David Cowell: ‘…it’s the size of the fight in the dog…’

by | Aug 12, 2016

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“What counts is not necessarily the size of the dog in the fight – it’s the size of the fight in the dog”   Mark Twain. Presumably this applies to the high number of adviser firm consolidations taking place. Bigger certainly isn’t better when the consolidators achieve the size they want. Is this the reason that the FCA is taking so long to authorise new small firms or is it that many advisers don’t like working for large companies where the only choice for clients is plain vanilla, and are going it alone?

Gosh, what happened? The Dax is officially in ‘bull’ mode, having leapt 20%. The Dow, S&P and NASDAQ all hit record highs. Where next? Some clues below.

The FCA is concerned by authorised firms outsourcing regulated activities to unauthorised firms. The regulator says: “Many authorised firms we have visited do not have adequate input or control over the advice they are ultimately responsible for giving to customers. Does this include using unauthorised investment research firms?


China’s latest trade data has pointed to a further slowdown. A spokesman for the National Statistics Bureau said on Friday that the country’s economy was still in a period of adjustment and facing downward pressure.

UK makes third highest per capita net contribution to the EU. Bild reports that, according to new figures from the European Commission, Germany makes the fourth highest per capita net contribution to the EU at €176 with the UK at €178, the Netherlands at €219 and Sweden at €226. Slovakia is the highest net recipient per capita at €571 followed by the Czech Republic at €541, Hungary at €470 and Greece at €454. No wonder they don’t want us to leave.



Standard Life’s chief executive has said the firm sees financial advice as “an increasingly important offering given the democratisation of financial risk”. Democratisation? Two things: 1) What the hell does that mean in this context, and 2) does it mean that they as well as Aviva are going after IFA clients?

The Bank of England’s latest bond-buying programme hit a wall on its second day of operations as investors refuse to sell their long-dated government bonds. Pension funds and insurance companies – which invest in long-dated UK bonds to match their liabilities – rejected the central bank’s attempt to buy £1.2bn of long-dated gilts despite receiving above market level offers. So, the economists show yet again that their expectations of standard behaviour don’t match real life. They obviously didn’t take their thoughts the extra step and ask themselves what the institutions were going to buy with the proceeds when the pensions and bank regulators insist on them owning shedloads if gilts.

The extent to which unconventional measures are driving the valuations of bonds and other assets is concerning. The fact that the ECB now owns over 25% of its government bond market, the BoE 28% and the BOJ over 30% suggests that their influence on bond prices has been considerable. The compression of bond yields is causing distortions in a wide range of other asset prices too. Investors seeking an income have been gradually squeezed into a shrinking pool of often riskier assets over the last few years. This process has accelerated sharply with the latest falls in longer-dated bond yields towards 0% or below. The refugees have bought property and infrastructure assets, junk bonds, insurance and derivative strategies and what are seen as the ‘safest’ equities (stocks with low volatility and historic dividend reliability like tobacco and utilities have strongly outperformed the rest of the global equity market). With yields at such low levels, the demand for such assets is unlikely to reverse soon but prices are distorted and in some cases the ‘bond proxies’ are relatively illiquid – some investors may find themselves unable to reverse out when they want to.


Zero or negative bond yields also have Implications for bank business models – a major part of banks’ profit has historically come from paying low short-term interest rates on deposits and lending out at higher long-term rates. Now, with long-term (10yr) interest rates at zero, this interest spread is no longer available. A less profitable banking system will be less inclined to take risk and to lend. While very low interest rates would seem to make the large pile of debt sustainable, some of it matures and needs to be refinanced each year; if creditors lose their appetite to roll over the debt, a financial crunch can occur. So monetary easing could now be at risk of damaging the financial system. See comment two paragraphs above.

I had a problem yesterday, so I called Eric, the 11 year old next door, whose bedroom looks like Mission Control and asked him to come over. Eric clicked a couple of buttons and solved the problem. As he was walking away, I called after him, ‘So, what was wrong ? He replied, ‘It was an ID ten T error.’ ‘An ID ten T error ? What’s that in case I need to fix it again?’ ‘Write it down,’ he said, ‘and I think you’ll figure it out.’ ? So when he had left I wrote down: Id10t. I’ll get the little b….

Have a good weekend.


David Cowell, Director, Myddleton Croft Investment Managers, Leeds




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