Transcript Episode 002 - Kung Fu Value
Film. Public Domain 1.0 0:11
Intro: '..refuse a challenge, you have to die.'
JB Beckett 0:26
Salutations Dear Citizens, as we peer into the new fund order to discover the immutable truth for asset management and wealth managers, the lowdown from the dark side, the frontier and the fringe of asset management and fund research.
A podcast for wealth managers fund selectors, distributors and investors. Bringing to you the 'People's Republic Podcast of Finance', in association with my sponsor Allianz global investors, capturing the latest market news, views and interviews with leading minds in our industry.
Allianz Global Investors is one of the world's leading active managers,
Computer 1:16
Podcast 002.
JB Beckett 1:18
In this episode, Citizens it's kung fu showdown for fund platforms. Our guest in this episode is Mark Polson principal and founder of the Lang Cat consultancy and all things kung fu master when it comes to fund platforms..
Lang Cat describes itself as 'making the complex simple' and in the space of just 10 years has become very much the authority of the UK fund platform industry.
Computer 1:42
Market News
JB Beckett 1:47
MoneyWeek runs with China touts next Tesla shares as electric car manufacturer Neo have rocketed over the past year.. can it keep motoring and live up to the hype?
Europe runs a story in the first instance of a funds transaction using a central bank digital currency or CBDC has successfully completed in France paving the way for instant blockchain based settlement.
Meanwhile, the economist runs worth 'why Europe is losing the big tech race'. Pre launch hype surrounding the video game 'Cyberpunk 2077' turned its Warsaw-based creater CD Projekt into the country's most valuable listed company says The Economist, ever since it was launched is still being littered with bugs.
The International Consortium of Investigative Journalists [ICJI] reports the Isle of Man is still facilitating the super rich owners of private jets to fly below European taxes, almost three years after the 'paradise papers' first revealed the practice
UK government plans post-Brexit reform of investment industry FT covers tax changes and new alternative investment funds will help keep Britain's £9.9 trillion Asset Management sector competitive.
The news of course is awash with GameStop. Bloomberg running GameStop is 'rage against the financial machine'. Traders putting on their short squeeze aren't motivated by greed; they're engaged in an anger-driven uprising against the establishment. And I'll be providing some comment on GameStop and what it means for the industry later in this episode.
And that's the end of market news, tag #newfundorder and let me know what stories I should be covering interview.
Computer 3:10
Interview
JB Beckett 3:11
And in these strange pandemic lockdown times. Rest assured that all guests are calling in remotely!
So it's great to have you on the newfundorder podcast Mark and of course a very Happy New Year to you.
Mark Polson 3:25
A very happy slightly tarnished New Year to you as well. It's not really new is it? It's kind of like re-gifted with a little bit of crud on the box. You know when it got a wee bit bashed when the kids were unwrapping it and didn't want it.. But there it is. There it is. Yes, it's nice to be here and I look forward to alienating your audience just as much as you alienated mine last time..
JB Beckett 3:45
Oh thanks very much, you are more than welcome.. it seems very apt indeed some might suggest contrived that we're recording this on Blue Monday?
Mark Polson 3:52
See know that Blue Monday thing that boils me up for a start right.. Blue Monday thing came out from a travel agent, and there was nothing in it other than they said, Oh, we had an algorithm. We worked it out
JB Beckett 4:03
Down with big media that's what we're basically saying..
Mark Polson 4:05
damn right.
JB Beckett 4:06
You know, obviously it is to some degree contrived because today's podcast is indeed entitled are fund platforms facing a new order obviously as a blazing sell off this podcast and of the book, of course,
I have a range of special effects just ready for you back in the bunker just for any instances of Scottish potty mouth. We know .. is an affliction
Mark Polson 4:25
It is and we use it as punctuation, you know, well, you only need to use language like that if you're not articulate yourself. I'm perfectly articulate. Thank you very much. I also like using the word F### and I really don't see a problem with it. And I'm looking forward very much to hearing what little noise you used in the final edit of this. to bleep out what I just said.
JB Beckett 4:45
Would you like to just throw out my special Sound effect?
Mark Polson 4:48
you're some ####
JB Beckett 4:51
Being me in true Orwellian style, are there any deep lies rooted in the fund platform industry and who is controlling them?
Mark Polson 5:01
That's a good and difficult question to start with, because the the fund platform industry, at least in the UK, right, and there's going to be people listening to this in other territories. But the kind of genesis of it, I think, was was kind of built on a bit of nonsense.
JB Beckett 5:17
But you talk about price, but also there's a there's a lot of obsession right now about the Assessment of Value [AoV] and the whole value for money question, do you think we should see something like the assessment of value framework being applied to the advice process, being applied to platforms?
Mark Polson 5:33
20 years in platforms is that one of the sort of fundamentals of it just just was never really true. I've written enough marketing bull#### over my time to know it when I see it. Back to your to Orwellian stuff. The chilling effect of this is that it is in nobody's interest, who controls the means of distribution, the platform's themselves and the fund industry have got exactly no interest in shaking that up. We cut everybody's throats if we do that, and we'd all not be able to make the margins that we're used to and some are making great margins anyway, the ability for retail investors outside of you know, if they're in big pension funds, or something like that to access, what I think they thought they were getting in the first place is seriously constrained.
JB Beckett 6:20
If you had to deliver a kung fu kick to one particular part of our industry, who is the peddler of the propaganda that's giving rise to this? Is it the regulator? Is it trade bodies? Is it? Is it the advisor community? Is it? Is it the distributors? Who's most to blame?
Mark Polson 6:37
I think it is... That's a great question. Because everybody's at the gangbang, right. And everybody dropped their car keys in the bowl. So I'm not sure that there's any one that gets a bit of, of 'Chop Socky' there. And lots and lots of people, I think, have gone along with this. Probably, probably the original sinners might be guys like Hargreaves, who genuinely were discount brokers for a while...
Also regulator always gets a bit on the shoe, right? Because there was the potential back in the day for them to control messaging a lot more.
One of the likely impacts of [this] regulation is that your costs are going to go up. Because not only will the fund industry defend its margins, the platform sector, now has explicit charges that it didn't before. And it's going to take that opportunity to defend its margins. And advisors are going to do that too, and probably put their prices up. And as a result, guess what regulation made things certainly more transparent, but more expensive as well. Everybody is complicit in that regard. Again, for the non UK people listening... this is a market where retail investors really do use collectives. And the share trading stuff is a whole different ballgame.
Listen, we're talking about price here, right? It's not the fundamental thing that the idea that people buy stuff and hold it on behalf of clients, and it's kept safe for them. It's run properly by serious people who've got degrees and stuff and are quite boring. And so they should be. And that all works pretty well. Actually, we/I spend my life inside the minutiae of it. So I'm always looking at what tiny little things could be five or 10% better, but in the main, it does very well. And the regulator in its platform market study found that although there are some things that exorcise us, in general, the market behaves relatively well on behalf of investors. But I think my point is that you could Franz Ferdinand once sang 'have it so much better'...
Right, I'm gonna sing my angry value Pixie song, right? And not everybody gets to hear this. So you know, you're very lucky. And, and it is this, that value is a word. I wish the assessment of value reports weren't called that I wish they were called something else. assessment of cheese, or fish or jam.. I don't care about but not the V word. Because the V word is something that individuals have to be allowed to experience for themselves, right? It's effectively utility is economic utility. And to do that, to derive value, and assess value, you need to understand two things, which in this instance is what something costs and what it does, right, there's only two things you need to know. But despite successive waves of transparency, this industry is like master level. I'm trying to think of the right what the right belt would be in Kung Fu, Jon, but you would probably know that from your obsession?
JB Beckett 9:53
Second Dan third Dan something like that [JB: actually these would apply to Japanese not Chinese martial arts :)]
Mark Polson 9:58
Third Dan
..separating people from understanding and agency is what this industry exists to do. And it does that usually with a relatively benign intent. But the key point is that you're not going to understand what value something gives you by reading an AoV report, you might understand how it compares against some of its peer groups. Even then, right, we did a survey with advisors, UK advisors mostly directly authorised mostly independent at the tail end of 2020. We just published it earlier this month, and only 6% of firms said that they actively used fund management AoV reports and put any stock in them at all. Most people made noises around the you know exactly what I think would happen. If you asked advisors or platforms or whoever else to see, are you good value or not? They see why Yes? Why? Yes, Jon, I'm exceptional value. And it would be the easiest lie they ever told.
So I'm not sure that asking an industry to say, hey, do you think you're doing a good job, lads? And see if you're not you're going to be bang in trouble is going to get you very far. So I don't know what the answer is there. But we probably need to stop saying that their actual assessment of value reports. We're not really assessing value there. And I think if we set the foxes to not only watch the hen house, but also the fox house, and then to assess how well, the foxes in the fox house have been watching the hen house, then we're probably not going to get all that far. It feels quite a long way to go at the moment.
JB Beckett 11:33
So it sounds as if you're not particularly optimistic about the whole value for money debate that's going on right now. Or should I say as it how it's being implemented? And certainly I have similar concerns.. the missing link for me being what did the non exec directors do? And how did they step up, how do they intercede and intervene in those fund boards, I think it's going to be crucial to actually producing something that's that's meaningful, but sounds like it at the moment, you're just left broiling in your own cynical broth as to the value of assessment of value reports. But of course, this is another invention by the regulator, who themselves had ambitions to echo the regime in the United States, and everyone's got their swords out for the regulator,
Mark Polson 12:17
Dunking on the regulator, right is is a great sport, and everyone can do it. It's the kind of game that everyone can play, and the regulator doesn't really get to answer back, either, whether it's a AoV, or ESG, or other three letter acronyms. You know, terminology can get in the way. But usually behind it, there's something quasi righteous, in terms of ESG it's really, really tough at the moment, there's a lot more ecologically generated heat than light at the moment. Everybody's doing something, every supplement is about ESG. Every fund manager is, you know, immediately running around saying 'what can be launched, what can we launch', we've got a report coming out about it, too. But one of the things that we're trying to talk about in it is that we need to slow down gotta slow this down, because the industry has done what the industry always does, which is go into manufacturing mode, and say, right, 'how can we tap into this latent and hot demand for ESG products and make a few bucks along the way?' And I know there are some people that have long held these beliefs and have manufactured now for a long time, but lots haven't, right? And the, you know, the the plethora, and the proliferation of these products, in a very short timescale is dizzying, and almost all of them, I suspect won't make the trip, in the longer term..
For platforms as distributors. It's really tough because one man's meat is another man's poison. And you either say, 'Well, listen, we are absolutely neutral in this, we don't care, you tell us what you want to buy, we buy it'. That's it. That's all we need to know. And I think that's quite tempting for a lot of them. Because to say, well, we put this in our, you know, our deep green cohort, or ESG core or whatever it is. And then someone says, 'Ah, but I see that's got Tesla and I don't like Tesla for these things, or I just had the boohoo problem' or whatever it may be all the all the stories that we all know, it's phenomenally fast moving, it's phenomenally difficult. And it's also very, very emotionally charged for investors that care about it. One of the things that that we find, as we've taken a look at it generally is that there will be particularly for intermediated investors with an advisor taking care of them. I don't I don't mean to give the game away. And it's a terrible generalisation. But there's characters in the IFA [independent financial advisers] world who really, really don't have a lot of time for all this kind of stuff. And I suspect that that's replicated with a lot of investors that we're not hearing about.
So there'll be a there'll be a bell curve, right. There'll be a decent sized cohort that just aren't motivated by ESG. They'll be highly highly motivated people. And that's where the fund industry really in a retail sense at least runs out of road. Because unless you can almost create infinite share classes with slightly different investment choices, and each one depending on exactly how I feel, then the idea of centralization, of efficiency, of keeping costs down.. centralised investment propositions for IFAs as well where it's cookie cutter, but but hopefully in a decent way that goes out the window with that. So that's your kind of wealth management territory. In the middle, probably, we end up with some kind of scoring mechanism, some kind of synthesis that says, look, the scores are three on JB's, 'green-ometer', you know, or whatever the hell it is. And as part of a fact find an intermediary says, Listen, you can have zero, which is, you know, we sacrifice baby kittens, drain their blood and drink it before making asset allocation decisions.. Right up to 10
JB Beckett 16:03
Sounds like something from the Crypt?
Mark Polson 16:06
..right up to 10, where we praise Gaia, and you know, dance around in sandals before we before we do anything, and you can just choose. So it probably ends up there that middle one, a platform can deal with; the one where nobody gives a damn, they can deal with that as well. What they can't do so easily is host these kind of mass personalised preferences, it's starting, there are one or two things that can do it that are starting to try and do it probably can't do that well yet. And maybe, you know, give it 10 years tech might have moved on to help that happen in this kind of framework. But it's a really tricky one.
JB Beckett 16:48
Absolutely. And I think you know, because of the greenwashing that we can see in the industry, and I do believe it to be endemic to our industry right now. It will give rise to probably one of the greatest inefficient periods of investing. When we look back, it's going to be on a level with the .com bubble. That this is an incredibly inefficient period. Whereas what I see from platforms, as purveyors of tools and effectively a supplier of services, I think is how they see themselves is that they they just facilitate. And there's almost a degree of nihilism, I think in finance, about these big issues.
Mark Polson 17:28
Yeah. And it's really interesting. So there are there are absolutely platforms who say Listen, it's none of our business pal, your individual preferences can really militate against the way the whole industry stitch together. And and if we believe that one of the cornerstones of giving good investment advice, which is different to financial planning, good investment advice involves a really good conversation about risk and ensuring that the portfolio delivered has got at least a nodding acquaintance with the risk requirement, the capacity for loss, and the risk tolerance of the individuals, three elements. If the client says, Yeah, but solar panels on primary school roofs is really where I want to be, and why my scale only goes up to 10 pal. And that's like 150,000.
Or I read about this really, really interesting thing with geothermal heat or whatever. And before you know it, what we've actually done through trying to accommodate client preferences and requirements, is we've created a bunch of kind of unregulated, hyper high-risk investments.
JB Beckett 18:41
I've got a few great guests coming onto the show later in the season who are knee-deep in those issues. For me, what I think it exposes Mark is that our industry was always based on the idea of pooled models, herding investors together into fairly standardised answers. And of course, that rubs completely against individuality of areas such as sustainability and ESG. And that's why we're having so much trouble.
Computer 19:15
Rapid fire round.
JB Beckett 19:16
First question, Bull or Bear?
Mark Polson 19:19
Bull
JB Beckett 19:20
Bogle or Buffett?
Mark Polson 19:22
Bogle,
JB Beckett 19:23
Prophet or planet?
Mark Polson 19:25
Planet
JB Beckett 19:27
Divest or engage
Mark Polson 19:28
Engage
JB Beckett 19:30
Lower cost or better value?
Mark Polson 19:32
Lower cost
JB Beckett 19:34
Supertankers or boutiques?
Mark Polson 19:36
Supertankers
JB Beckett 19:39
Star managers or team players?
Mark Polson 19:41
Team players,
JB Beckett 19:43
Public or private
Mark Polson 19:45
Public
JB Beckett 19:46
High growth or stable income?
Mark Polson 19:48
High growth
JB Beckett 19:49
Socialism or free markets?
Mark Polson 19:52
Socialism
JB Beckett 19:56
if you could pick a number between 11 and 40
Mark Polson 20:00
24
JB Beckett 20:01
Question 24
Consensual or contrarian?
Mark Polson 20:05
Contrarian
JB Beckett 20:05
You have survived the new fund order Mark Polson, it's been a pleasure as always to be chatting. And thank you very much again for joining us.
Mark Polson 20:14
Thanks for having me and Oceania has always been at war with Eurasia. Just keep that in mind.
JB Beckett 20:22
That's a great in-joke for the 1984 listeners. Thank you very much Mark Polson.
Please don't forget to like and share and subscribe you know, click the subscribe button, a new podcast every two weeks with a new guest. Stay tuned!
Computer 20:35
JB opinion.
JB Beckett 20:37
In the obtuse techno-soup that is the internet and social media verse.. deriding our industry is easy. we collectively attack the regulation, the regulator, active management, greenwashing, and value..
Previously I have noted the imperative of clear communications and steering the public will so to speak and pure communication, pervert and distract the consent of investors. Cynicism plays to the contrarian, the resistance, the mob rule and the truth itself becomes controlled by the frenzy. It feeds off social media, and advisor community and fund selectors are no different in this regard. Confined as the are to their pandemic bunkers, they appear to be carrying both old cynical baggage in the form of ESG as well as some new issues. Case in point being the assessment of value regime and greenwashing. We need to better understand why there is cynicism amongst advisers and fund selectors if ever we are to try and improve.
Whichever fund jurisdiction you find yourself in, which markets, which country these issues commute across borders, and we can see that common themes of centralization, transparency, and efficiency, as well as environmental social governance are universal. Fund platforms as a form of technology are there to improve the lives of investors and make the job of fund selectors easier, we have to ask ourselves Citizens is do they?
So Citizens, let's talk about GameStop. Fundamentally, I think the biggest mistake the industry is trying to make is to comprehend what's happening on Reddit from a point of finance, it is far better to look at what's happening on GameStop. from a sociological point of view. This is about public revulsion to what it perceives Wall Street doing what it perceives hedge funds doing. If you stop to actually watch the original Roaring Kitty bull case for GameStop, now this is a straightforward stock pitch. Keith is talking about the company, about its valuation, about its fundamentals, about its earnings stream, about its restructuring, about its business model. Now whatever investors then took from that, and you know, we could talk separately about whether shorting is a parasitic part of society, a parasitic part of the market, what I think is then subsequently happened is that this idea of rebellion, subsequent investors have grouped together and they have weaponized the stock as a means to attack the hedge funds..
It is no longer about, Roaring Kitty's original stock idea, it's about putting it to the man. And that is a worry for the industry and I think it has to be a worry for society, because the capital model is not necessarily the great basis for protest. Albeit it is proving to be quite an efficient one.
The thing that has been missed in the public media is the sheer interconnectedness of our industry. So everybody is affected by this. Indeed, when they attack hedge funds, you know, average investors sitting inside pension schemes are being attacked by these actions. So that perhaps indicates a generational gap between those who are older and have more to lose sitting in pension funds, and those who are younger, who have very little in the way of long term savings, and indeed, they have rebelled from the traditional savings model. The interesting thing that happens next is what regulators then do with the direct stock platforms like Robin Hood. These social media behaviours have been occurring now for a long period of time on the main social media platforms. They are a form of protest, and now we're starting to see that protest being weaponized into financial markets.
A big thanks to you, dear listener for tuning in, brought to you by my sponsor, Allianz Global Investors and a warm thanks to today's guest. Legally, I am compelled to remind everyone that all views of this podcast are of course independent and do not belong to any affiliation or organisation. Just in case that was in any doubt. Tune in for the next podcast every two weeks from..
Computer 24:54
The new fund order..
JB Beckett 24:55
Please subscribe, share, like and comment. Let me know what you think. and what you like covered in future episodes. Till then stay safe and keep it Left-field..
Transcribed by https://otter.ai
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