Slow Finance

Slow Finance, by Gervais Williams, Bloomsbury, London, Sterling £20, 183 pages

There’s food for thought in adopting the principles of the Slow Cooking movement and applying them to making investment decisions. Typically the Slow Cooking aficionado chooses ingredients carefully, preparing them the night before, cutting meat into small chunks, trimming the vegetables. In the morning they go into a vessel which cooks them slowly at a lower heat, allowing all the juices and flavours to blend. In the evening the smell of a delicious casserole wafts out from the kitchen. This makes a much more appetising prospect than zapping an “unidentified frying object” in a microwave, as celebrity chef Keith Floyd used to say.

Successful UK fund manager Gervais Williams has adopted this domestic metaphor to produce a recipe for more sustainable and profitable investment. The word slow is important. “Bide your time while waiting for that investment opportunity, know that it might be a long wait”.

In a book which is part extended analysis, part commentary, and part exhortation, he looks at the wreckage of boom-and-bust economies, and especially how financial markets have disconnected from the real economy, and the savers and investors who provide the funds.

Noting that the major problems in the finance sector have not been solved, and so are likely to recur (albeit perhaps in a different fashion), and likely restrictions on credit in the future, leading to lower growth rates, he argues that the continuing disconnect between savers and their investments requires a very different approach to finance.

The kernel of the argument is as follows. The previous excessive complexity of many financial products will drive a desire for investment simplicity. The overuse of debt will be replaced with the desire to avoid instability associated with excessive credit. The move away from hoping to get lucky on trading gains in the next high-growth service or commodity will be replaced with a renewed interest in good and growing dividend income. Fast strategies based on uncertain market liquidity will be replaced by a renewed emphasis on compounding returns over time. After decades where bigger seemed better, investors will readopt an interest in smallness and stock specific selection.

You can see the shadow of the Sage of Omaha hovering in the vegetable section of the supermarket, mulling over the offerings, examining cabbages and runner beans before going the checkout, avoiding the frozen food section.

“The appeal of Slow Investment principles lies in the fact that they reconnect the investor and the ultimate purpose of investing. They hand more control back to the investor. They offer scope to re-invigorate companies that have suffered reduced access to capital during the credit boom. They can help boost the domestic economy and local employment. But the Slow Investment strategy still offers the prospect of premium returns. Investing in value, in smaller domestic companies, and high dividend not high-growth markets and in companies with good and growing income are all strategies that have delivered over the long term.”

With deleveraging, credit demand will likely grow slowly for an extended period, and world economic growth will adjust to a new low growth path. With the close correlation between world economic growth and the performance of larger companies (which Williams explains succinctly), it is likely that overall stock market indices which are dominated by large company shares could prove disappointing in terms of investment returns for many years.

The time may have come again for small and medium-sized businesses, particularly those investments with intrinsic value. Williams however is aware of the advantages (and the disadvantages) of diversification, and still sees a place, carefully managed, for some investment in larger businesses.

Interestingly, when it comes to emerging markets, and China in particular, he is quite negative. He draws upon a research note which questioned China’s rapid GDP growth. [China: A Public Sector Boom, Andrew Hunt, Andrew Hunt Economics, 2011.] The conventional, generally accepted view, is that China’s rapid growth has been based on its massive export sector. In an analysis which Irish readers may find uncomfortably familiar, Hunt highlights the impact of the internally driven, local government-led construction boom, funded by credit. Major infrastructure projects and even whole cities have been built, although many are barely being utilised.We may be witnessing a bubble in its growth phase.

So caveat emptor on China, but how does the canny investor know when to invest, and when to hold back?

“Watching the discount on [UK] smaller companies investment trusts would be a good way to monitor developments.” Extrapolated this means that most major institutional investors put minimal or no funds into smaller companies during the credit boom. With more limited returns available from larger companies in the new credit-restricted era we are in, some of that investment flow will return to smaller companies, particularly investment trusts. When that starts to happen – evidenced by a reduction in the discount (versus the underlying assets values) – that is a good time to consider investing in the area.

Although written from a UK perspective, all investors and savers will gain from reading this nicely presented book, – best savoured over a steaming cassoulet with fresh raw celery sticks and a generous glass of organic Bordeaux.

Richard Whelan is a commentator on geopolitics.

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