Hello to All!

This Blog is dedicated to a very special course concerning the Mecca of the finance world: Introducing the City.

London is calling so lets check it: http://www.introducingthecity.com/


To get a real feel of what happens on Introducing the City, please take a look at a snapshot from one of the delegates on March 2007 course:

May 10th
'Derivatives were born as financial instruments in the 12th Century when European trade fairs sellers started to sign contracts promising future delivery of the items they sold', said Cassim Mangerah from Centrica Energy in the ninth session of Introducing the City. I did not have the guts to disagree with Cassim then, but I believe he was wrong. If we go back to Bible, we might find in the Book of Genesis that Jacob purchased what was effectively a call option on marrying Laban's daughter Rachel in exchange for the premium of seven years of hard labour. It was also the first default on a derivative as Laban did not actually fulfil his contractual obligation.
Thousands of years later, instruments whose value depends on the price movements of an underlying investment changed the face of finance. They now play a huge role in managing risk, and a modern company can barely get by without using them. But given the complexity involved, the general public is likely to hear about derivatives only when they lead to stupendous losses. Derivatives scandals usually involve a good mix of corruption, greed and sheer human stupidity, which always makes a great front page story. The debacles at Metallgesellschaft and Barings Bank have shackled derivatives with negative connotations, and investment guru Warren Buffet cemented this perception by famously dubbing them 'financial weapons of mass destruction'. Nevertheless, it seems that there is little alternative to using derivatives. Take Jacob, who even after being swindled by Laban, chose to enter another seven-year option contract that finally resulted in his marriage to Rachel.

May 3rd
Some people might argue that an evening in the company of an insurance salesman is a fate worse than death. Some might even claim to know this from personal experience. What is certain is that insurance has an unenviable reputation as being the most boring of financial subjects. Having been woken up numerous times on Sundays at 8:30 in the morning by a guy from a life insurance company knocking at the door, I was also far from interested in this subject. However, I must confess that the 8th session of Introducing the City on Insurance and Risk Management completely changed my views.
After the presentation by David Wilson from Price Forbes, insurance appears to me clearly as an integral part of the modern economy. Insurance provides predictability for both companies and individuals - and without such predictability, it would be impossible to achieve sustainable growth. It is a safety net of underwriting agreements that the business world is based on. As Martin Russell pointed out, if this system were instantaneously destroyed, the whole economy would tumble down.
It is interesting that today everyone can receive profits (and take risks) associated with the insurance business. All you need to do is to invest in catastrophe bonds, or so-called cat bonds, that will partly transfer to you both risk and reward. For instance, you can bet against the possibility of a disastrous flood in the City of London and Canary Wharf. As The FT reported last month, flood bonds were issued by an insurance company that wanted to pass some of its risk on to investors in order to remain solvent were such a disaster to occur. Unless triggered by a catastrophe, a cat bond will pay higher interest than comparably rated corporate bonds. Investors are also attracted to cat bonds because, unlike most financial instruments, they are largely unaffected by economic or stock market conditions. Therefore, they provide greater diversification.

April 26th
A great chess grandmaster Jose Raul Capablanca made no mention in his autobiography of any games drawn or lost, because he 'thought them inadequate for the purpose of the book'. Similarly, in a prospectus of a managed fund, it is unlikely that you will find details of financial losses that occurred in the past. Sometimes the prospectus will only give you the statistics of the last couple of years where everything looks great. But, as Lord Latymer from Cazenove Capital pointed out in the seventh session of Introducing the City, fund statistics are practically worthless if they do not represent at least five years' performance. Otherwise you will not be able to see if the results shown by the fund were due to the managers' competence, or if the underlying bull market did the job for them.
It is not surprising that fund managers who can outperform the market year after year are in great demand all over the world. Certainly, the likes of Warren Buffet are rare. Kim Yates, a professional head-hunter from Principal Search, noted in her presentation that there are very few people in the world who constantly get it right. Such people are sometimes referred to as 'high alpha' managers. 'Alpha' is a term to describe outperformance of a fund relative to the benchmark. And in relation to the skills of a fund manager, 'alpha' is probably something not unlike 'the force' from the Star Wars movie. In other words, it is incredible intuition and the ability to spot market moods and react on them before anyone else does. However, we should remember that, as Capablanca also said, 'a good player is always lucky'.

April 19th
Have you ever heard Garry Kasparov talking about chess or Homer Simpson talking about doughnuts? That was the way Nigel Wellings from Clifford Chance was talking about mergers and acquisitions in the sixth session of Introducing the City - with passion and perfect knowledge of every detail. In the first part of the session Andre Sawyer from MergerMarkets provided a good theoretical background, but it was Nigel who presented the anatomy of a real life public bid. As a number of high profile takeover deals hit the headlines (Alliance Boots and ABN Amro to name a few), this fascinating insight into the intricacies of M&A was particularly valuable. I especially liked the case study on Banco Santander/Abbey National takeover deal - it gave a pretty good picture of the stress under which those involved in the bidding process operate.
Cunning takeover strategies and elaborate techniques to thwart hostile bids are probably the most exciting subjects in business world. They make perfect scenarios for Hollywood blockbusters. Take, for instance, the scorched earth defense - this M&A term even sounds a bit like a movie title. It basically involves liquidating the most valuable assets, so-called 'crown jewels', and assuming crippling liabilities just to make the company completely unattractive for corporate raiders. It seems that managers applying this kind of tactic draw their inspiration from Sun Tzu or Carl von Clausewitz. However, in the business world a side-effect of this defense is that the company becomes unattractive not only for predators, but for shareholders also. Certainly, if you destroy your own company just to avoid takeover, it does not make you look very smart.

April 12th
Just when you thought you understood equity capital markets, along comes Andreas Loizou and adds something new to the picture. He illuminated for me the value of Beta, the statistical measure of relationship between historical performance of a stock and the underlying market, as an instrument in portfolio correlation analysis. Using Beta, you can get a pretty clear picture of the extent to which one investment in your portfolio will track another, and diversify your investments accordingly. I did not have to wait long to apply this knowledge - the FTSE 100 competition started in the fifth session of Introducing the City, and I took Beta into consideration while choosing my 5 stocks.
In Andreas's vivid account of share markets, I especially liked how he managed to illustrate theoretical concepts using examples from real corporate life. He knows this life inside out - before focusing on training, Andreas was an equity analyst in one of the world's largest global investment banks. It means that where you see a pair of inordinately expensive luxurious shoes, he sees an opportunity for leveraged buyout of a manufacturing company.
Leveraged buyouts led on to the role of private equity in the economy. Private equity is usually portrayed by the media as a ruthless world of vulture capitalism inhabited by Wall Street's Gordon Gekko type of characters. However, as Andreas pointed out, there is ample evidence that these guys make companies more efficient, provide better returns for millions of investors, pensioners among them, and, contrary to popular beliefs, create jobs rather then cut them.
It seems that private equity faces a number of serious PR challenges as it increasingly becomes a matter of concern to regulatory and legislative bodies, most notably in the UK and the US. The buyout boom that affected a host of household names, and enormous profits, largely explained by cheap debt, have moved the hitherto secretive industry into the public spotlight. But despite this newly acquired public presence, the industry appears to remain insensitive to major PR issues, hence the lack of public understanding.

April 5th
If you ask me, bonds do not look nearly as sexy as equities. Investing in fixed income securities seems rather dull - certainly, it will not make your heart beat faster when you read company news, unless the news is bankruptcy. There is not much left to guess as interest and principal are received on a pre-arranged basis. In addition, from the economic point of view, long-term investments in bonds might seem a bit irrational as equities offer a much higher return that appears disproportionate to the risk involved. The best economic minds of the world struggle to find a solution to the so-called 'equity premium puzzle': it has been observed that over long time periods the difference in returns between bonds and equities cannot be explained by different levels of risk.
However, debt capital markets are not as boring as they first seem. Ian Weitzel from Reuters made that clear for me in the fourth session of Introducing the City. Indeed, if higher volatility and higher returns is what you want, the secondary market with its exposure to the changes in interest rates can offer it all. Bond market history also has plenty of exciting stories, and Ian mentioned a couple of them. My favourite is the one about Michael Milken, an American financier who revolutionized the industry in the 1980s. He developed the market for high-yield debt, or junk bonds, and thus helped to fuel corporate raids. Some argue that Milken provided access to capital for small companies and revitalized the industry. Others nicknamed him 'The Junk Bond King' and say that he became rich by destroying American businesses. In his defense, Milken once pointed out that 'people forget that today's junk is often tomorrow's blue chip'. Milken eventually went to prison for violating market regulations, but his supporters saw it as a result of a plot by business establishment.
The warning 'Please drink responsibly' on a beer bottle is much easier to ignore than market regulations - I proved it myself at the drink reception that followed the fourth session of Introducing the City. And it was as interesting as the session itself to chat with other delegates informally and hear so many stories of personal City experiences.

March 29th
Large groups of people can be smarter than the smartest people in them - so argued New Yorker business columnist James Surowiecki in his book The Wisdom of Crowds. What I learned about currency futures in the third session of Introducing the City seems to be a perfect illustration of this phenomenon. As Nigel Green said, year after year future contracts on currencies prove to be a much better prognosis of exchange rates than forecasts made by legions of individual experts. So it turns out this FT page with future prices that took us a couple of minutes to find during the last session is collective wisdom in its essence. And it seems one can make use of it even if one does not manage any funds but their own. Ever tried to second-guess where currency exchange rates will be heading by the time you go for a holiday abroad? The next time I plan to go to, say, Spain I will know if I should buy euros straight away or wait for a couple of months - chances are the futures market gets it right.
Sometimes, when it comes to money, an individual can outsmart very large groups of people indeed. Foreign exchange market gives a remarkable illustration of that, too: George Soros effectively redistributed wealth between the government and himself when he decided to sell short about $10 billion worth of pounds on Black Wednesday in September 1992 (still known in Mr Soros' company as White Wednesday). Legend has it that Soros was the one who broke the Bank of England. But in the last session of Introducing the City Nigel made me look at the dramatic events of Black Wednesday from a different prospective. He stressed that Soros' decision was only the tip of the iceberg particularly noticeable to the media. In fact, he was not the only one who saw the weakness in the pound and acted accordingly - a number of other people responsible for pension funds money made similar decisions.

March 22nd
'Normally wrong' - that was how Paul Temperton characterised inflation forecasts made by the world's leading economists over the last decade. This evokes an old joke: 'Why do we need economists? In order to make weather forecasters look good!' Really, after Paul's account of global economy in the second session of Introducing the City, economics seems the most glamorous of all sciences, but the most speculative, too. If physics is the foundation of a skyscraper of modern science, chemistry and biology share the ground floor and other disciplines follow in the order of increasing remoteness from earth, economists habitually take the penthouse - with a plasma TV and cold beer in mini-bar.
Paul's lecture was preceded by a guided tour around the Square Mile, which proved to be the highlight of the whole programme. It is not that I did not enjoy our visits to the London Metal Exchange and the Bank of England, but for me, Lloyd's headquarters in One Lime Street was the best part of the tour. Shame on me, I did not really listen to our guide talking about the intricacies of the insurance market. But how could I miss exciting photo opportunities that this building, normally closed to the public, had to offer? So there I was, running around with my camera in search of nice shots - and the view at the Underwriting Floor from above was breath-taking:
The tour turned out to provide revealing insights not only into the modern life of the City but also into its medieval origins. It is especially true about our visit to Guildhall, which has been the ceremonial centre of the City for several hundreds of years. And it is still home for more than a hundred of trade associations, so-called Livery Companies: the 13th century Worshipful Company of Fishmongers is found here side by side with The Worshipful Company of Management Consultants.
We wondered with my colleagues over lunch the other day why livery companies called themselves 'worshipful' and what it was supposed to mean. One might think that it was just a corporate buzzword back in the 13th century, like "upskilling" or "rightsizing" that make normal people shudder today. In fact, 'worshipful' was just an equivalent of 'honourable', and, surprisingly, had no religious connotation (thanks Wikipedia). But of course, like any medieval institution, liveries could not be completely divorced from religion. It suffices to look at their mottos to understand that. First livery companies of the City were established seven centuries before 'Beyond Petroleum' started to sound smart enough for a corporate motto. Back then businesses opted for more solid statements, like God Is Our Strength. Imagine a modern company other than Vatican Inc that formulated its corporate mission simply as Give Thanks To God - what would their shareholders think of that?

March 15th
Frankly, until yesterday I was not quite sure whether Introducing the City would be any good for me. I know quite a lot about the UK financial system and read the salmon-coloured FT pages religiously every morning. But with my knowledge mostly coming from books, what I wanted from this course was an insight into the real-life financial world of London. After the first session, I believe there are people in this programme who can provide such an insight, and for the first time in my life I will be learning about the City not from academics, but from people who actually ARE the City.
I was genuinely impressed with Martin Russell. This loud, charismatic man is a 100% industry practitioner. I asked him after the course what his academic background was, and the answer was a bit of a shock: none at all. He threw himself into the whirlwind of financial world straight after his time in the army, and all he knows he picked up from his work in the City over the decades. So here is good news: it is unlikely that our Course Director will be boring us with abstract economic models and one page long mathematical equations. Certainly, Martin Russell is not one of these guys, not uncommon in academia, who do not know what they are talking about and make you feel like it is your fault.
If you ask me, little revealing was said about the City in the first session. But the main goal of this session was to set the scene; it was the introduction to the introduction, as Martin put it. Besides, starting with the basics was a good idea, taking into account how heterogeneous the audience was. There are economists and financial analysts among us, but there are also IT, HR, marketing and advertising pros for whom financial jargon may sound like gibberish. Really, for a speaker, this course is one hell of a balancing act. It is a tall order to explain the basics of accounting to people with little understanding of what the word 'liabilities' mean and not to bore the pants off professional accountants.
What really exceeded my expectations was the mid-evening break. Who would have thought that 'substantial refreshments' promised in the brochure would in fact amount to a real supper! While some delegates concentrated on their plates, others took the opportunity to chat with their new classmates. Quite rightly so, since great networking opportunities appear to be one of the biggest advantages of this course, would be unwise to pass them up.