Tora: Which is the riskier - oil and mining or banks?
During my lengthy career (49 years in the investment business and still counting), I have worked for three banks. The first, a modest sized merchant bank, is sadly no longer with us, having fallen victim to the collapse of the Icelandic banking system.
Number two was the mighty HSBC, which took over the firm for which I worked in the wake of Big Bang nearly 30 years ago. I learned from that experience that banks operate to a different agenda to many other financial institutions.
So when nearly two decades later the employer to which I had escaped found itself on the receiving end of a bid from another major domestic bank, I harboured no false illusions. A relatively brief period of confirming what I knew all along to be true saw me jump ship again to a more independent minded firm. But, believe me, I take no pleasure from the crisis currently enveloping our major banks. Few, if any, will profit from current events.
The banking sector was, until a few years ago, the biggest component of the FTSE 100 Share index. It was also an important source of income for dividend-hungry investors. Indeed, its fall from grace unsettled the performance of more than a few UK income fund managers.
Today, its influence in market performance terms is massively reduced. Recent events suggest that it will have a declining influence in economic terms, too.
The power that banks have exerted in the past is now clearly under threat. While I personally did not particularly enjoy my brief periods of working within these financial leviathans, I did at least understand why they operated as they did.
Two elements within their business model took precedence, so far as those of us working in the personal advice and management sector were concerned - scaleability and reputational risk.
You might well wonder at the second imperative, given the way in which reputations have been so damaged through a series of unprecedented - and largely unconnected - disasters. But if you are concerned that rogue action might bring the organisations’ good name under threat, then you are more likely to demand greater central control of decision- taking. In turn, this harmonising of approach generates the economies of scale that large institutions require to maintain profitability.
Such a culture can be considered stifling by independent spirits, which is why many smaller organisations are populated by those who have received the excellent training that these businesses can provide but prefer to work in a less constrained atmosphere.
There are no wrongs or rights about this - just a difference in approach. Except that the enhanced power that these organisations have accumulated has been concentrated in few hands and these have not always acted in a manner that wider society considers appropriate.
There is, of course, no turning back. Perhaps a new Glass-Steagall age will emerge. Maybe banks will return to allowing their managers to build proper relationships with their customers that endure.
Time will tell but the weight of opinion is now so heavily against these financial giants that it is hard to see them regaining their past glories. Which means, of course, that we are unlikely to see them dominating our benchmark index again.
We are, fortunately, a very adaptable race. No sooner had banks been forced from the top spot in market domination terms than a flood of new mining ventures, many of which had little connection with the UK other than a listing on the London Stock Exchange, thrust resources to the top of the tree.
Which is the riskier - oil and mining or banks? I imagine those building portfolios find this a more difficult question today than it was a decade ago.
Brian Tora is an Associate with investment managers JM Finn & Co.
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