Another Royal Mail bargain

6 min read

I enjoyed yesterday a delightfully long lunch – a bit like the old days except for the fact that nobody had a couple of gins and tonic to start with, no heavy claret with the steak, no dessert and not as much as a single glass of port with the coffee at the end of it. My companions were Bill Blain, my fellow scribbler from Mint Partners, and an observer of all matters City of some repute who might prefer to remain anonymous.

It was very jolly and, as all such lunches, we spent most of the period bemoaning the way in which regulation is strangling our industry.

The regulators – and their political masters – seem to behave ever more like the road safety lobby. Cut the speed limit to 70 mph and road deaths decline. Cut it to 50 mph and they decline again. At 30 mph they’re even lower. At 10 mph they’re next to zero and if you lower it to 0 mph, believe it or not, nobody at all gets hurt. Practical? Not their problem and not what they get paid for.

Between the three of us, we identified and named any number of situations which are now occurring and point towards the seemingly wilful destruction of our industry.

There is little argument that the British car industry was put out of business by the unions (now largely de-unionised, it’s booming again) and it would appear that the banking industry is going the same way while under the cosh of a civil service which has no roots in or understanding of what banks do and why.

In the afternoon, I spoke with a friend who has been appointed treasurer of a small bank with none of the legacy issues of some of the big guys but with aspirations to grow in the conventional retail space so beloved of the political classes. Though decades old, the bank has remained very small and has specialised in servicing high net worth individuals, albeit not in the often controversial wealth management space. Hence the bank is regulated in a lighter fashion than the big boys.

Thus, a new management team has been brought in with the aim of gearing the place up a bit. Obviously the regulator needs to be consulted but I understand that management, made up of sound, middle-aged professionals with many decades of relevant experience and of unquestionable standing, was staggered to find itself visited by a bunch of sub-30s, all of whom had evidently gone straight from their respective degree courses to a job with the regulator and who had never lent a cent to anyone other than the kid brother or sister.

There they sat, looking suitably smug, while pontificating on how the bank had to be run. Isn’t it maybe time to update one of those old bon-mots to “Those who can, do. Those who can’t, regulate”, while maybe adding the less often used third part which would now be “…and those who can’t regulate, teach regulators”.

Back to the lunch where another topic was that of benchmarking and its effect on the directional dynamics of markets. Is it right and justifiable that the default position for investment managers should be “index neutral”, thus immunising them from directional choices and hence, for better or for worse, placing the burden for directional losses on the fee-paying customer. Would Joe SixPack, when he buys a bit of a fund off his IFA, even be aware that the man or woman who manages his or her money has no fundamental need to consider direction? Isn’t it funny how it’s the fund manager’s genius when long in a rising market and the rest of the world’s fault if still long when it goes down again.

We know that customers sign up to approved risk profiles when they open accounts with wealth managers but when I see what my then 80-year old Dad signed up to at UBS makes me tremble. Until then he’d never had more than a few deposit accounts and a handful of Marks & Spencer shares which never ever would have qualified him to agree to a medium-risk investment profile in the vein of UBS’s model portfolios. They might just as well have been offering him a cup of polonium-spiked tea in Russian.

I came back to the office feeling very jolly to find that Royal Mail’s 10 year €500m bond had a book of €4.3bn. It was priced at the tight end of guidance – no surprise there – at MS+108bp, and promptly tightened a further 10bp on the break. It opens this morning going on for two points above re-offer.

Given the furore over the mispricing of the IPO, one would have expected the lead managers to be a bit more circumspect when it comes to pricing the deal correctly.

How much will the victorious heads of syndicate get paid in their bonus packets for generously giving away €10,000,000 of Royal Mail shareholder’s money simply because they didn’t have a clue how to price the deal correctly? Answers on a postcard please.

Bring back competitive price bidding for underwriting positions and that will very quickly be rectified. Too much mumble swerve for my liking.

Anthony Peters