July 15, 2013
In glorious sunshine, sitting on the banks of the river Thames beside the bridge at Henley, you could scarcely be in a more quintessentially English place. The muscular rowers haul svelte canoes through still waters, while traditional Venetian-style, polished wooden boats, ‘put-put’ gracefully.
The Union flag flutters astern. Everything is calm; all is quietly efficient and in order. There is neither a fender nor rope out of place. It’s beautiful, if a bit dull – but, then again, dull is often underestimated.
I’ve just had the pleasure of listening to one of Britain’s best and most consistent investors, Neil Woodford of Invesco. Woodford has been doing the same job brilliantly since the late 1980s. He has mastered his craft. He is the UK’s number one fund manager and so it was strange hearing him say that he doesn’t really care about stock market gyrations – the helter skelter that is the diet of umpteen business shows and which keep most moneymen awake at night.
For him, the most important thing is to invest other people’s money in very strong companies. He does this after a long period of reflection and analysis, and he invests for the very long-term. When he deploys his capital, he has quite a lot to use: close to €40 billion.
He takes positions in companies for decades, not just months or years. This steady – some might say dull – approach has paid remarkable dividends over the years.
So, this week, let’s sit back and praise the dull, as opposed to the exciteable. Let’s praise the slow and methodical over the fast and furious. Let’s salute the accumulated return over the fast buck.
One of the companies Woodford has backed is Drax, a large British power plant that provides about 7 per cent of all the UK’s energy. Like Irish power stations, the business is trying to make the essential change from fossil fuels to biomass.
This is an expensive, capital-intensive endeavour that demands lots and lots of money and investors who will be around for the long haul. It is also an absolutely strategic business as, without it, the lights don’t go on.
What is fascinating about the relationship between the investor and the company is the fact that, every time the company has needed to raise large amounts of money, Invesco has taken up 30 per cent of the allocation.
Not just this, but the fund manager has been at the table with the government when plans for the industry were being discussed, making it clear to the government that investors need to make a certain profit to be incentivised to put lots of cash into a business. Otherwise, the state would have to foot this huge bill from the taxpayer, who is already paying for electricity at the far end of the generating process.
This is a slow, thoughtful process involving long discussions with all sorts of people to plan the development of the British energy market over the next two generations. It is an example of using British pension resources to invest in British projects, which should help power our nearest neighbour’s economy into the future. It would seem to be a sensible way of allocating capital, which saves the state money, but uses the citizen’s savings to finance essential strategic projects that benefit many people.
Listening to the power company and the long-term investor talk about making things together, it struck me that this is a remarkably sensible way for a fund manager to manage the fund’s money, and it stands in direct contrast to the histrionics and macho posturing of many in the financial markets, who seem to have scant regard for the actual economy beyond the hourly ups and downs of their share prices.
One of the interesting points that Woodford made wasn’t about appropriate management of companies, but appropriate owners. When asked about the lack of funding for UK start up companies, he made the fascinating and sometimes overlooked point that most venture capital funds have only a three-year investment cycle.
This implies that almost as soon as they invest in a start up, they are looking for an exit. This, according to Woodford, is the worst thing that the management of a small company needs when trying to get a technology from the lab in a university to the point where it is a commercial product that can be put on sale.
The major point he is making here is that, for a country to foster its talent (and that includes a country like Ireland), it needs to have what I might term ‘slow money’ as opposed to ‘fast money’. Like the difference between slow and fast food, slow and fast money offer entirely different experiences.
Fast money, like fast food, is all about the instant hit, the instant sugar-rush that satisfies a short-term need with a short-term fix. In the same way that fast food is filled with all sorts of addictive substances that hook the eater, fast money is also full of all sorts of gimmicks – such as interest-only balloon payments linked to all sorts of targets that suck the desperate company in – so much so that, like the fast-food junkie, the fast money junkie ends up working for the investor rather than with the investor.
Slow money, on the other hand, understands deeply the industry it is investing in. It works in partnership with its company and crucially it hold the asset for years, prepared to understand the ups and downs of the business cycle as long as the company’s management knows what it is doing and have legitimate and achievable ambitions. Slow money, like slow food, involves lots of preparation and lots of deliberation. It is patient but, ultimately, far most satisfying for investor and recipient.
As the global economy takes on more and more risk because cheap central bank money is driving a wedge between rising asset prices and poor economic performance, we would be wise to change our financial diet from fast to slow money. This can be done by the state incentivising long-term investment through taxation policy. But, ultimately, tax can only take you so far.
In truth, the change has to come in the heads of fund managers and financial market players so they see that with money comes great responsibility, and that the best decisions are often arrived at slowly.
As I watch the slow boats meander gently, peacefully and – yes, predictably – up the river, the beauty of the dull and repetitive is there for all to see.