand and the United States.

Within a few months of that ‘buy’ rating being issued, ABC’s shares had collapsed from above $5 to zero and the company went into administration by September 2007 under the weight of $1.5 billion in debt.

In January 2008, an analyst from a high-profile Australian investment bank issued a report with an “outperform” recommendation on the Queensland property development group MFS and a 12-month price target of $7.15 from the then price of just under $4. A week later, the shares had collapsed by 75 per cent to $1.3 MFS subsequently went into liquidation.

For sure, there are good broker calls as well. But the East Coles survey found these are few and far between, which leaves fund managers wondering whether they would be better off with a dart board.

Further evidence of persistent inaccuracy in broker forecasts came in another recent survey, this time on the US market and carried out by management consulting firm McKinsey, updating a similar survey almost a decade ago.4

Analysing earnings forecasts for S&P-500 companies over a quarter century to the end of 2009, McKinsey found that with few exceptions aggregate earnings forecasts tended to exceed realised earnings per share.

Actual growth surpassed forecasts only twice in 25 years, the consultancy found, and both times during the recovery following a recession.

Instead, the survey found the most accurate expectations were actually those built into prices on capital markets themselves.

“This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions,” McKinsey said. “Executives…ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.”

Good advice – and yet another reason to see market pricing as the best unbiased estimate of expected returns on capital markets.

1. ‘The Broking Analysts Who Make the Really Big Calls are Few and Far Between’, Michael Evans, July 17, 2010
2. ‘Childcare Giant ABC Tipped to Lift Fees’, The Courier Mail, Sept 15, 2007
3. ‘Debacle at MFS a Lesson to Others’, The Australian, Jan 21, 2008
4. ‘Equity Analysts: Still too Bullish’, McKinsey on Finance, Number 35, Spring 2010, McKinsey & Company

Tuesday, August 03, 2010

Missed it by that Much!

Jim Parker, Vice President, DFA Australia Limited
Market timing is hard; so hard that even the most experienced and respected market professionals struggle to finesse their exit and entry points. Just ask the famed hedge fund manager Barton Biggs.

Biggs made his name as chief global strategist with Wall Street investment bank Morgan Stanley. These days, he runs his own hedge fund and remains a regular media commentator on market trends.

In early July 2010, when market sentiment was the worst it had been since the crisis, Biggs announced he had sold half his equity holdings. Stocks had fallen nine times in 10 days and all the talk was of a double-dip recession.

“I’m not putting my money into anything,” Biggs said at the time. “I’ve taken basically all of it out in the US, and we had a broader exposure to consumer stocks and just, in general, I’ve reduced my net long position by about 30 or 40 percentage points.”1

That was a shame, as that point in early July marked the beginning of a turnaround in stocks that took the S&P-500 up more than 8 per cent in the intervening four weeks. Bolstering sentiment were solid earnings reports and more encouraging signs on the US and global economies.

In a radio interview with Bloomberg at the end of July, Biggs said he had now changed his mind and was rebuilding his positions in stocks.

“Economic data around the world in the last 10 days to two weeks has turned more positive,” he said. “It has exceeded forecasts almost without exception. The odds of the world slumping into a significant slowdown have diminished.”

None of this is intended to reflect poorly on Biggs’ skills as an investor. He clearly has a large market following and there appear to be plenty of people willing to back his judgment on perceived turning points.

But it does show the great difficulty facing even the most experienced and well informed investors in perfectly judging when to get into or out of the market. For everyday investors, then, the challenge must be even harder.

Research group Dalbar has charted this challenge for many years in its quantitative analysis of investor behaviour, a survey that shows investors almost ritually make the mistake of buying high and selling low.

In a recent interview with Barron’s, Dalbar founder Lou Harvey pointed out that many investors missed the boat yet again in 2009 by moving into safe investments like cash and missing the upturn when it came.2

The best protected investors, Dalbar found, were those who worked with advisors that put their clients first. By contrast, do-it-yourself investors tended to underperform those advised by a fiduciary.

“We found that people working with fiduciaries, advisors with a legal obligation to put the client first, and whose personal assets were on the line, tended to be among the winners - these clients were well protected,” Harvey said.

So it’s a familiar story. Investment advice is not about making predictions about the market. It’s about education and diversification and designing strategies that meet the specific needs of each individual. Ultimately it’s about saving investors from their own, very human, mistakes.

And, as we’ve seen, even the best of us make those.

1. ‘Biggs Buys Stocks Three Weeks After Cutting Holdings’, Bloomberg, July 26, 2010
2. ‘Did Investors Learn Anything From 2008’s Crash?’, Barron’s, July 24, 2010