inbusiness issue 17

Issue 17

Ten years strongMilestones from our first decade as Cass Business School

And what’s next?Cass academics cast an expert eye over the future of business

Hollywoodgoes social

Why tweets are the key to the next blockbuster

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InBusiness A decade as Cass – Ten year anniversary edition

Contents 04Ten years on...Celebrating a decade as Cass Business School.

06 Development highlightsAchievements from the past ten years.

08A little bird told meCan Twitter make or break a Hollywood blockbuster?

12Emerging markets Asian countries make up half of the top ten M&A deal destinations.

14Quota, unquotaWill new legislation even up the boardroom battle of the sexes?

16Spend, spend, spendCass research shows how acquisitions could benefit the economy.

20Risk Momentum investing can be a winning strategy, but risky business.

22The next ten yearsCass academics predict the next challenges for their sectors.

26Book reviewsReviews of four new publications from leading Cass academics.

28Big banksIs it worth paying top dollar to the biggest banks for advice? Research suggests it can pay off to pay big.

30Sweet talkingCzarnikow Chief Executive Robin Cave on food, fuel and the sugar trade.

34Opinion pieceGet the most from your piggy bank.

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Cass Business School In2002,CityUniversity’sBusinessSchoolwasrenamedSirJohnCassBusinessSchoolfollowingagenerousdonationtowardsthedevelopmentofitsnewbuildinginBunhillRow.TheSchool’snameisusuallyabbreviatedtoCassBusinessSchool.

Sir John Cass’s Foundation SirJohnCass’sFoundationhassupportededucationinLondonsincethe18thcenturyandtakesitsnamefromitsfounder,SirJohnCass,whoestablishedaschoolinAldgatein1710.BornintheCityofLondonin1661,SirJohnservedasanMPfortheCityandwasknightedin1713.

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InBusiness | Issue 17

COVER: IMAGE BY iSTOCK / ILLUSTRATION BY AHOY THERE / CENTRAL ILLUSTRATION AGENCY

This year, we celebrate a special milestone – our tenth anniversary as Cass Business School.

Since changing our name in 2002 – following a generous donation from Sir John Cass’s Foundation – we have continued to build on the success of our past and strengthen our reputation as one of the world’s leading business schools.

This success has been founded not only on the academic excellence of our faculty but on the quality of our staff, students, alumni and corporate partners, with whom we proudly celebrate our achievements.

In this special edition of InBusiness, we mark ten years as Cass with three unique features.

We look back at a selection of highlights from the past decade, from the Queen’s opening of our Bunhill Row campus in 2003 to the coveted triple-crown accreditation we were awarded in 2010.

We chart the route by which our alumni group has grown to more than 35,000 professionals worldwide and review some of the key corporate partnerships, events and donations which have influenced our development along the way.

As well as looking back, we ask some of the brightest minds in our Research Centres to profile the biggest issues that will shape their industries over the next ten years, from M&A and pensions to emerging markets and the third sector.

Whatever your connection with Cass, I hope you will join us in celebrating the tenth anniversary of our name, and together we can look forward to future decades of producing cutting-edge research and outstanding business leaders.

Kind regards,

Richard Gillingwater

A welcome from the Dean

Dear alumni, friends and colleagues

Milestones from the past ten years2012 marks ten years since City University Business School became Cass Business School – new premises, name and brand – the business school for the City of London.

For further information, visitwww.cass.city.ac.uk/10th-anniversary


04 | Ten years on... Celebrating a decade as Cass Business School

Cass announces plans for the Peter Cullum Centre for Entrepreneurship, which offers programmes on new venture creation and business development, and gives young companies incubation support. The Centre is officially opened by Lord Mandelson in July 2009 and a year later the Cass Entrepreneurship Fund is founded. This £10 million fund provides financial backing to the most promising ventures emerging from the Cass network and has so far invested in six businesses.

Cass launches an Executive MBA in Dubai in collaboration with the Dubai International Financial Centre. It was the first to offer a stream in Islamic finance. Cass’s Dubai Centre has now recruited more than 240 students for the Dubai EMBA programme and the fifth cohort of students will graduate from the two-year course in the spring of 2013. Cass is now growing the programme to include a second annual cohort, with the first starting in spring 2013.

First Onassis prize presented by the Costas Grammenos International Centre for Shipping, Trade and Finance at Cass. The University of Chicago's Professor Eugene Fama receives the $250,000 award for his work in finance academia. Sponsored by the Onassis Public Benefit Foundation, it is the first award made outside Greece to bear the Onassis name. It signifies the importance of the City of London as a global leader in shipping, trade and finance.

The Queen officially opens the Bunhill Row site with its excellent facilities and City of London location. Cass is now perfectly positioned to deliver its wide range of programmes and to further develop relationships with neighbouring corporates. In the same year Cass launches its MSc in Management.

Cass adopts its new name, changing from City University Business School (CUBS) to Sir John Cass Business School, usually abbreviated to Cass Business School. The renaming follows a generous donation from Sir John Cass’s Foundation, which was founded in 1748 and is one of London’s oldest and largest education charities. Sir John Cass, who was born in the City of London in 1661, served as Alderman, Sheriff and MP for the City, receiving a knighthood in 1712.

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Cass Consulting launched to build on the world-leading research featured on Cassknowledge.com. The in-house and research-led service provides bespoke and independent advice for business by applying academic research and thinking to help solve business problems.

The 22nd Mais Lecture is delivered – the City’s foremost event for bankers and finance practitioners, policy makers and economists. The Lecture has been held since 1978 in honour of Lord Mais, former Lord Mayor of London and City University London Chancellor. In 2004 a packed audience heard from Professor Otmar Issing, then a member of the executive board of the European Central Bank. Recent speakers have included the renowned US economist Paul Volcker (2011) and the Chancellor, George Osborne (2010, pictured).

Cass launches its China Symposium as part of the MBA programme. Since then the event has run every year, annually growing in popularity. Today Cass MBA and Executive MBA students can choose to visit numerous places as part of their programme, including Argentina, Dubai, Las Vegas, Poland, South Africa and Vietnam.

The School celebrates its 40th anniversary – four decades of successful growth. In 1966, the management department at City University, later to become Cass Business School, opened its doors to ten students on the one postgraduate course on offer – an MSc in Administrative Sciences.

Cass announces its new strategic plan, which includes the considerable expansion of its Executive Education offering. Since 2008, Cass Executive Education (CassExec) has nearly trebled its revenue while building an impressive roster of private and public sector clients around the world, including substantial business from China. CassExec plans a further 30% growth in 2012/13, which will be achieved partly by launching a series of open programmes. This marks Cass’s move away from offering purely bespoke programmes.

Cass gains the triple crown, the gold standard in business education, when it received accreditation from the Association to Advanced Collegiate Schools of Business (AACSB). Triple accreditation by the Association of MBAs (AMBA), the European Quality Improvement System (EQUIS) and the AACSB has been granted to only 57 schools worldwide. The AACSB commended Cass for the quality of its undergraduate programme.

2004

2010

2005

2011

2006

2012


06 | Development highlights from the past ten years

2002 2003 2004 20062005

In contact with

16% of alumni

Cass’s dialogue with business shapes the structure and content of all it does. The Development Office and External Relations department works with donors and sponsors to deliver scholarships, partnerships and research sponsorship. As we celebrate ten years of the Cass name, we look back at some of its successes.

Opening of the Bloomberg dealing room at Cass

Cass adopts its new name, changing from City University Business School (CUBS) to Cass Business School

First alumni special interest group, Cass Entrepreneurs' Network, to support students, staff and alumni in launching and developing their business

Cass alumnus Bob Kelly (Executive MBA, 1986), then Chief Executive of BNY Mellon, pledges

£500,000 over five years for the Dean’s Fund Cass alumnus Stelios Haji-Ioannou (MSc in Shipping, Trade & Finance, 1988) pledges

£1 million to fund ten scholarships a year for ten years

Launch of the 40th Anniversary FundPeter Cullum, Cass alumnus and Non-Executive Deputy Chairman of Towergate Insurance, creates the Cullum/Towergate Scholarships supporting four students for five yearsFormation of a tax-exempt US charity arm

• Corporate Development

Key

• Individual Giving

• Alumni Relations

• Fundraising & Governance

Launch of the Corporate Partnership schemeLaunch of Thomson Reuters dealing room, designed to simulate real life in a dealing room

Formation of international alumni groups in 15 countriesFirst international alumni event in China with the Lord Mayor of London

More than

£850,000 raised this academic year. To date, we have raised in cash and pledges more than

£32 million

06 | Development highlights from the past ten years | 07


2009 20102007 20112008 2012

International alumni groups in 60 countriesFirst European alumni event in Monaco hosted by Cass alumnus and easyJet founder Stelios Haji-Ioannou

In contact with

74% of alumniFifty alumni events hosted, 19 of them across Europe, Asia, Africa and North America

Alumnus Vipin Sareen supports six scholarships across the MSc and MBA finance programmesFirst donor event at Tate Modern

First Senior Corporate Partner is BNY Mellon First Research Centre, with Towers Perrin (now Towers Watson) co-sponsoring the Centre for Leadership, Learning & Change First Founding corporate partnership is with Santander, which also offers five postgraduate scholarships and awards for students. Cass becomes the first UK business school to be asked to join the Santander Universities Programme

40th Anniversary Fund is renamed the Cass Fund

£190,000 contribution to the Cass FundInaugural Class Gift from Full-Time MBA Class of 2008Launch of the China & Hong Kong scholarship programme

Contributions from corporate supporters exceed

£1 million for the first timeCzarnikow and Threadneedle become Corporate PartnersOpening of the state-of-the-art Thomson Reuters study zone at Bunhill Row

Cass has 21 corporate supporters

MARC has three Senior Sponsors, AXA Private Equity, Credit Suisse and Ernst & Young, and two Sponsors Mergermarket and Towers Watson

£225,000 contribution to the Cass FundLaunch of Pettman Scholarship – available to MSc students for five years

Alumni Online Community has more than

8,000 membersInaugural Cass Alumni World Forum – 400 people attend in London;

14 satellite events held across five continents; in total, 650 attend

Launch of the Costas Grammenos International Centre for Shipping, Trade & Finance fundraising campaign.

£5.5 million raised in two years

Launch of the Haberman Campaign for Actuarial Science.

£100,000 raised and four postgraduate and one undergraduate scholarship established

Introduction of new alumni services, including free MBA or MSc electives for postgraduate alumni and access to online research toolsLaunch of the Alumni Online Community platform

Cass has

35,000 alumni,

80% of which we are in contact withAlumni Online Community has

10,000 members Launch of Masterclass

programme events across EuropeLaunch of official Cass alumni LinkedIn group; membership now

4,700

Creation of a new Alumni Board, and Strategy and Development Board with the international banker, Sir Malcolm Williamson, as ChairmanInaugural Cass Alumni Ball at the Natural History MuseumLaunch of Cass Women in Business and The Actuarial Network alumni special interest groups

50 alumni events hosted worldwide

Maris Tsakos Foundation donates

£500,000 to Costas Grammenos foundation to endow scholarships

Dean Richard Gillingwater leads the NASDAQ closing bell ceremony in New YorkLaunch of the Cass Legacy Giving Programme. First pledge received in 2010Launch of the Singapore and USA Scholarship programmes

Introduction of seven new advisory boards to oversee different areas of Cass operations

Peter Cullum pledges

£10 million to support the next generation of entrepreneurs at Cass

Launch of Mergers & Acquisitions Research Centre (MARC)Cass has 13 corporate supporters

Micro-blogs can have a powerful effect on a movie’s opening weekend box-office success, according to an academic study of four million social network messages. Charles Arthur reports.

A little bird told me...


08 | Feature Hollywood goes social


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IMAGE BY iSTOCK / ILLUSTRATION BY AHOY THERE / CIA

The screenwriter William Goldman, whose credits range from Butch Cassidy and the Sundance Kid to

Good Will Hunting, seems to be wired directly into the cinematic zeitgeist. But in his book Adventures in the Screen Trade he asserts repeatedly that “nobody knows anything”. He means that, until a movie has opened and the first weekend’s box-office receipts have been counted, nobody in Hollywood has any real idea of how well a film will do.

But many would-be viewers decide an awful lot more quickly than that whether to contribute to those takings. They make their decision on the opening night after reading micro-blogs that have often been started before the closing credits roll. And the Twitter effect may have a significant impact on the success of a movie.

Twitter and Facebook have become a key part of many people’s lives: Facebook, founded in 2004, has more than 900 million users worldwide, of whom more than half access it via mobile phones, while Twitter, founded in 2006, has 140 million active users with a high proportion also accessing it via mobile phones.

Before the advent of micro-blogging, word of mouth still influenced people’s choice of what to see but it took longer to spread. The internet disseminated critical opinion, but sites such as Rotten Tomatoes and the Internet Movie Database – the definitive source for much trusted movie information – did not publish user reviews until

Monday morning, by which time a lemon that deserved to sink without trace could have recovered its costs.

Surprising successDr Caroline Wiertz, Reader in Marketing at Cass, Thorsten Hennig-Thurau, Professor of Marketing at Cass and the University of Münster, Germany, and Fabian Feldhaus, a researcher at the University of Münster, studied Twitter traffic about 105 films on their opening weekend and compared the information with that from a control group of 105 films from the pre-Twitter era. Their report, Exploring the “Twitter Effect”:

Thurau were inspired to investigate the role of Twitter by Brüno, Sacha Baron Cohen’s 2009 mockumentary about a German fashion designer who moves to Los Angeles. It took $14.4 million (£9.2 million) on its opening night but seems to have fallen victim to the Twitterati. On its second night the takings were down by more than 60% to $8.8 million.

The research focused on films released on more than 800 screens in the United States between October 2009 and October 2010 – including blockbusters such as The A-Team, Inception and Sherlock Holmes – and checked all four million micro-

An Investigation of the Impact of Micro-blogging Word of Mouth on Consumers’ Early Adoption of New Products, concludes that tweets can have an impact on the success of even the most expensively marketed movies.

Film analysts have blamed the twitter effect for the failure of some big-budget films, notably G.I. Joe: the Rise of Cobra and suggested that it may have been responsible for the surprising success of Transformers in 2007 and the 2010 version of The Karate Kid, both of which had been panned by professional critics.

Dr Wiertz and Professor Hennig-


10 | Feature Hollywood goes social

IMAGES BY REX FEATURES

Social media milestones

1971 The first email is sent by Ray Tomlinson, a computer engineer, in Cambridge, Massachusetts. The sending and receiving computers are next to each other.

1997Google is launched from a garage in California by Larry Page and Sergey Brin. In 2011 it generates revenue of more than $37 billion. Today it has more than one billion unique users per month.

2000The dot.com bubble bursts when the NASDAQ index of leading technology shares spikes at 5,048.62.

1978The first bulletin board system – a pre-internet method of sharing information – is invented by Ward Christensen and Randy Suess in Chicago.

1994GeoCities, a web hosting service that groups sites according to subject matter, is launched. It is sold to Yahoo! in 1999 for $3.57 billion and closes down in the West in 2009.


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blogging word-of-mouth messages sent about them over Twitter on their opening weekends, using sentiment analysis to extract the embedded meaning.

Critical ratingsThe study began with three hypotheses: that the Twitter effect really did exist and micro-blogging word of mouth (MWOM) from people who had just seen a newly released film would affect its subsequent popularity; that the impact would vary depending on the overall volume of messages; and that the impact would vary depending on the receiving audience, with the effect being stronger for films aimed at teenagers and weaker for those aimed at families (where deciding what to see is a complicated negotiated decision involving several family members).

The researchers looked at positive and negative Twitter reaction on the opening Friday night, and then at the variance in Saturday and Sunday takings. They also allowed for the amount of advertising spending, professional critics’ ratings and other controls.

Twitter gave them extended access to its database and they examined four million tweets – an average of more than 38,000 per film – identifying 892,000 as post-consumption evaluations. Most were posted on Friday evening and Saturday morning, peaking on Friday at 11pm. The researchers sought out positive or negative valence, or emotional response, to each film.

They found that two of their three hypotheses were supported.

Dr Wiertz said: “We found that sentiment spread via Twitter does systematically influence other consumers’ decisions about whether to see the movie during the remainder of its opening weekend.

Advertising spending“The Twitter effect holds even when controlling for other known influencers of movie success, such as production budget, pre-release advertising spending, pre-release buzz about the movie, professional critics’ ratings, star actors and so on.

However, it does matter who the main target audience of the movie is. Movies aimed at families are less affected by Twitter sentiment than others.”

Pre-millennium internet use was minimal compared with today and word of mouth spread almost exclusively among physical social circles. As the internet grew, forums and review sites sprang up but the reviewers were people the would-be cinemagoer didn’t know. MWOM is more personal: now, as soon as the first viewers come out of a film, they trigger an “informed information cascade” as they publish their opinions – good or bad – to a social circle, says Dr Wiertz. Readers know the people passing judgment and are therefore more influenced by their opinion.

But this brings a new problem for film studios, which have been used to pushing movies that they know aren’t great onto a lot of screens on an opening weekend to recoup

their investment before people hear that it’s no good.

Information advantage“Expensive pre-release advertising campaigns will not be able to drive audiences much beyond the opening night,” says Dr Wiertz. “Film producers who previously held an information advantage over consumers on the quality of a movie are now at the mercy of micro-blogging. This will level the field and give smaller, independent films a better chance to compete.”

So how should the film business react? Quite possibly by putting their eggs into more baskets, suggests Professor Hennig-Thurau. “Rather than one $300 million film, you

put out ten $30 million films. Then you have a portfolio so that you can afford nine flops. I think that’s what’s going to happen.”

First, though, the film business will have to curb its enthusiasm for blockbusters. Professor Hennig-Thurau says: “Production budgets have become completely inflated. Look at the Alien franchise. While the first Alien, released in 1979, cost just $11 million, the recent prequel, Prometheus, had a budget over $200 million. Is that really necessary to make a good movie?”

The advertising included attempts to build interest through Twitter hashtags. Perhaps Goldman’s theory that “nobody knows anything” might need to change to “nobody in the industry knows anything – but with Twitter, consumers now know enough to make an informed choice”.

Charles Arthur is Technology Editor of The Guardian. He can be contacted on Twitter: @charlesarthur

For further information on the research, contact Dr Caroline Wiertz at [email protected]

“Film producers who previously held

an information advantage... are now

at the mercy of micro-blogging.”

ILLUSTRATION BY AHOY THERE / CIA

2003 – 2004 The social networking sites Myspace and Facebook are launched. By 2009 Facebook emerges as favourite and now has 500 million active users.

2005YouTube is launched in California. It is bought by Google in 2006 for $1.65 billion. More than 3 billion hours of videos are viewed each month on the site.

2006Twitter is created by Jack Dorsey. Today there are 140 million “tweeters” generating more than 340 million tweets a day.

2011The number of internet users is estimated at 2.2 billion – almost a third of the Earth’s population.

2012A Facebook IPO values the company at $104 billion. This has since fallen by about 25%.


As developed markets face, at best, low growth over the next few years, companies are

increasingly looking to emerging markets for new business opportunities. These markets have captured a rising proportion of global mergers and acquisitions in recent years. But which countries are ripe for investment and where should dealmakers be looking next?

New research from the M&A Research Centre (MARC) at Cass

Business School and Ernst & Young offers an intriguing glimpse into the world’s most attractive M&A markets. The M&A Maturity Index, published annually, ranks 148 countries according to their ability to attract and sustain M&A activity.

Scott Moeller, Professor in the Practice of Finance at Cass and Director of MARC, says: “The index analyses factors such as regulatory, political, economic and financial environments together with technological capability, the

availability of assets and socio-economic characteristics to draw out how attractive each country is for domestic and inward M&A deals.”

USA tops tableIn the latest index, the USA tops the table with Singapore in second and the UK third. Asian countries now make up half the top ten M&A destinations with Singapore joined by Hong Kong (4), South Korea (5), China (9) and Japan (10).

“Singapore and Hong Kong’s high

ranking is driven mainly by their well-developed infrastructure, the availability of companies with assets valued at over $1 million to purchase and business-friendly regulatory environments,” says Professor Moeller. “This contrasts with most of the other top ten countries, which mainly owe their competitive advantage to high levels of technological development, including high-tech exports and innovation in terms of patents filed, which demonstrates a highly skilled

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12 | Feature Emerging markets

IMAGE iSTOCK / ILLUSTRATION BY FP CREATIVE


Asian countries now make up half the top ten deal destinations. Vicky Meek looks at the rise and rise of Asia and the Gulf states.

business community that can attract investment interest.”

Future hot spotsWith close to 40% of deals completed since 2009 taking place outside US and European markets, the rankings also offer a valuable insight into future M&A hotspots. Among the rising stars is the UAE, which has leapt six places to 20th in the past five years, albeit falling by one position since 2011.

“While political stability remains an issue in many Middle Eastern markets,

the changes should mean that economies in the region become more open,” says Professor Moeller. “There is a huge amount of wealth from oil and much has been done with this to improve infrastructure – both physical and financial – and that is attracting companies and business.”

Malaysia’s jump of seven places to 18th in the rankings over five years has been driven by significant improvements to its regulatory and political environments. Other high-climbers over the past five years

include Poland (up five to 30) Romania (up 13 to 36), Turkey (up seven to 37), India (up five to 38), Kazakhstan (up six to 40) and Morocco (up eight to 47).

Eurozone woes Unsurprisingly, the rise of emerging markets has come at the expense of developed countries in Europe, where the economic problems afflicting traditional M&A markets are reflected in the ranking changes. Germany, the Netherlands,

Switzerland, Austria, Sweden, Italy and Finland have all fallen in the rankings over the past five years, while Greece (53), unsurprisingly, has fallen 12 places since 2011 and 23 places in the past five years.

Vicky Meek is a freelance financial journalist. She can be contacted at [email protected]

For further information on the research, contact the M&A Research Centre at [email protected]

S I N G A P O R E2

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14 | Feature Women on boards

Quota, unquota

The European Union is considering imposing quotas for women in the boardroom. Only 13.7% of directors of

large companies within the EU are women; the figure falls to 3.2% for company presidents and

chairwomen. Public consultation ended on 28 May 2012 and the European Commission will decide later this

year on any action to be taken. But are quotas a step too far? Two Cass academics debate

whether new legislation should even up the boardroom

battle of the sexes.

ILLUSTRATION BY ASGER BRUUN / FP CREATIVE


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“The dominance of men at the top

of our commercial organisations

remains ‘situation normal’.”

The debate on board diversity is skewed too much towards women and not enough towards experience and

thinking styles. Two examples illustrate what happens when a mandated percentage of any type of director is forced on a board.

Norway imposed a 40% quota of women. The pool from which they were chosen was small but the demand was large, so many accepted too many directorial posts with the inevitable result that they were stretched too thinly to fulfil their role – and their fees rose noticeably. So the “golden skirts” came into being.

Demand for women directors continued to grow and, as the quota was backed by the legal threat of closing down companies that failed to obey the 40% rule, women directors were imported from other Nordic countries, with the knock-on effect of creating a shortage of competent women directors in those countries.

In South Africa, the Black Economic Empowerment scheme produced a similar effect, giving rise

to the “black diamonds”, particularly in state-owned enterprises and listed companies.

From the legislators’ viewpoint, imposing a mandatory percentage of a particular type of director is an easy win. They can tick the box and move on, claiming a success. But the consequences do not take into account diversity of experience and thinking styles to match the maturity and environment of a specific company.

In the UK, the 2006 Companies Act codified for the first time the seven specific duties of a director. While some are obvious, such as maintaining the law, not being corrupt and ensuring the success of the business, two are more difficult to deliver: ensuring the independence of thought of each director, and having the care, skills and diligence to fulfil a directorial role. These demand diversity in the boardroom and are beyond the capacity of any legislator to deliver. Yet they are more important in ensuring the success of a company than either sex or colour.

AGAINSTBob Garratt, Cass Visiting Professor

The number of women on the boards of Britain's largest listed FTSE 100 companies is growing but the pace of

change remains slow. Some business leaders and academics suggest that this is because women don’t want to make it to the top or that men don’t want them there. Both answers may hint at the truth, but neither explains what’s taking so long. An alternative explanation is that the wish, often expressed by business leaders, to see more women at the top is real. However, they are less committed to making the quite dramatic changes to their organisations’ structures and cultures that are needed to make this a reality.

To date, the main motivation for change has been the business case. This suggests that companies are missing out on talent by not retaining and promoting women, or that more women at the top would enable organisations to respond more effectively to customers and perhaps even encourage more ethical corporate behaviour. Yet whilst the business

case is widely cited, the question remains – if the commercial benefits of boardroom diversity are so compelling, why has the problem not already been solved?

One answer is that significant change to organisational practices usually requires a sense of urgency – even, perhaps, a visible crisis. The evidence to date suggests that a voluntary agenda based mainly on commercial drivers has not been sufficient to bring this about.

Quotas, therefore, might be the most effective and efficient means of increasing the scale and speed of change. This strategy will not be welcomed by everybody, including the very women who may become directors as a result. However, the dominance of men at the top of our commercial organisations remains “situation normal”. A mandated target might make the opposite true so that in future male-dominated boards will look decidedly odd.

IN FAVOURDr Louise Ashley, Cass Visiting Fellow


16 | Feature Corporate cash

IMAGE BY GETTY IMAGES

Spend, spend,spend

Apple, the world’s most valuable company, also has the world’s biggest corporate cash pile. The

unqualified commercial success of its iPads, iPhones and iMac computers means Tim Cook, Apple’s new Chief Executive, has a staggering $100 billion war chest – a sum equivalent to 25 years of Britain’s scientific research budget. Apple shareholders insist Cook, who succeeded the late Steve Jobs, must formulate a convincing cash deployment strategy.

The size of Cook’s cash conundrum – a result of superb product design, stellar marketing and rigorous cost control – may be off the scale. But companies in the USA, the Eurozone, the UK and Japan are sitting on an unprecedented $7.75 trillion of cash or near equivalents, according to the Institute of International Finance.

As governments around the world cut spending and pay down debt, the private sector is supposed to pick up the baton and invest its way out of austerity. But that is not happening. Companies are hoarding cash and Western economies are spluttering as a result.

Global trendThe top five “cash kings” according to rating agency Moody’s are Apple, Microsoft, Cisco Systems, Google and Pfizer which together hold $276 billion, or 22% of America’s non-financial corporate cash balances. Apple’s recent decision to pay

investors from its $100 billion cash balance will go some way towards making a dent in that, but the overall global trend remains unaltered.

In September 2011, Adam Posen, a US economist who sits on the Bank of England’s Monetary Policy Committee, characterised UK corporate cash piles as a symptom of the private sector’s unwillingness to take risks – a response in part, he said, to an excessive accumulation of debt by households, and to bank losses. “Some correction from the risk-taking behaviour of the boom years is justified, but this has gone too far and persisted far too long,” he said.

Yet a new study by Cass Business School’s M&A Research Centre (MARC) and Credit Suisse, which examined the cash holdings of all companies whose shares have been listed in the UK since 1996, suggests that the hoarding of extensive cash stockpiles is by no means a new phenomenon. In fact there is evidence to suggest, according to Anna Faelten, Deputy Director at MARC, that corporate hoarding has been increasing since as early as 2004.

Hoarders under-performMARC’s findings also showed that companies which held on to their excess cash significantly under-performed the market over the next three years. This has huge implications for investors.

“The companies who don’t


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Companies are sitting on huge piles of cash – but Cass research shows that splashing out on acquisitions and buybacks could benefit shareholders and the economy. Nick Mathiason reports.

This way of working informs our culture and daily routine. From formal meetings to casual conversations, information flows freely across the entire investment team – regardless of asset class or region – and sparks fresh ideas that lead to some of our most rewarding investment decisions.

As Mark Burgess, our Chief Investment Officer, puts it, “By working together as a team and sharing our ideas we aim to deliver out-performance for our clients.” In fact, weighted by current assets under management* 72% of funds have outperformed over 1 year, 72% over 3 years and 83% over 5 years.

Threadneedle is pleased to partner with Cass Business School and support the education of students seeking a deeper understanding of the investment world.

Please be aware that Threadneedle does not offer investment advice. If you are unsure please talk to a Financial Adviser. Past performance is not a guide to future returns. The value of investments and any income is not guaranteed and can go down as well as up.

Like all the brightest minds and best thinkers, our fund managers never stop learning. They are constantly sharing ideas and information with each other to gain fresh perspectives and new insights.

Out-think. Out-perform. threadneedle.co.uk

*Source Threadneedle Investments. Total value of funds outperforming their relevant benchmark as at 31 March 2012 expressed as a percentage of total assets under management. Past performance is not a guide to future performance. Threadneedle Asset Management Limited. Registered in England and Wales, No. 573204. Registered Office: 60 St Mary Axe, London EC3A 8JQ. Authorised and regulated in the UK by the Financial Services Authority. threadneedle.com AD0097

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acquisition – even though a significant number fail – or a share buyback strategy to impress shareholders and boost returns.

Too much to spendApple, at the time of writing the world’s most valuable quoted company, has attempted to spend cash in every conceivable way. Under Cook’s direction it has invested significantly in new retail outlets, server farms to support its iCloud service, new campuses to house more staff, acquired companies and expanded research and development departments. In its latest move, the company has broken new ground by paying a dividend and buying back its own shares. On top of all that, Apple is understood to be about to buy up companies in its own supply chain. That could, if all goes according to plan, reduce costs further and throw up even more cash.

“A lot of tech companies have got to that stage now where it’s almost too much too quickly for them to be able to spend it,” says Faelten. “Just because you have money it doesn’t mean you’re going to go out and spend it on anything. As a manager you obviously need to be very diligent.”

If the UK economy returns to sustained growth in 2013, the

likelihood is that companies will start dipping into cash reserves to fund expansion. Where that money is deployed will be crucial not just for shareholders but for the social, political and economic future of the country. And the same holds true worldwide.

“There are almost daily reports about company cash levels,” says Faelten. “It makes for a sexy headline. It’s an astonishing figure: $643 billion for our sample of UK-listed firms alone. It’s a huge pot of under-utilised cash and that has implications for the whole economy.

“I do understand why companies are being more careful. In recent years they have experienced these massive economic shocks. But at the same time we find in our study that actually holding this cash penalises companies significantly. This is a very important point.”

Nick Mathiason is Business Correspondent at the Bureau of Investigative Journalism and a consultant at the Task Force for Financial Integrity and Economic Development.

For further information on the research, contact the M&A Research Centre at [email protected]

spend their excess cash suffer negative index adjusted returns of 9-10% over a three-year period. This shows that we can expect companies that hoard cash and not spend it to under-perform,” says Faelten.

The MARC/Credit Suisse study measured the difference between total cash on company balance sheets and the liquidity required for ordinary business. “Of the $643 billion of cash reserves in our sample, two-thirds is actually excess. Even accounting for all the things that are company or industry specific, you still have over $400 billion on corporate balance sheets that could be spent,” says Faelten.

Among the sectors in which companies have built up the largest cash piles, in terms of the ratio of the cash to their net assets, are technology (46%), healthcare (44%), materials (40%) and oil & gas (35%).

The research also investigated the best strategies for spending excess cash by comparing the share price performance of companies opting for capital expenditure, acquisitions, dividend payments, share buybacks and paying down debt.

M&A returnsThe study found that the most profitable ways to use excess cash – from a shareholder’s perspective – were acquisitions and share buybacks.

“Buybacks reap early benefits, generating average returns amounting to 7% after 24 months.

However, the strategy of spending on M&A generates even higher returns, equal to 11% realised in the third year after the strategy has been implemented. When adjusted for risk, the two strategies are almost on a par,” says Faelten.

“The performance results suggest that companies which are able to seize profitable investment opportunities quickly through engaging in acquisitions or returning funds to shareholders – when they do not face any viable opportunities to expand – outperform companies which choose to follow alternative options.”

Alternative uses of excess such as increasing a company’s dividend appear, according to MARC’s research, to have little impact on a company’s overall performance. “We found share buybacks are the kind of strategy that gives a significant return, compared to the dividend which has a neutral effect on performance.”

One aspect of the research with worrying implications for those hoping corporate investment will inject new life into the economy is how little impact corporate capital expenditure has on a company’s share price compared with M&A or share buybacks. One explanation, according to Faelten, could be that strategic investments by companies are not well communicated to investors, or at least receive significantly less attention than an acquisition or a buyback.

It adds to the impression that companies may need a big-bang


18 | Feature Corporate cash

IMAGE BY iSTOCK

Where the money is...The sectors in which companies have built up the largest cash piles, in terms of the ratio of the cash to their net assets. (%)

0 5 10 15 20 25 30 35 40 45 50 %

Technology46%

Healthcare44%

Materials 40%

Oil & gas35%









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20 | Feature Momentum trading

Momentum investing – buying what has performed well and selling what has done

badly – has proved a profitable strategy for equity traders.

This trend-following approach, which is based on the assumption that recent performance is more likely to continue in the same direction than to reverse, has also been found to work in other markets – even currencies, an asset class that some see as especially difficult to predict.

In fact, foreign exchange markets show as large a momentum effect as equities, according to Currency Momentum Strategies, researched and written by Lucio Sarno, Professor of Finance at Cass Business School; Lukas Menkhoff, Professor of Economics at Leibniz University, Hanover; Maik Schmeling,

Assistant Professor of International Money and Finance at Leibniz; and Andreas Schrimpf, Economist at the Bank for International Settlements.

In an analysis of 48 currencies over various timeframes between 1976 and 2010, currencies which had recently strengthened went on to gain up to ten percentage points more, extrapolated as a yearly figure, than those that had weakened.

Trading in a crisisThe study also found that momentum returns did not correlate with those from the so-called carry trade – the most popular foreign exchange trading strategy whereby investors borrow in currencies with low interest rates to invest in those with higher rates.

Professor Sarno says: “There’s a great deal of benefit in diversifying

away from the carry trade – momentum is a hedge.

“Carry trades do very badly in a crisis [as investors push up the value of “safe haven” currencies with lower yields], while momentum does well in bad times. It offers a different source of profits.”

But why does the momentum effect exist at all? And if it is such easy money, why – given that foreign exchange is the most liquid of markets populated by professional traders with the incentive to exploit the strategy – hasn’t it been arbitraged away?

Bandwagon effectAs with momentum in other markets, investor psychology is seen as playing a part, specifically the common tendency for under- or over-reaction. Exchange rates are often

slow to respond to news as traders process information. Then, once currencies do start to shift, traders frequently over-react, creating a bandwagon effect which adds to the movement.

The research also found that most of the momentum profits in foreign exchange came from the less liquid currencies of emerging markets, including the Brazilian real, the South African rand and the Philippine peso, rather than the dominant currencies such as the US dollar, the euro or sterling. This means higher trading costs as well as higher risks for those seeking to capture the effect, which in turn limits arbitrage activity. Costs for transactions between two of the more exotic currencies can be ten times the cost of transactions between major currencies.


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Momentum investing can be a winning strategy in foreign exchange but the risks may be too high, according to research by Professor Lucio Sarno at Cass. Steve Lodge reports.

Momentum involves regular portfolio rebalancing, and the most profitable strategies in foreign exchange are usually short-term, where currencies are bought and sold according to movements in the past month. This raises turnover and, therefore, expenses. Overall, about a third of returns are lost in costs.

Investors will also be exposed to countries with specific political or macro-economic risks – and therefore potential exchange rate instability or convertibility problems.

Waiting gameProfits can also vary significantly in the short term. Momentum traders need to be prepared for extended periods of loss. Asset managers, however, may not be able to play the waiting game. The study says: “As a

three-year window is often seen as the maximum period an unsuccessful asset manager can survive, the application of currency momentum trading is clearly risky.”

Moreover, the relative illiquidity of emerging market currencies means that large funds looking to trade momentum are at risk of moving prices against themselves. Professor Sarno, who is routinely called for foreign exchange advice by organisations such as the US Federal Reserve, the European Central Bank and the International Monetary Fund, says: “The biggest funds will have problems investing in the lesser currencies – the ideal fund would be small.”

He points out that while there are exchange traded funds (ETFs) that exploit currency momentum and offer trend-following strategies

Swept alongby the currencies

IMAGE BY iSTOCK

for low management fees, these cover only the currencies of the G10 economies, where the effect has been much less apparent. Deutsche Bank’s X-trackers Currency Momentum ETF, for example, under-performed the group’s less specialised Currency Returns ETF – which invests a third each in momentum, carry trade and value strategies – in 2009 and 2011.

George Saravelos, a foreign exchange strategist at Deutsche Bank, acknowledges that emerging market currencies show a greater inclination to follow trends, but notes that there are still concerns about their liquidity and tradability.

Professor Sarno says that currency momentum should be seen as “compensation for risk” rather than a market anomaly. The research draws parallels

with momentum in equities and corporate bonds, where studies have shown the effect is concentrated in shares with high credit risk and in non-investment-grade corporate debt. “It’s not a free lunch: to generate these higher returns, investors need to take higher risks,” he concludes.

Currency Momentum Strategies, by Lukas Menkhoff, Lucio Sarno, Maik Schmeling and Andreas Schrimpf, forthcoming in the Journal of Financial Economics.

Steve Lodge is a freelance financial journalist. He can be contacted at [email protected]

For further information on the research, contact Professor Lucio Sarno at [email protected]


22 | Feature Cass Research Centres

As Cass Business School celebrates ten years of its name, the Directors of some of Cass’s influential Research Centres predict the biggest issues their sectors will face over the next decade.

The nexttenyears

ProfessorIgor Filatotchev

ProfessorPaul Palmer

IMAGES BY JAMIE BEEDEN

ProfessorScott Moeller


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WorldCom and to the financial crisis of 2008. Key stakeholders found themselves questioning the role of non-executive directors and board committees. Thus there are increasing pressures for organisations to commit to more rigorous corporate governance values.

Over the next ten years the Research Centre will be concentrating on: • Corporate governance and

organisational performance – the link between organisations’ compliance with “good” corporate governance principles and their corporate performance. This includes the market perception of the appointment of executive and non-executive directors and shareholder engagement

• Non-executive directors – a study of the roles they play, supported by theories in organisational behaviour and human resource management, to point the way to better practice

• Communicating with stakeholders – improving transparency while protecting information seen as commercially sensitive. Received wisdom is that better voluntary disclosure should benefit organisations in terms of a lower cost of capital and/or reduced share price volatility. The objective is to examine how organisations can manage the trade-off between the desire of investors and other stakeholders for more transparency, and the costs associated with disclosures that might benefit competitors

• Legal and institutional aspects of corporate governance – the impact on a company’s performance of various governance factors such as boards of directors, shareholder activism and executive incentives, may differ depending on the legal system and institutional characteristics in a specific country. Legal, political and economic institutions may also affect the extent of mutual interaction of

Professor Scott MoellerM&A Research Centre

Mergers and acquisitions. Just the term now seems to be loaded. “Big is better, so even bigger must be even better.” Right? But the M&A market isn’t what it used to be pre-Lehman, when it seemed as though Gordon Gecko was once again on the prowl for the next big deal.

Thus we face a very real question about the M&A market: will it ever return to its heyday of several years ago (my, how that already seems so long ago!) or even to the slightly lesser peak around the turn of the millennium? The answer must be yes. • The M&A market has always been

cyclical, so the ebb and flow of the financial markets and the overall economy will always have a great impact on the willingness of boards and chief executives to make the decision to do big consolidating deals

• But the need to have greater market share, more synergies from scale economies and to acquire attractive assets and people will not disappear

• In fact the maturation of emerging markets will open up new areas for deal activity, both from the target and buyer side.

The challenge will be to live through the troughs to benefit from the peaks. But the view from those peaks will be worth the wait.

Professor Igor FilatotchevCentre for Research in Corporate Governance

Most countries and international bodies have adopted corporate governance codes and frameworks in recent years but this has often led to compliance with the letter rather than the spirit of the code. This, in turn, led to corporate disasters such as Enron, Global Crossing and

different governance mechanisms producing a diversity of governance patterns around the world. Researchers need to develop more holistic, institutionally embedded governance frameworks to analyse organisational outcomes of various governance practices.

Professor Paul PalmerCentre for Charity Effectiveness

Over the next ten years the following themes will shape the non-profit and philanthropy sector:• Relationship with the state in a

continuing time of austerity – organisations will still need to deliver services despite falls in funding from state sources. These cuts (estimated at 10-20%) will be felt unevenly across the sector

• Effectiveness and impact – the focus on management improvement and techniques will continue as charities strive to demonstrate their impact for both funding and legitimacy purposes

• The emergence of social bonds – will they happen and will they work?

• Convergence vs. separate pathways – will there be a blurring and an interchange of ideas between the discrete philosophies of charity and private and public sectors?

• Will conventional Western philanthropic practices be challenged by new ideas and traditions as Eastern superpowers emerge?

• Women are gaining more financial power through their own fortunes and through inheritance – how will this affect giving and the identification of philanthropic issues and causes?

• Ethical giving – key issues include charities being used for tax avoidance and support for controversial or unpopular causes.

ProfessorKate Phylaktis


24 | Feature Cass Research Centres

Professor Kate PhylaktisEmerging Markets Group

Over the next ten years the following issues will dominate research on international financial markets:• Emerging markets as an asset class

will continue to be of great interest to both investors and academics, reflecting the increasing role of emerging markets in the global economy and the disappointing economic performance of advanced economies together with their very low returns. Thus, the pricing of assets in emerging economies will be a key area of research. This becomes a challenging job in a changing institutional, regulatory and corporate governance environment

• The financial crisis of 2007-2009 and the ongoing problems in the Eurozone will preoccupy academics’ interests on issues

relating to crises, such as their impact on the real and financial sectors, on their transmission between markets; whether it is possible to forecast and prevent them in an age of increasing globalisation

• The volatility of foreign exchange and financial markets has intensified efforts to understand what drives these markets. Research will continue to put emphasis on the microstructure approach

• In a world of severe national fiscal imbalances and global external imbalances, private international capital flows as well as sovereign flows will resume renewed interest from both academics and policy makers. Research will be concentrating on their determinants, impact on the real economy and financial sector as well as on their monitoring and regulation.

Professor David BlakePensions Institute

Demographic factors will dominate over the next half century and this will begin to be felt over the next ten years.

An ageing population coupled with increasing longevity will put increasing strains on state pension costs unless there is a significant rise in the retirement age. The retention of very good public-sector defined-benefit pensions when the private sector offers only poorly funded and poorly designed defined-contribution schemes will also lead to tensions.

Another key issue will be the removal of inherited defined-benefit liabilities from company balance sheets. The longevity risk transfer market, which began in the UK in 2006, will really take off over the next ten years. The securitisation of longevity risk will be an important research topic.

Financial factors will still be important, with the low real returns and high volatility of the past ten years set to be a feature of the next ten. The design and funding of investment strategies for defined-contribution plans that deal with this will be another important area of research.

Professor Laura EmpsonCentre for Professional Service Firms

Five of the biggest challenges facing professional service firms:

• How to create value from global networks without

resorting to inappropriate levels of centralisation. Over the past ten to 20 years the largest firms have built up substantial

global networks – PwC has offices in almost 50% more countries than McDonald’s has restaurants. The

challenge now is to turn these loose networks into global, integrated organisations without losing

the qualities that made the component offices successful in their individual markets

• How to maintain loyalty and commitment from professional staff while diminishing the appeal of partnership. Becoming a partner is no longer a guarantee of lifelong employment – partners risk losing their jobs and must submit to rigorous performance management processes in the same way as non-partners. However, when a firm removes its commitment to support a partner through good and bad, partner loyalty is compromised

• How to utilise opportunities for offshoring and outsourcing while protecting core business from new-model service providers. As firms make the most of international efficiencies, they need to protect their fundamental business from innovative new entrants to the sector

• How to respond to pressures for regulatory change while defending professional autonomy. Post-Enron and the banking crisis, professional services firms have been accused of oversight failures. In this context it is hard for professionals to justify self-regulation but they still need to defend the essence of their professionalism

• How to provide the strong leadership required in the economic downturn without losing the support of professional colleagues. The partnership model is an example of direct democracy, albeit without an explicit opposition party, and in these economically challenging times managing partners are having to make unpopular decisions.

For information on the Cass Research Centres, visit www.cass.city.ac.uk/research- and-faculty/centres

“The M&A market isn’t what it used to be pre-Lehman, when it seemed as though

Gordon Gecko was once again on the prowl...”Professor Scott Moeller, M&A Research Centre

ProfessorLaura Empson


Professor David Blake

www.cassknowledge.com

Cass ConsultingGive your business an academic edgeAt Cass we believe that the purpose of research lies in its real-world application, which is why our consultants all have extensive hands- on experience in their chosen fields.

Cass Consulting offers an unrivalled portfolio of expertise, services and solutions to enable you to grow and strengthen your business whether on a domestic or global scale. What sets us apart is being able to call on a range of insights to provide bespoke and independent advice for any challenges you may face.

To find out more about how Cass Consulting can help you, email Dr Christina Makris at [email protected], call +44 (0)20 7040 3273 or visit www.cassknowledge.com


26 | Book reviews Latest releases


In print

Giving is big business but, more often than not, it is done badly. This book argues that how one gives is central to the impact of charitable giving. The process is not well understood and Grant’s work draws attention to the shortcomings of existing practice.

He opens with a stinging depiction of the status quo: under-trained staff, few external pressures and a lack of best practice standards, among other drawbacks. Grant’s book is thus a remedial work – a course on philanthropy, grant-making and social investment.

The sections on social investment as a business process cover issues of risk, operations and performance management while the sections on managing social investment cover programme design, assessment, selection and post-design management. Grant draws thoughtfully on business insights and experience while avoiding either simplistically aping business methods or condemning them out of hand. Charles Keidan, Director, Pears Foundation

The Business of GivingPalgrave Macmillan | £35by Peter Grant, Lecturer in Voluntary Sector Management at Cass

I wish I’d had this book at the beginning of my MBA – it would have given me the tools to hit the ground running. I read it chapter by chapter, which is not something most people do with a typical finance book. Guy Fraser-Sampson, with echoes of his background in alternative assets, rails against the norm to give his readers an engaging approach to finance.

The book is pitched at newcomers who want to cut through financial jargon and take a view based on a set of core principles. The layered structure of No Fear Finance is invaluable. I can now quickly link

capital efficiency to the weighted average cost of capital, to calculating the internal rate of return, to IRR’s role in capital allocation, to how a balance sheet fits into the grand scheme of risk and return, to a stock’s beta, and to so much more.

The book dispels common misconceptions and addresses everyday lessons. Reading the chapter on time value of money, I worked out that my daughter discounts all future treats by r=(FV/PV)-1. Even if you don’t have a daughter, read on. Richard Samuel, Cass Executive MBA student

No Fear FinanceKogan Page | £24.99by Guy Fraser-Sampson, private equity expert at Cass


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Risks are inherent in every aspect of business and the ability to manage them defines outstanding business leaders. In a supply chain there are potential risks in every link.

The authors blend methodologies and research with case studies and observations in practice in an up-to-date and comprehensive treatment of the subject.

The chapters deal with the entire spectrum of risk from product development to product launch, from procurement to manufacturing, and from distribution to after-sales support

and product end-of-life. Supply chain risk management requires end-to-end coverage and this book has that.

It contains management lessons on how risks can be mitigated, and how they can be contained once disruptions have occurred. As such, it is also a book to help practitioners to gain insights and develop management skills. Professor Hau L. Lee, Thoma Professor of Operations, Information and Technology, Stanford Graduate School of Business

Managing Supply Chain RiskSpringer | £117by ManMohan S. Sodhi, Professor of Operations and Supply Chain Management at Cass, and Christopher S. Tang, UCLA Distinguished Professor

According to a recent survey, a typical pension fund trustee spends more time each week making tea than taking investment decisions.

Yet, as this book points out, these 120,000 unsung heroes are largely responsible for managing more than £1 trillion of liabilities (and hopefully nearly as many assets) on behalf of almost 20 million members of UK pension schemes. Its authors, Professor Andrew Clare and Chris Wagstaff, are both trustees but acknowledge that most of their peers are little more than enthusiastic amateurs.

Consequently, this guide does not assume too much prior financial knowledge. Instead, the reader is taken on a journey from the pension fairy to hedge funds and complex financial derivatives in a series of

bite-size nuggets that could easily be consumed while waiting for a kettle to boil.

The length of the glossary, at 48 pages, gives some indication of the breadth of the book, but this is no dry treatise; the section on behavioural finance ably illustrates the authors’ light touch with a series of teasers designed to bring the most confident reader back to earth.

If there is one criticism, it is that fees – a proven killer of investment returns – do not get a section of their own until page 500 (two pages before sex). But any pension scheme member would sleep easier knowing their trustees had at least sipped at this fountain of knowledge. Steve Johnson, Deputy Editor of FTfm at the Financial Times

The Trustee Guide to InvestmentPalgrave Macmillan | £35by Andrew Clare, Professor of Asset Management at Cass, and Chris Wagstaff, Visiting Fellow at Cass


28 | Feature Investment banking

big surpriseBig banks,

banker at a boutique advisory firm said, this might be down to the fact that the large corporates most likely to engage bigger investment banks are also more likely to be serial acquirers and therefore be “better” at M&A. But research in 2011 by the Boston Consulting Group found that so-called serial acquirers generated lower returns than other types of buyers. Further, the study’s elaborate methodology takes care of any such potential confounding effects.

Dr Golubov’s research found that the distinguishing factor was the ability of top-tier advisers to identify and structure mergers with higher synergy gains, to negotiate harder on price, and to extract a higher proportion of the synergies for the bidder.

Media spotlightIn turn, the fact that the halo effect of hiring a top-tier bank is evident only on public transactions – which attract a harsher media and shareholder spotlight – suggests that top-tier banks work harder to extract better outcomes for their clients and to protect their own reputations.

The top-tier banks in the study were Goldman Sachs, Merrill Lynch (now Bank of America Merrill Lynch), Morgan Stanley, JP Morgan, Citi/Salomon Smith Barney, Credit Suisse

First Boston, Lehman Brothers (now Barclays Capital) and Lazard. Echoing the conclusions of the study, the Co-Head of Global M&A at one of them said: “I and many of my colleagues have worked in this business for more than two decades. The cumulative value of that experience is not something that a smaller firm or a new entrant can replicate any time soon.”

Dr Golubov said: “We were puzzled by the earlier evidence that top-tier advisers could seemingly get away with charging premium fees and not delivering better outcomes, so we decided to re-examine this issue. It turned out that superior performance of top-tier investment banks was hidden within the sub-sample of public firm acquisitions [in fact, the largest deals], where advisers’ reputations are truly exposed and on the line.”

This new study will, for the time being, reaffirm the banks’ obsession with their “big is beautiful” approach to league tables. William Wright is an Investment Banking Columnist at Financial News. He can be contacted at [email protected]

For further information on the research, contact Dr Andrey Golubov at [email protected]

Investment bankers have long lived by the maxim that, when it comes to M&A advisers, big is beautiful. Now there is academic

research to support their claim that the top-tier banks really do deliver the best returns for their clients.

Working on large transactions – and winning league table credit for them – brings prestige, fees and an ill-defined sense of “quality” that in turn generates a momentum of its own in winning future business. That’s why nine of them fought to advise on the proposed $45 billion merger of the commodities giant Glencore and the international mining group Xstrata. And yet academic research has, in the past, failed to establish a clear link between the biggest advisers on the largest deals and the benefits to clients of their expensive work.

Instead, research has pointed to a negative correlation between size and performance. But a new study by Dr Andrey Golubov, Lecturer in Finance at Cass; Dimitris Petmezas, Professor of Finance at the University of Surrey; and Nickolaos Travlos, Professor of Finance at the ALBA Graduate Business School in Athens, suggests that top-tier advisers do indeed generate higher shareholder returns for publicly listed bidders – but not for obvious reasons and only when

they are advising on the acquisition of other public companies.

Their paper, When It Pays to Pay Your Investment Banker, which was published in the Journal of Finance (February 2012), examined more than 4,800 transactions between 1996 and 2009 by publicly listed companies in the USA, separating them into the acquisition of public and private companies. It measured the shareholder returns on these deals by means of the “cumulative abnormal returns” to investors in the five-day period around the announcement of a transaction.

A $65 million benefitIt found that the perceived quality of top-tier advisers (the eight largest investment banks by the value of deals advised over the period) had no discernible impact on returns across the sample. But when it came to acquisitions of other public companies, bidders who employed top-tier advisers generated excess returns to their shareholders that were 1.01% higher than on deals advised by less prestigious banks.

This effect – which translates into an average benefit to shareholders of $65.8 million per deal – more than offsets the fee premium of almost 40% charged by top-tier advisers.

At first glance, as one senior M&A

Does it pay companies to hire expensive top-tier advisers for M&A? New research shows that it does, and on a significant scale, writes William Wright.

big value,


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ILLUSTRATION BY OSCAR WILSON / DEBUT ART


30 | Corporate profile

IMAGE BY JAMIE BEEDEN

Mary Poppins was right: a spoonful of sugar helps the medicine go down. The nanny’s timeless

wisdom is a reminder that some commodities will always be in demand. So it is not surprising that Robin Cave, the 48-year-old Chief Executive of the sugar trader and consultant Czarnikow, has a confident air as we settle down to talk.

Not that everything in the sometimes volatile world of sugar trading is always sweet. When Cave was brought in to run Czarnikow three-and-a-half years ago the firm was wrestling with the great financial crisis. Cave was a 20-year veteran of derivatives trading at City houses such as Smith New Court, Merrill Lynch and HSBC. He had worked mainly in equity derivatives, not commodities, and knew nothing about sugar. He had also never been a chief executive before. “People here knew a lot more about sugar than I did, and for a while I was allowed to ask some basic questions,” he says. “Even now I learn something new about sugar almost every day.”

Czarnikow started trading all sorts of exotic commodities in London in

1861. It became a pure-play sugar trader 20 years ago when it was heavily dependent on the Australian market. It diversified to trade in the growing sugar markets such as Brazil and India. But when the credit crunch hit, trade (and cash) flows were disrupted. Cave was brought in from outside the industry to help right the ship.

Global preferencesThere are many basic facts about sugar that the outsider may not appreciate. In India, for example, the preference is for larger sugar crystals, whereas in Japan the stress is more on achieving the greatest purity.

The juice from sugarcane is highly versatile. Boil it and let it crystallise and you have sugar. Ferment it and you have alcohol. And the fibrous residue called bagasse, left after the sugarcane has been crushed to extract the juice, can be burnt to produce electricity and power the sugar processing machinery.

The use of bioethanol as a possible replacement for fossil fuels is another area to explore. But here, Cave says, the price of crude oil is key. If it falls, the incentive to find alternatives reduces. But were we to head back to

talkingSweet

Robin Cave, Chief Executive of the commodity house Czarnikow, discusses food, fuel and the future with Stefan Stern, Visiting Professor at Cass.


| 31

$150 a barrel or higher, research would be stepped up again.

Improved technology is changing everything in the sugar industry, Cave says. Efficiency has improved and the development of large areas of land in Brazil and India has changed the dynamics of the market. Satellite images can help to predict surpluses or shortfalls by identifying the size of sugarcane crops around the world.

Improved cropsBut misreading these images can also skew markets. In equity markets, volatility increases when underlying prices fall, but in commodities it is the complete opposite. Indeed, says Cave, the challenge in the industry can be to persuade farmers to improve their crops when prices are steady and reasonably high.

The crucial thing for Czarnikow is to maintain the best possible market intelligence by understanding how farmers are operating worldwide and what this will mean for levels of supply. The value of the crop in the ground can rise or fall long before sugar is actually delivered to customers. Skilful use of hedging is thus vital – which is where a derivatives expert such as Cave can offer experience and insight.

Czarnikow’s London offices are literally just round the corner from Cass and the company has been a corporate partner since May 2010, supporting Cass students through placements and internships. Cass’s Masters degree in Shipping, Trade & Finance turns out a ready supply of potential recruits – people who already have an affinity for the business of international trade. “We’re spoilt,” says Cave.

Renewable fuelsCzarnikow is also working with Cass on a white paper to be published this year which will explore future demand for transport fuel and the role that renewable fuels will play in meeting it.

The demand for energy is growing in much the same way as the demand for sugar and food. Czarnikow hopes that Cass’s expertise will help the company to better understand how that market is growing, and the type of fuels that will be required. Czarnikow is an expert in bioethanol, based on its market knowledge of sugarcane. Bioethanol already accounts for about 6% of global transport fuel consumption, and this could rise.

Czarnikow is positive about the potential for technological innovation to increase the volume of ethanol that can be produced from existing feed-stocks and to enhance the compatibility of ethanol with petrol.

In the meantime, we will all continue to need a few spoonfuls of sugar in our tea, cakes, fizzy drinks, alcoholic beverages and a thousand and one other consumer products. This is one commodity that remains constantly in demand.

Stefan Stern is Director of Strategy at Edelman and also Visiting Professor of Management Practice at Cass. He can be contacted at [email protected]

The demand for energy is growing in much the

same way as the demand for sugar and food.

Czarnikow hopes that Cass’s expertise will help

the company to better understand how that

market is growing...


32 | Corporate profile


experts in sugar and biofuels

Czarnikow is well regarded internationalcommodity house that has been trading in globalcommodity markets since 1861.

This year Czarnikow is celebrating one hundred and fifty yearsof providing services to growers, millers, refiners, beetproducers, traders, merchants, and industrial consumers ofsugar. The success of the business has been built uponmarket knowledge, confidentiality, reliability and independence.

Czarnikow has grown from an exclusive focus on sugar, toworking with other core commodities such as biofuels, ethanoland biomass, while developing a dedicated corporate financeteam which leverages Czarnikowʼs global network andknowledge base in order to create growth and developmentopportunities for companies in the sugar and biofuels spaces.

Czarnikow puts ethical standards at the heart of all its workand commitments, taking pride in the quality of service itdelivers to all parts of the physical supply chain.

For more information please visit www.czarnikow.com

Celebrating 150 yearsin commodities

Dr Iqbal Owadally, Senior Lecturer in the Faculty of Actuarial Science and Insurance at Cass, advises on effective saving and investing.

How to get the most from your piggy bank

caught up in the latest fad and end up buying too late, after investments have already gone up. They are disappointed when these investments then fall, whereupon they sell, again at the wrong time.

Investing in index and exchange-traded funds enables them to ride the market and benefit both from diversification and from the judgment of professional investors and analysts.

A purely passive stock market-oriented approach is likely to be disappointing. Index funds may be dominated by large-cap firms and by certain sectors, and they increase their weighting when these shares go up.

First, investors should diversify into other asset classes, including bond funds and commercial property investment trusts. They should also invest internationally.

Secondly, they can and should hold individual shares in companies and sectors which they have researched or followed for several years, and in areas where they may have professional expertise, as engineers or scientists or IT specialists. The advice of Warren Buffett, America’s most celebrated investor, to buy only what you understand is wise. Investors should avoid companies that have opaque structures, unfocused business plans or excessive debt. They should choose companies that have a unique character or

Most people save and invest. To maximise their returns they should follow a

cost-cutting, passive-plus and contrarian approach.

Cost-cutting means that investors should be fanatical about minimising not just their tax liability but also investment management charges, loads, fees and dealing costs.

The professional investment industry pays most of its employees not for their superior investment skills but for their sales skills. They do not generate high enough returns net of charges and fees, so investors should eschew funds and platforms that charge excessively. Structured products with complex guarantees are usually expensive and should also generally be avoided.

In fact, index-tracker funds and physical-security exchange-traded funds should form the bulk of an investor's portfolio. Not only are they cheap, but they form the core of the passive-plus approach.

We know that markets are not fully efficient in the sense that they do not price assets correctly, that they gyrate irrationally because of greed and fear, and that bubbles and crashes will happen. They are efficient, however, in the sense that it is difficult to beat markets regularly and consistently. Too many investors think that they can time markets, but get emotionally

commercial advantage, and whose performance will be uncorrelated with the rest of the market.

The key advice for long-term investors is to be contrarian. Markets sectors within these markets and individual companies all experience cycles. Anticipating these cycles – market timing – is difficult, but one can act after these cycles have turned.

If you are young or middle-aged, you should be in a phase of your financial life-cycle where you are accumulating wealth. You should be a long-term investor and should rejoice when prices fall because this is the time to buy. Ignore the noise, do not trade frequently, and periodically rebalance your portfolio to maintain your desired asset allocation. If your portfolio does better than expected, it may even be better to slow down or add no new cash to it. Keep your powder dry and build up your savings in a cash ISA or in Premium Bonds.

You may even want to spend and travel the world, or learn new skills. But be ready to invest when irrational exuberance dies down and value and sense come back to the market. Dr Iqbal Owadally can be contacted at [email protected] For more commentary and analysis by Cass experts, visit www.cass.city.ac.uk/casstalks

34 | Opinion piece


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