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Agents v. Principals

November 5, 2011

As pointed out by Dr Paul Woolley of the Paul Woolley Centre for the Study of Capital Markets Dysfunctionality at LSE, fund managers and banks (Agents) acting for major investors such as pension funds (principals) do not have identical interests to their principals. The agents have better information but do not necessarily use it primarily for the benefit of their clients. He argues that this is a major contributing factor to asset bubbles.[Woolley 2010]

He argues that the solution lies in the hands of the principals themselves and offers the following advice:

1. Adopt a long-term approach to investing based on long-term dividend flows rather than momentum-based strategies that rely on short-term price changes.

2. Cap annual turnover of portfolios at 30% per annum

3. Understand  that all  the  tools currently used  to determine policy objectives and implementation are based on the discredited theory of efficient markets

4. Adopt stable benchmarks for fund performance

5. Do not pay performance fees

6. Do not engage in any form of “Alternative Investing”

7. Insist on  total  transparency by managers of  their strategies, costs,  leverage and trading

8.  Do  not  sanction  the  purchase  of  “structured”,  untraded  or  synthetic products.

9. Work with other shareholders and policy-makers to secure full transparency of banking and financial service costs borne by companies in which the Giant funds invest

10. Provide  full disclosure  to all  stakeholders and  for public  scrutiny of each fund’s compliance with these policies.

Does your pension fund follow this advice? Before contacting the trustees, download Woolley’s advice for free. It is part of ‘The Future of Finance: the LSE Report’, 2010, downloadable at

Paul Woolley, who has wide experience in stockbroking and fund management as well as academia, is understandably (given the state of English libel law) reluctant to name names. However some idea of what went on in the USA can be gleaned from a report published in April 2011 by the United States Senate, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Committee on Homeland Security and Governmental Affairs, entitled “WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse” – downloadable at . It is sufficient to read the Executive Summary.

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