Leading academic questions Kay Review on portfolios, fiduciary duty, mandates

With the UK government set to issue its response to the Kay Review later this month, a leading investment academic has questioned some of the review’s main recommendations.

Oxford University’s Gordon Clark says the government-sponsored review “appears muddled” on a number of accounts, including concentrated portfolios, its focus on reviewing the concept of fiduciary duty and its lack of focus on asset owners.

While enthusiastic about the report’s agenda, Clark writes that he is surprised by some of its underlying assumptions. He suggests it is “only half the story” as it skates over the role of asset owners in short-termism.

The comments come in The Kay Review: A Guide for the Perplexed that was presented at the PRI–CBERN Academic Network Conference at York University in Toronto last month.

Clark finds Kay’s recommendation that investors should focus on much smaller bundles of stock “hard to fathom” – and gives three reasons for this. Transaction costs would lead to investors focusing on the largest companies, leaving the rest of the FTSE100 “in the shadows”. Secondly, he argues one of the advantages of large and diversified portfolios is that smaller asset owners can get cost-effective access to global opportunities. And, thirdly, Clark says concentrated portfolios of UK stocks would not be as “efficacious” as investing in third-party provided emerging market portfolios.Clark also takes issue with Kay’s call to review the concept of fiduciary duty, saying it “idealises a 19th-century remnant” from English common law.

But Clark also has some searching comments about Kay on the role of asset owners, saying the economist is “virtually silent” on their roles and responsibilities – one of which is to impose discipline on their service providers. “The most remarkable feature of the Report is its rather cursory treatment of asset owners,” he says.

“Asset owners are implicated with asset managers”

“Many asset owners lack the skill and resources necessary to be effective clients on the demand side of the industry,” he says – adding that insufficient time and expertise are devoted to setting the terms of service contracts. This means many institutions “focus upon ephemeral indicators of short-term performance”.

He concludes: “Standard practices means that asset owners are implicated with asset managers.”

Clark, who participated in a number of meetings of the ‘Friends of the Review’, has published widely on institutional investment. He is the in-coming Director of the Smith School of Enterprise and The Environment and the Halford Mackinder Professor of Geography at Oxford University.

The government will publish its response to Kay – officially the Kay Review of UK Equity Markets and Long-Term Decision Making – in the next few weeks.