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Warwick Business School Alumni Association magazine: summer 08
Release your potential
                                                       H The Warwick MBA
Having studied at WBS, you already know the quality      One of the world’s leading MBA programmes. For the
of our expertise and teaching. But did you know that     ultimate flexibility in work life balance, study full time,
WBS can help you and your organisation at every          by distance learning, or in modular format
step of the way?
                                                       H The Warwick MPA
We offer a range of flexible, post-experience            The public and voluntary sector equivalent of the MBA,
qualifications for individuals, many of whom are         study part time in modular format
sponsored by their organisation.
                                                       H Doctoral Programme
Find out more about any of our programmes:               To pursue an academic interest in a highly specialised
  W wbs.ac.uk                                            area, study with one of the world’s top programmes
  T +44 (0)24 7652 4306
  E enquiries@wbs.ac.uk                                H The Warwick Diploma in Applied Management
                                                         A broad management course delivered part time in
                                                         modular format over 18 months

                                                       H The Warwick Diploma in Public Leadership & Management
                                                         An 18-month, part-time modular course for middle to
                                                         senior managers in the public sector

                                                       H The Warwick Diploma in Service Leadership
                                                         Delivered by WBS academics, at the Singapore Institute
                                                         of Management (SIM), a modular course for middle and
                                                         senior managers of customer facing operations

                                                       H Financial & Management Accounting
                                                         A highly focused development course for managers with
                                                         little or no finance training. Launching Autumn 2008
3

 message from the dean                                                                                                                        3



                                   2008 has been a momentous year          embedded DNA of strong innovation a global perspective, we
                                   on many fronts and one I am sure        will enhance our research output, through inter-disciplinary
                                   we will all have firmly placed in our   initiatives and through dialogue and contribution from
                                   minds in the future.                    business, industry and government. We will develop our
                                                                           curriculum, our delivery and our accessibility. All of this
                                Not only has the impact of sub-            will be developed through completing the WBS building
                                prime lending and mortgages been           development on campus and by advancing our brand
                                significant, but the importance            globally through institutional and business partnerships and
                                of strong leadership within                advancing our global alumni network.
                                business, industry and government
                                is increasingly scrutinised.               WBS has come a long way in a short period of time and we
    Organisations and countries are naturally striving to address          have the wide community to thank for that – staff, students,
    increasingly pressing global issues – from liquidity, inflation,       friends, donors, associates and you, our increasingly successful
    interest rates and investments, to climate change, carbon              alumni body. Thank you. Working together we can achieve
    footprint, uncertainty and political instability. As a leading         so much more which will benefit everyone in the WBS and
    European business school with an international faculty and             Warwick community.
    curriculum, we are working with governments and business
    leaders to address many of these issues.                               So here’s to the challenges that lie ahead and embracing the
                                                                           solutions – from addressing global issues, to advancing the
    Last year the Vice Chancellor, Professor Nigel Thrift,                 service we offer through your Alumni Association, to securing
    announced a dynamic and challenging, but exciting, vision              your help, expertise and support to build our global brand and
    to firmly place Warwick in the top 50 global institutions by           improving our School offering. From our oldest graduates to
    our 50th anniversary in 2015 (Vision 2015). In parallel with           our new alumni who have just graduated – we look forward
    the University at large, at WBS we have built upon our strong          to working with you in the year ahead and sharing a mutually
    vision and mission, developing an overall strategic vision with        beneficial relationship.
    supporting strategies to firmly place us in the top echelon of
    European business schools where we can seriously compete with
    the top global schools by 2015.

    We have a big challenge ahead of us, but we have never been
    an institution to rest on our laurels. As we build upon our




 contents
focus on finance               4       development and alumni relations
                               5       alumni board
                                                                               24                                                             20
One of the key               6–9       WBS news
values of WBS’                10       holy simplicity?
Alumni Association                     Professor Anthony Neuberger
is our commitment             11       credit crunch
to relevant lifelong                   Phil Ashdown
learning in business          12       climate change and financial markets
and management.                        Professor Mark Salmon
                              13       raising the standard
In this edition of nexus               Anne Gunther
we focus on finance,          14       crisis and currency
drawing upon research                  Professor Lucio Sarno                        6                                    13
being undertaken by           15       aligning the objectives
leading faculty at WBS                 Bo Kratz
and from our alumni           16       the credit spread puzzle
who are leaders within                 Professor Gordon Gemmill
their field.                  17       hurdles… what hurdles
                                       Rob Cooper and Jon Hill
                              18       raising funds for future leaders
                              19       WBSS update
                           20—22       UK event reviews, SIGs and regional groups
                              23       Overseas event reviews
                           24–26       alumni news
                              27       hot off the press                                       23
44



the development and alumni relations office
                                                                     on-line forums. We aim to advance the ways in which you
                                                                     can learn from and connect to the valuable research coming
                                                                     from WBS. We now have over 23,000 alumni, over 35 percent
                                                                     based overseas and you are all continually moving and
                                                                     wanting to connect. We aim to connect you better through
                                                                     technological advancements and through ensuring we have
                                                                     active networks and groups around the world.

                                                                     Finally, as Baroness Julia Neuberger DBE, (Chair, Commission
                                                                     on the Future of Volunteering), reflects, ‘Volunteering plays
                                                                     a vital part in the life of our communities, our nation and
                                                                     our world.’ But only where there is effective volunteer
                                                                     management in place. Many of you have offered to be and are
                                                                     active volunteers of WBS. We want to leverage this immense
                                                                     resource to enable you to advance your Alumni Association
You will have noticed many changes over the past year in             through our facilitation and management. To do this the
your Alumni Association – from staffing to Board activity,           Alumni Board is working with our regional, international and
and events around the world to academic updates. We                  industry volunteer leaders to empower groups to become
are continually striving to improve our service to you and           more engaged and active, bringing value to the alumni body.
to advance your involvement and support. Our sincere                 (Further details of this are shared by Gill Thewlis, Chair of the
thanks for all your support over the past year.                      Alumni Board, P5).

As we now move towards 2015, we have a clear set of                  We look forward to working with you to advance your Alumni
objectives and supporting strategies to deliver greater              Association and to see WBS and Warwick grow successfully.
value and relevance to our global alumni body. There are
three key values that will help us to achieve this – lifelong        Alison Bond
learning, global networking and volunteering. We are                 Deputy Director
committed to provide relevant business and management                Development and Alumni Relations
learning throughout your lifetime – from your alumni
magazine to tailored events, specific industry groups to



  contact details
  Alumni Association              Kathryn Chedgzoy                           Tracy Lynch                    Charlotte Wilkes
  Warwick Business School         Development and Alumni Relations Officer   Development and Alumni         Associate Director,
  University of Warwick           (Corporate Affairs)                        Relations Officer (Student &   Development
  Coventry CV4 7AL                t +44 (0)24 7615 0515                      Regional Affairs)              T +44(0)24 7615 0075
  United Kingdom                  e Kathryn.chedgzoy@wbs.ac.uk               t +44 (0)24 7657 5835          E charlotte.wilkes@wbs.ac.uk
  t +44 (0)24 7652 2813                                                      e tracy.lynch@wbs.ac.uk
  f +44 (0)24 7652 3719           Development and Alumni Relations                                          In–house photography by
  E alumni@wbs.ac.uk              Administration                             Faith Plevin                   John Weatherly
  W www.wbs.ac.uk/alumni          t +44 (0)24 7652 2813                      Development and Alumni
                                  E alumni@wbs.ac.uk                         Relations Officer              nexus is the magazine of the
  Pam Barnes                                                                 (Corporate Affairs)            Alumni Association, Warwick
  Alumni Publications Officer     Ann Jackson                                t +44 (0)24 7615 0372          Business School
  t +44 (0)24 7652 4396           Development and Alumni Relations Officer   e faith.plevin@wbs.ac.uk       T +44 (0)24 7652 4306
  e pam.barnes@wbs.ac.uk          (International Affairs)                                                   The views contained in nexus are those
                                  T +44 (0)24 7652 8197                      Ben Plummer                    of contributors and not necessarily
  Alison Bond                     E ann.jackson@wbs.ac.uk                    Director of Development and    those of Warwick Business School or
                                                                                                            the University of Warwick
  Deputy Director, Development                                               Alumni Relations
  and Alumni Relations            Paula Kersten                              T +44(0)24 7652 4188
  T +44 (0)24 7652 4176           Events Coordinator                         E ben.plummer@wbs.ac.uk        Design by Morse–Brown Design
  E alison.bond@wbs.ac.uk         t +44 (0)24 7615 0171                                                     w www.morsebrowndesign.co.uk
                                  e paula.kersten@wbs.ac.uk
55

 alumni board

  Your alumni board has 15 members drawn from across the
  alumni community, as well as three student members and five
  WBS Staff members. Together we are focused on building
  engagement across the alumni body, with a specific focus this
  year on recognising our existing active volunteer base across the
  world, and building on it. To that end we are organised into
  four working groups, oriented around the main routes alumni
  can take to connecting with the alumni network.

  Gill Thewlis
  Chair of the Alumni Board
  FTMBA 1989–90


where we are...                                  what we do...                                      who we know...
                       We all live and work                                Whatever discipline
                       somewhere, and                                      brought us to WBS
                       our aim is to get                                   in the first place,
                       to the point where                                  we have current
                       every alumnus and                                   professional interests
                       alumna can access a                                 either in terms
                       WBS network close                                   of our functional
                       to where they live or                               specialism or our
                       work. Manny Coulon                Nick Jessett      industry. There are         Jemima Tomlinson           Kate Spencer
    Manny Coulon       leads the group                                     high concentrations
                       focused on this route     of WBS alumni in many of the world’s largest       Whenever we completed our studies at WBS,
to connecting, so if you’ve volunteered in       global organisations, and so there are many        we were (or for current students, still are)
the past to do something or represent the        ways of connecting with the WBS network            part of a ‘Class of…’ Many of our alumni
network in your locality, particularly if you    through your professional interests. Nick          are keen to stay in touch with or re-connect
are outside the UK, you can expect to receive    Jessett leads the team focused on developing       with the people they knew when at Warwick.
some contact soon from Manny’s team.             new Special Interest Groups and advising the       We’re going to build a network of class
                                                 central Alumni Relations and Development           representatives, so that everyone can connect
                                                 team on where to focus their energies in           with someone they recognise from their class
Manny Coulon           FTMBA 1998–99
                                                 building WBS corporate partnership networks.       – however long ago that was. We’re also keen
Rob McCulloch          BSc Management                                                               to make sure the existing student body see
                       Sciences 1972–75                                                             the value of connecting with alumni whilst
                                                  Nick Jessett           EXMBA 1985–89
Karamjit Singh         MAIR 1973–76                                                                 still at Warwick. Jemima Tomlinson and Kate
                                                  Issam Hamid            FTMBA 2002–03              Spencer lead this group.
Janet White            DLMBA 2002–06
                                                  David Myers            FTMBA 1999–2000
If you would like to help set up an alumni        Paul Nicholson         FTMBA 1971–72              Kate Spencer          Current DLMBA student
group in your area please contact                 Ananda Roy             FTMBA 2005–06              Jemima Tomlinson EXMBA 2003–07
Alison Bond, Deputy Director at
                                                                                                    Cristiano Coppola     Current FTMBA student
e alison.bond@wbs.ac.uk
                                                 If you would like more information on joining
                                                                                                    Paul Edwards          WBS Professor of
                                                 a Special Interest Group or establishing a
and bringing the                                 corporate partnership, contact Faith Plevin at
                                                                                                                          Industrial Relations
                                                 e faith.plevin@wbs.ac.uk                           Richard Hughes        DLMBA 2003–06
network together…
                                                                                                    Francis Lootes        Current Undergraduate
                       David Allan leads the team focused on organising the first ever event                              and President of WBSS
                       to bring as many as possible of our active volunteers together on
                       27 September 2008 at WBS, physically, virtually and in spirit. The           If you would like to become a class
                       programme is evolving but is already packed with activity and we hope        representative or would like to nominate
                       to shrink the world with technology so that as many people as possible       someone from your class, please contact
                       can take part. The day is intended to become an annual event and a core      Tracy Lynch at e tracy.lynch@wbs.ac.uk
                       part of supporting and
                       thanking our active          David Allan           MPA 2000–04
                                                                                                     If you would like to attend the Volunteer Day,
                       volunteers – we look for- David Sykes             FTMBA 1986–87               in person or ‘virtually’, please contact Tracy
                       ward to seeing as many of                                                     Lynch at e tracy.lynch@wbs.ac.uk
      David Allan                                  Mark Whitley          FTMBA 1999–2000
                       you as possible on the day.
6 nexus: summer 08                                                                                                     WBS news

                                                                             winter graduation celebrations
                                                                             On 23 January around 620 people gathered at WBS to celebrate the
                                                                             successful completion of study by over 300 WBS students. Winter
                                                                             graduation is primarily for postgraduate students, and many of their
                                                                             families and friends came along and joined the celebrations.




 rankings
The ever-present theme of ‘rankings’ brought some pleasing news for
WBS. The first ever ranking of Distance Learning MBAs, carried out by
the Economist Intelligence Unit, placed WBS third in the world and
first in the UK.

It was also good to see that our Full-time MBA rose into the top 30 in
the Financial Times’ world ranking, climbing seven places in one year.        MSc Finance prizewinners Thierry Cambray, Wael Hathout and
                                                                              Chan Tong Ong with Professor Howard Thomas, Dean of WBS
Our undergraduate programme continues to remain in the top
echelons in the UK.

WBS Dean, Howard Thomas, commented: ‘Media-based rankings are                student competitions
now a fact of life for business schools and universities. Our aim is to be
the best European, University-based business school and our rankings         WBS undergraduates seem to have been even more involved than usual
show that we are well on the way to this.’                                   this year in competing in external business student competitions.

                                                                             Five teams took part in the IBM Universities Business Challenge, with a
a new masters degree                                                         team of second years making it through the semi-finals, coming top in
                                                                             their own stream of 8 teams.
In January, a new Masters degree, the MSc in Business Analytics &
Consulting (MSBAC), was launched, with the first intake starting in          Other WBS teams were the Warwick Trio in the L’Oreal Brandstorm
October. This 12-month full-time degree brings to ten the number of          competition, and football4future, Frontier, and Potentia Events in the
specialist masters courses on offer at WBS, which together with the          Ernst & Young Profitunity competition.
non-specialist Masters in Management, are aimed at new and recently-
graduated students.                                                          The Warwick Bears in the Global Management Challenge, who
                                                                             finished in the top eight worldwide, beat over 1,000 students from over
MSBAC will run as a sister programme to the existing MSc in                  300 teams. All teams were a credit to themselves and to WBS.
Management Science & Operational Research (MSOR), which has a
strong reputation in the OR community and is the longest-running
specialist masters course at WBS.

W www.wbs.ac.uk/students/masters



superbrand status
WBS attained ‘business superbrand’ status in a survey highlighted in
the UK’s Daily Telegraph newspaper in February. Stephen Cheliotis,
Chairman of the Superbrands Council said, ‘It is no surprise that
the high regard in which Warwick Business School is held by the
international business community has translated into being recognised
as a UK Business Superbrand. It is a brand that continues to gain
momentum and every year is a more compelling challenger to its often
older and more established rivals. As the most improved brand in its
category, jumping almost 100 places in the rankings, it is clear that its
influence on both experts and business professionals alike is growing.’
                                                                              Members of one of the five WBS teams in the IBM Universities
w www.superbrands.uk.com/bsb/index.html                                       Business Challenge
WBS news                                 nexus: summer 08                                                                                     7


staff successes                                                                student successes
WBS Dean, Howard Thomas, was confirmed as Chair of both the                    Former British Olympic marathon runner and current DLMBA
AACSB (the US-based Association to Advance Collegiate Schools of               student, Richard Nerurkar has been working in Ethiopia for the past
Business) and the ABS (UK-based Association of Business Schools) for           seven years, staging athletic competitions for the Ethiopian public.
2007–8. Howard is the first Brit to hold the position at AACSB and             Working with Olympic gold medallist Haile Gebrselassie, he has set
the first to hold both posts.                                                  up the Great Ethiopian Run, an organisation which has now staged
                                                                               more than 35 races in different parts of Ethiopia for more than
Another busy person is Martin Cave, director of the WBS research               200,000 participants. ‘These races are more than just athletic events,’
Centre for Management under Regulation. In February the UK                     explains Richard, ‘We also use the races as a way of publicising
government asked him to lead a year-long review of the UK water                health and social messages.’
industry, then in April came a request from the Secretary of State for
Transport which he could not refuse! Announcing a review of the                BSc Management finalist Philip Craig went to the University of
economic regulation of the UK airport system, she appointed Martin             Wisconsin-Madison for an extra year’s study last year, and ended up
to chair a panel of experts to carry out this review.                          researching and delivering several lectures to fellow students!

In April, Linda Dickens MBE, Industrial Relations & Organisational             MSc in Management Science & Operational Research students won
Behaviour group, delivered the annual Warwick-Acas Lowry lecture on            a cash prize and certificates from business process analysis company
campus to an audience of senior HR managers, trade union officials,            The Lanner Group for the best consulting report.
employment relations professionals and academics. She reviewed
the last 25 years of employment relations and related legislation in
the UK, arguing that the cumulative result of ad hoc responses to
particular problems has been growing institutional fragmentation,
complexity and an increasing lack of regulatory coherence.




                                                                                  The Lanner Group prize winners


                                                                               In April, WBS hosted a successful conference organised by doctoral
                                                                               students for doctoral students from three of the world’s best business
                                                                               schools: Judge Business School at Cambridge, the Saïd Business
This year’s Warwick-Acas Lowry lecture presenter Linda Dickens MBE (centre)
                                                                               School from Oxford, and WBS itself.

Simon Collinson, Marketing & Strategic Management group, was
one of a group of experts to speak on new perspectives in Chinese
innovation at Demos, the independent think tank based in London.
Other speakers represented organisations including the OECD, the
Asia Pacific Technology Network, and the China-Britain Business
Council. Simon’s two year research project, carried out through
AIM Research (the ESRC-funded UK-based Advanced Institute
of Management Research) interviewed managers from British,
European and US firms operating in China.

Also from MSM, Professor Nigel Piercy and WBS doctoral graduate
Ken Le Meunier-Fitzhugh were awarded the US Marvin Jolson Prize
for the Best Contribution to Selling and Sales Management Practice                Concentration levels are high at one of the presentations
for 2007 by the Journal of Personal Selling & Sales Management. This              at the doctoral conference
is the second time Nigel has won this award.

Julia Kotlarsky, ISM, was joint author of an article on outsourcing
published in the Wall Street Journal this May. A Corporate Social
Responsibility paper by Industrial Relations Research Unit’s Paul             For more news items, features, media coverage and podcasts visit our
Marginson and Tony Edwards (IRRU associate fellow) and others,                Press Centre W www.wbs.ac.uk/news/
following on from research on multi-national companies, has been
placed in the top ten HR listings in the influential newsletter of the
US-based Academy of Management (AoM).
8 nexus: summer 08                                                                                          research review

                         Dr Qing Wang,
                         Associate Professor
                         of Marketing &
                         Innovation, has been
                         the driving force
                         in launching a new
                         research network to
                         explore key issues
       Qing Wang         where marketing              John Benington            Jean Hartley              Colin Clubb            Shahed Imam
                         and innovation
meet with regard to fast-growing economies        The 6th International Studying Leadership         Research by Dr Shahed Imam and Professor
such as China and India. The cross-border         Conference took place at WBS in December,         Colin Clubb, WBS Accounting group, with
research network on Marketing, Innovation         on the theme of Leadership: Purposes, Politics    Richard Barker, Judge Business School, on
and Chinese Economy (MICE) has already            and Praxis. Academics convened for a two-day      The Use of Valuation Models by UK Investment
received funding for specific projects from the   set of plenary sessions and individual papers.    Analysts will feature in the European
US-based Marketing Science Institute and the      There were 59 papers and over 100 delegates.      Accounting Review.
Chinese Natural Science Foundation.               There will be a special issue of the journal
                                                  Leadership based on some of the papers,           The study is based on semi-structured
Main research themes include:                     edited by conference organisers Professors        interviews with 35 sell-side analysts from ten
• Firm’s marketing capabilities and               John Benington and Jean Hartley, IGPM.            leading investment banks and seven buy-side
  technological capabilities for radical vs                                                         analysts from three asset management firms;
  incremental innovations                         The conference got off to a strong start with     and content analysis based on 98 equity
• Consumer characteristics and behaviour for      an introduction from the Deputy Dean of           research reports for FTSE-100 companies
  really-new products and services                WBS, Professor David Wilson, followed by an       covered by the sell-side interviewees.
• Aesthetics of innovation and the effect on      electrifying keynote talk from Professor Jean-    They conclude that, while the literature
  adoption intention: exploring cross-cultural    Louis Denis from the University of Montreal,      has focused on the technical merits of
  differences and similarities                    who spoke on the topic of The practice of         alternative valuation models, analysts’ actual
• Innovation and branding strategies of           leadership in the messy world of organisations.   usage of valuation models also requires
  Chinese high-tech firms.                                                                          an understanding of social and economic
                                                  Another highlight was the plenary session         context and motivations.
MICE members come from UK institutions            with David Blunkett, MP and Sir Michael
including WBS, Cambridge, Tanaka                  Bichard, in conversation with John                Another research paper from Dr Shahed
Imperial, and Sussex University, and four         Benington, as they reflected on the purposes,     Imam and Richard Barker, Judge, Analysts’
institutions in China including Tsinghua and      politics and praxis of leadership from their      Perceptions of ‘Earnings Quality will feature
Zhejiang universities. The first workshop, in     respective roles and working relationship as      in the Accounting and Business Research
collaboration with Tsinghua University, took      former Secretary of State for Education and       Journal. This research seeks to understand
place on 30 March (see P23).                      Permanent Secretary for Education.                earnings quality as interpreted by analysts
w www.wbs.ac.uk/faculty/research/mice.cfm                                                           and then tests this interpretation against its
                                                                           Jean Hartley and         actual usage in analysts’ research reports. An
                                                                           Lyndsay Rashman,         inductive approach is used that combines
                          In their work for                                                         interview data with content analysis, and
                          the Warwick Local                                of the Institute of
                                                                           Governance and           the findings are interpreted in the light
                          Authority Local                                                           of findings from market-based and other
                          Authorities Research                             Public Management,
                                                                           were commissioned        research.
                          Consortium,
                          Acting Director                                  by the UK’s
                          Howard Davis and                                 Renew Northwest                                   Research papers by Dr
                          Maggie Rust, Local          Lyndsay Rashman      organisation to                                   Philip Stern, Associate
     Howard Davis         Government Centre,                               see how public                                    Professor, MSM, are
                          have produced a         service organisations can share knowledge to                               to appear in two
guide to Understanding the Governance and         bring about regeneration. Their report was                                 leading international
Accountability of Partnerships. Partnership       published in April, and outlined a knowledge                               journals.
working is an increasingly vital element of       transfer framework including advice on how
the day-to-day working of local authorities       organisations can adapt the lessons learned                                Physicians’ Persistence
and other local public services.                  by peers and competitors to meet their own              Philip Stern       and Its Implication
                                                  specific needs.                                                            for Their Response to
In early March LGC coorganised a seminar                                                            Promotion of Prescription Drugs (2008) with R
to explore the challenges of urban transport      Variable pay systems or collective bargaining?    Jarakiraman, S Dutta, C Sismero will feature in
governance facing city regions and other          Research by members of the WBS Industrial         Management Science.
major urban areas in England in the               Relations Research Unit (IRRU) found
context of the Government’s emerging              two major trends characterising recent            Stochastic Modelling and Industrial Networks –
city regions agenda. Attended by senior           developments in pay setting in the UK: the        Complementary views of organisational buyer
officer representatives of the majority of city   continued retreat of collective bargaining        behaviour, co-authored with PhD candidate
regions in England, the seminar sought to go      in the private sector, and growing emphasis       Jim McCabe, in the Journal of the Academy of
beyond merely repeating the key elements of       on variable pay systems (VPS). They looked        Marketing Science.
legislation by constructively challenging the     at these two trends and found a complex
Government’s proposals and considering the        relationship, varying according to the type of
practical and political issues concerned with     VPS and features of the firms or organisations
its implementation.                               involved.
research review                           nexus: summer 08                                                                                    9


                                                                               Their paper provides a comprehensive evaluation of the short-horizon
                                                                               predictive ability of economic fundamentals and forward premia on
                                                                               monthly exchange rate returns in a framework that allows for volatility
                                                                               timing. They implement Bayesian methods for estimation and ranking
                                                                               of a set of empirical exchange rate models, and construct combined
                                                                               forecasts based on Bayesian Model Averaging. Their assessment of the
                                                                               economic value of the in-sample and out-of-sample forecasting power
                                                                               of the empirical models finds two key results:
  Pasquale Della Corte       Lucio Sarno              Ilias Tsiakas
                                                                               • a risk averse investor will pay a high performance fee to switch from
An Economic Evaluation of Empirical Exchange Rate Models, co-authored            a dynamic portfolio strategy based on the random walk model to one
by Dr Pasquale Della Corte, Professor Lucio Sarno and Dr Ilias Tsiakas,          which conditions on the forward premium with stochastic volatility
WBS Finance group, featured in the top finance journal Review of                 innovations
Financial Studies.
                                                                               • strategies based on combined forecasts yield large economic gains
The paper recently appeared as a working paper for the CEPR (Centre              over the random walk benchmark. These two results are robust to
for Economic Policy Research). The authors also received an invitation           reasonably high transaction costs.
from VoxEU.org to write a short research column. Established by
leading economists, this well-respected website provides research-based        w www.voxeu.org/index.php?q=node/876
policy analysis and commentary.




  post-conflict reconstruction and governance
  Professor John Benington and IGPM               up action is being planned and a proposal             Kathy Johnson (a graduate from
  colleagues have begun to develop                being prepared for a longer term programme            our Postgraduate Diploma in Local
                                                  of capacity building.                                 Government Management) has been
  active working links with the new                                                                     appointed to work in Juba for a year as a
  Governments of Sierra Leone and of                                                                    research and policy officer in the office
  the Southern Sudan, both of which                                                                     of the Minister for Commerce and Trade,
  are struggling to restore democracy                                                                   to analyse the context, to assess needs on
                                                                                                        the ground, and to develop pilot training
  and public services after bitter civil
                                                                                                        programmes.
  war. Warwick IGPM has been invited
  to contribute to the training and                                                                                              The first of these
  development of Ministers and senior                                                                                            took place in Juba
  civil servants in each of these two                                                                                            in February 2008,
                                                                      Southern Sudan                                             when John, Jean
  countries.                                                                                                                     Hartley and Kathy
                                                                                                                                 Johnson ran a
  Sierra Leone                                    Southern Sudan
                                                                                                                                 one week training
  The elections which swept the All People’s      Southern Sudan is in a very difficult period
                                                                                                                                 workshop on
  Congress (APC) into government in Sierra        of transition, with peace and democracy
                                                                                                                                 ‘Managing People
  Leone in October 2007 have created a            by no means yet certain. After more than
                                                                                                             Kathy Johnson       and Performance’
  historic moment of opportunity for this         20 years of civil war, the Comprehensive
                                                                                                                                 for the top 50
  war torn country to make a significant          Peace Agreement makes provision for a
                                                                                                        managers in the Ministry of Commerce.
  transition to peace, democracy and              possible secession of the largely African and
                                                                                                        A second workshop on ‘Managing
  economic and social development.                Christian South from the largely Arabic and
                                                                                                        Finance’ took place in June and a third on
                                                  Muslim North. An interim Government of
                                                                                                        ‘Managing Projects’ in July.
  Moving quickly after the elections, John        the Southern Sudan has been established,
  and IGPM associate fellow Mark Sheldrake        and elections are planned for 2009 and a full
                                                                                                        W www2.warwick.ac.uk/fac/soc/wbs/igpm/
  helped to run a one week workshop for all       referendum in 2010.
  the new Ministers and their Permanent
  Secretaries, in Freetown in December.           Having hosted a visit to Warwick in February
  They had the privilege of contributing          2007 by the Minister of Commerce and
  to a series of Policy Development and           Trade in the Government of the Southern
                                                                                                          The spring 2009 issue of nexus will
  Strategic Leadership Forums for the             Sudan and his Director General of Finance
                                                                                                          focus on Entrepreneurship. If you run
  newly elected Ministers and their senior        and Resources, John Benington made a
  civil servants, sponsored by the Sierra         visit to the capital Juba in June 2007 to               your own business and would like to
  Leone government’s Public Service               assess the Government’s development and                 contribute to your alumni magazine,
  Reform Programme and Institute of               training needs. Subsequently John and                   then do email the editor
  Public Administration and Management            IGPM colleagues have been developing pilot              E pam.barnes@wbs.ac.uk
  (IPAM), and supported by DfID and Public        programmes of support.
  Administration International (PAI). Follow
10 nexus: summer 08 finance




holy simplicity
Professor Anthony Neuberger examines the reality of the latest pensions policy reform

Now that all the dust has settled, it is time
to look back at what has been described                                                                the author in                   minute
by Ministers as the most radical reform of
pensions policy since Beveridge. The rhetoric
                                                                                                       Anthony Neuberger is Professor of Finance at
suggests a grand and elegant vision. The                                                               WBS and current Head of the Finance Group.
reality is rather more prosaic.
                                                                                                       His previous experience includes the Institute
Rarely has such care and deliberation gone                                                             of Finance and Accounting, London Business
into an area of public policy. A Pensions                                                              School (1985–2004), the UK Department of
Commission, under Adair Turner, has                                                                    Energy (1975–83), and he was a member of
                                                                                                       Central Policy Review Staff, UK Cabinet Office
deliberated for three years, produced two
                                                                                                       (1973–75).
major interim reports, and one final report.
Evidence has been taken, White Papers                                                                  Anthony consults for a variety of investment
have been written, bills enacted, quangos                                                              banks, exchanges, government departments
established. The timescale is leisurely. The                                                           and trade associations.
reforms to the UK state pension system will
only be implemented in full by 2080.                                                                   His research interests are: derivatives;
                                                                                                       commodities; market microstructure;
                                                                                                       investment management; pensions policy.
It is easy to mock the pretentiousness of the
plan. What confidence can there be in any
planned sequence of changes unrolling over
such long horizons when the Department
of Work and Pensions itself has only been in
existence for seven years and when, during       with pensioner income, and the savings              present measures to dismantle past reforms
its brief life, it has had no fewer than seven   credit that first increases and then declines       (such as the state earnings related pension)
Secretaries of State?                            with income.                                        as radical new initiatives. Complexity also
                                                                                                     makes it easier to provide goodies – by
But the need for reform is patent. The           The New Jerusalem to which we are heading           relaxing a contribution requirement here, by
Pensions Commission described the UK             looks like a pretty messy, complex sort of          adding a credit there – to buy off particular
pension system as the most complex in the        place. And that matters.                            pressure groups without spending too much
world. Unravelling the complexity is bound                                                           money.
to take time.                                    Pensions policy is intended to enhance
                                                 social security. It is hard to see how people       Complexity is an effective device for
                                                 can get security from a system that is so           keeping costs down. The system will end
                                                 complex that they cannot understand it. The         up delivering what is in fact very close to
        Pensions policy is intended              state provision is intended to complement           a flat rate universal pension – the so called
        to enhance social security.              occupational pensions and private pension           Citizen’s Pension. But if there were a single,
   It is hard to see how people can              savings. The complexity of the state system         universal flat rate pension, the pressure to
   get security from a system that               makes it hard to give sound advice to people        raise the level of the pension would be hard
                                                 on moderate incomes who may well be                 to resist. By having a system of multiple
   is so complex that they cannot                means-tested in retirement.                         interlocking pensions and credits, the target
   understand it.                                                                                    of campaigners for change is diffused. Any
                                                 Why the system has not really been                  proposal for changing part of the system
                                                 simplified                                          can be resisted on the grounds of its adverse
                                                 Radical change creates losers. To create a          effects elsewhere in the system.
The Grand Design                                 consensus for change you have to buy off the
So what is the grand design towards which        losers. But despite all the rhetoric, there is no   Our mean and complex state pension system
we are moving at such a stately pace?            consensus to spend more on pensions. True,          is likely to remain substantially unreformed
By 2080 the UK will still have two state         the expenditure on pensions is expected to          because there is no desire to spend more on
pensions: the Basic State Pension and the        rise as a proportion of GDP, but not nearly         the state pension, and the complexity makes
State Second Pension. They will both be          so fast as the proportion of pensioners in the      the meanness politically feasible.
flat rate, but will be computed on the basis     population. The UK state pension system is
of different criteria, with different rules of   notably meaner than almost any other in the
entitlement. Actually, it is not quite true      developed world, and it will stay that way.
that the state pension will comprise just
two components. There will also continue         I suspect that the real reason is that Ministers
to be two other components of the pension        are addicted to complexity. Only because the
package – the guarantee credit that declines     system is so poorly understood can Ministers
nexus: summer 08 finance                                                                            11




credit crunch
Phil Ashdown (FTMBA 1996–97) Director, Altima Partners LLP, gives his thoughts on how to prepare for the opportunities

We have just experienced the worst
financial markets since the 1930s. The                                                                the author in                    minute
world’s leading financial institutions are
successfully repairing their balance sheets                                                        Phil Ashdown has over 25 years of diverse
having taken combined losses of c.$380bn                                                           experience gained within banking and advisory
since last summer. Globally, central                                                               businesses. He is currently Director, Altima Partners
bankers, regulators and governments have                                                           LLP and is responsible for building their credit
engineered an unprecedented yet highly                                                             strategies business and is presently raising a bespoke
successful coordinated approach to address                                                         stressed/distressed fund from institutional investors
                                                                                                   and family wealth offices, globally. Altima currently
immediate liquidity concerns and systemic                                                          has in excess of $4.5bn assets under management.
risk within the financial system. Despite
the dramatic news flow around the credit                                                           Previously, Phil was Managing Director, Head of
crunch, stock prices continue on the whole,                                                        Acquisition Finance and Sponsor Coverage for
to be relatively robust (ex of the financial                                                       ING Bank in London, where he was responsible
institutions sector). We can, it seems, look                                                       for the strategic development of an integrated
                                                                                                   business model covering, Acquisition and Leveraged
back and be confident that the worst crisis                                                        Finance, Advisory and Debt Capital Markets. He has
to impact financial markets since the 1930s                                                        successfully led financings for in excess of €20bn,
is over.                                                                                           during his career.

Or is it? The US economy is fully expected                                                         Phil became an Honorary Professor at Warwick
                                                                                                   Business School in May 2008.
to enter into a recession, or at the very least
a period of ‘sub-normal’ growth, since last
summer house prices have fallen 14 percent
in the USA, some cities have seen prices fall     rate of economic growth within the BRICs         they sought. Nevertheless, it is increasingly
c.25 percent; Main Street is very wary of the     continue to run at levels outside all historic   likely that at the very least, timing and
impending fall-out from Wall Street. The          boundaries. Has there been a de-coupling of      holding periods will be longer than perhaps
US Fed economic policies are in complete          emerging markets? There appear to be new         envisaged/expected; equity returns will be
divergence with the ECB, concerning               fundamental drivers behind commodity,            lower whilst risk has undoubtedly increased.
differences of opinion over near term growth      energy and food prices as a consequence of
prospects and inflation concerns. In large        the growth in BRICs. Does this underpin the      However, growing realism amongst
part this has lead to the rapid appreciation of   sustainability of such prices at the current     vendors (either ‘forced’ or ‘willing’) and
the Euro/$ rate.                                  trends/levels? What impact will this have on     the substantial availability of liquidity and
                                                  USA and Euro economies?                          capital appropriately structured for the new
More broadly, currency rates have shifted                                                          post credit crunch environment will drive
swiftly since last summer, impacting              There is a paradox and we are I feel, just       many excellent investment opportunities
purchasing power parity, revenue and cost         part way through the consequences of the         over the next few years. Timing is critical.
inputs aggressively. The UK is beginning          credit crunch; the eye of the storm perhaps.     The adage of ‘avoid the falling knife’
to experience a very real housing problem,        Immediate concerns of systemic risk and          strongly prevails. Some investors are
with prices now expected to fall by as much       liquidity within the financial services sector   beginning to utilise their liquid resources
as 7 percent this year alone (revised from        appear to have been addressed; much credit       now, time will tell whether they are right.
+3 percent since last summer), the retail         should go to the leadership taken by the         Most probably, it is the eye of the storm
and building and construction sectors are         Fed in this regard. However, we are at the       however. Huge opportunity is out there
now operating under increased economic            beginning of more fundamentally driven           as the feedback mechanisms from the
and financial strain. Globally, financial         consequences of the credit crunch and their      credit crunch impact fundamental drivers
institutions have substantially tightened         impact upon the wider and ‘real’ economy.        across all sectors and asset classes. As more
their lending criteria, risk spreads and          Caution is the key watch word.                   fundamental drivers unfold, vendors and
associated costs have risen dramatically.                                                          acquirers will be able to undertake robust
                                                  Those long of assets, at the wrong time          and diligent appraisal of valuation and assess
Availability and cost of finance is a very real   (notably 2006 and 2007 vintages) and with        risk/reward, bottom up.
issue for consumers and those corporates          too much leverage will be harshly hit as the
and sectors facing even just mild stress,         consequences of the new post credit crunch       On balance, it remains a little too early
both in Euro-land and the USA. Default and        environment become reality over the next         to take advantage… get ready this is
distress rates, across all forms of consumer      two years. Globally, financial institutions      undoubtedly an exciting time. Time
and corporate debt are predicted to increase      have seen this already (IMF has said losses      compression is typically prevalent as markets
from record all time lows of 0.8 percent          could reach $1trillion globally). Those in the   rapidly adjust downwards and strategic
to in excess of 10 percent of total debt in       fortunate position of having locked capital      and sustainable competitive advantage can
issue, by year end 2009. Whilst globally,         and sufficient cash flow to ride out the next    be rapidly built and/or expanded at this
commodity, energy and food prices and the         2/3 years may ultimately achieve the returns     juncture, for those ready and bold. Be bold!
12 nexus: summer 08 finance




climate change and financial markets:
risk or uncertainty?
Professor Mark Salmon addresses the issue of how financial markets can be best employed to manage the risks
associated with climate change

The ability of financial markets to bear risk     The major factors behind these escalating        The extent to which the redistribution of
is central to economic welfare and stability.     costs are economic and population growth         risks by financial markets (after securitisation
Growth and economic wellbeing is inhibited        with accompanying land-use changes               of assets) can be a benefit or a danger to
if financial markets are unable to transfer       and movements of capital and people to           society as a whole is a critical issue. How far
resources efficiently from the suppliers of       vulnerable regions. In other words, the main     can we rely on financial markets to efficiently
liquidity to risk takers or entrepreneurs.        cause is global change and development           price and transfer risks? The repackaging
Ensuring a proper return to capital and risk is   in its broadest sense. At the same time as       and reselling of US subprime mortgage debt
the function of a market and market stability     such profound and sustained global change        through CDOs exactly mimics the way in
enables proper long run planning and the          is occurring, it is expected that long-term      which insurance has traditionally managed
efficient allocation of resources to productive   worsening of weather extremes due to             or diversified risk through re-insurance. If
activities. These statements underlie the free    climate change will also accelerate if action    recent experience has shown us anything
market philosophy that drives our economy.        is not taken.                                    it has shown us that we currently can’t
What happens when this belief system is                                                            price these instruments correctly and rating
confronted with global warming?                   Specific events such as hurricanes Katrina       agencies are unable to properly assign risks
                                                  and Andrew in 1992, the Northridge               so how can we hope that environmental
There is real concern within the insurance        earthquake in 1994, or even the bombing          risks will be properly priced and traded in
industry that the true costs of climate change    of the World Trade Centre in 2001, have          financial markets? Uncertainty is perhaps
have not been fully recognised and hence          all served to underline the increasingly         more important than Risk.
priced (see for instance the Swiss Re, Munich     stretched capacity of global insurance
Re, OECD, and World Bank web pages).              markets. This has in turn sparked an             These are some of the issues the Finance
Equally there has been a growing realisation      increasingly active debate among actuaries,      group at WBS is currently addressing.
that the capital base of financial markets has    economists and politicians over how
to be employed to manage the risks associated     financial markets could, or indeed should,
with climate change. The traditional route        be used to hedge risk that has previously          the author in                    minute
of insurance and the diversification of risks     been covered using other channels. A
through reinsurance is simply unable to carry     symptom of the debate and of the increasing
the potential burden. The implications of         linkage and possible convergence between
liquidity failure and default on a large scale    the insurance and financial markets has
within the insurance industry could have a        been the steadily increasing stream of
major impact on the global economy.               financial instruments that contain some
                                                  form of insurance product and vice versa.
We are faced with two options; either various
climate-related insurance lines, say flooding,    The lines between the industries have
are simply withdrawn and environmental            become increasingly blurred and this
risks become uninsurable or we start to use       has stimulated the tailoring of products
financial markets to manage (and price) these     to the risk preferences, capacities and
risks. The issue facing us then is, given the     demands of both buyers and sellers of risk
uncertainty regarding the physical processes      based products. Securitisation of risks in
underlying climate change, how can financial      both areas has generated a concomitant
markets be best employed to manage the            development in the pricing of products
associated risks?                                 containing both insurance and financial            Mark Salmon is Professor of Finance at WBS
                                                  elements, the result of which has been a           and Director of the Financial Econometrics
                                                                                                     Research Centre (FERC), which forms part
According to the 2003 report by the               search for an appropriate class of processes       of the Warwick Finance Research Institute.
International Institute for Applied Systems       to solve the problem of price determination        He was formerly Deutsche Morgan Grenfell
Analysis, more than 700 major ‘natural’           for extreme risks. Arguably one of the most        Professor of Financial Markets at Cass Business
catastrophes occur every year. Since the          important aspects in this process is the way       School, London. Mark previously held the
1950s alone, economic losses from disasters       in which risk and perhaps more importantly         position of Professor at the European University
of either natural or man-made causes have         uncertainty are handled in each discipline.        Institute in Florence. He has been an advisor to
increased 14-fold. Although the developed                                                            the Bank of England for the last five years and
                                                                                                     has many links with City institutions.
world generally suffers the greatest absolute     Uncertainty arises when we do not know the
economic losses, when seen as a percentage        probability distribution of random events,         His research interests are: financial
of GNP the losses in the less developed world     risk applies when we assume we do. Finance         econometrics; behavioural finance;
are 150 times greater in terms of human           has critically focused on risk not uncertainty     asset pricing; knightian uncertainty; risk
victims and apparently 20 times greater in        and new methods of financial analysis need         management; asset management.
terms of economic loss.                           to be developed.
nexus: summer 08 finance                                                                           13




raising the standard
Anne Gunther (FTMBA 1989–91), Chief Executive of Standard Life Bank, examines the greater challenges of managing
risk now facing the financial services industry

Standard Life has been my working life for                                                        on top of the current liquidity risks. Risk
the last six years and it’s proven to be far                                                      management, always the bankers’ bread and
more fascinating than I ever imagined when                                                        butter, is now unimaginably wider, deeper
I moved to Edinburgh. I was heavily involved                                                      and more complex than even ten years ago.
in the run up to our demutualisation and
our Initial Public Offering (IPO) in 2006, an                                                     Did my time at Warwick Business School
event that wasn’t even on the horizon when                                                        prepare me for this? It certainly taught
I joined in 2002. After IPO, my role began                                                        me to think much more globally, and
to expand, from focusing on the Bank, our                                                         I remember, with mixed emotions, the
mortgage and savings business, to a wider                                                         debates I had with Peter Doyle about the
role increasingly looking across the retail                                                       Japanese approach to competing on the
propositions used by Standard Life’s customer                                                     world stage. He also taught me the huge
base of c.7m.                                                                                     importance of brand and brand values; not
                                                                                                  what a company’s advertising looks like but
                                                                                                  the overall image projected, ‘the sum total of
      Pundits had been asserting                                                                  what everyone thinks and feels about you’.
                                                                                                  Your reputation is your single biggest asset
      that the US subprime                                                                        and the risks I’ve discussed above, or rather
  mortgage problems wouldn’t                                                                      lack of management of those risks, are the
  spread to the UK as our                                                                         surest way to destroy your reputation.
  mortgage books were great
                                                                                                  My lasting impression of Warwick has
  quality and our securitisation                                                                  therefore changed over the last 12 months
  issues were different. No-one                                                                   as I’ve realised just how much it did teach
  had thought through the new                                                                     me and how that has equipped me to help
  concept of contagion risk!                                                                      my team manage through a very different
                                                 Pundits had been asserting that the US           environment.
                                                 subprime mortgage problems wouldn’t
                                                 spread to the UK as our mortgage books           Looking to the future, my widening retail
However, banking activities have become          were great quality and our securitisation        portfolio within Standard Life gives me
centre stage, once more, as a result of the      issues were different. No-one had thought        plenty to think about as we move from a
current credit crunch. It has become clear to    through the new concept of contagion risk!       traditional pensions company to a major
the financial services industry, as a whole,     If one market doesn’t know enough about          asset managing organisation, working across
that the challenges of managing risk have        another market, the safest bet is to assume      the full range of corporate and retail assets.
become much greater with the impact of           that it’s all the same. Hence, very quickly,
globalisation which first showed up, truly, in   UK institutions could no longer source
the Stock Market crash following the dot com     well priced long term funding through the          the author in                 minute
boom, coming into play across a much wider       securitisation markets and the Northern
range of risks than the traditional credit       Rock implosion was the all too public              Anne is currently CEO of Standard Life Bank
risks associated with banking. 9 August 2007     face of this. Since then, write-downs of           with further responsibilities as CEO Designate
will remain engrained on many bankers’           unprecedented size, capital raising of equally     of their Healthcare division and MD of
memories as the day the structured finance       unprecedented size and continued suspicion         Customer Relationship Development. Prior
markets, and the asset backed securitisation     in the markets regarding who still holds the       to SLB, Anne’s career began at NatWest as a
                                                                                                    Graduate Management Trainee, before moving
market in particular, slammed shut.              remaining subprime mortgage risks has led
                                                                                                    to Lloyds TSB, eventually becoming MD of
                                                 to the Bank of England taking the major step       Direct Channels.
This market had been widely used by the          of providing an alternative securitisation
mortgage industry to diversify funding away      market to begin to redevelop liquidity and         Anne holds a degree in physics, a Warwick
from total reliance on the retail savings        confidence in those instruments.                   MBA and an honorary doctorate from
market and to spread credit risk. In the US,                                                        Edinburgh. She has chaired the industry trade
however, the ability to pass on most, if not     Meanwhile, further shocks around inflation,        body of the Council of Mortgage Lenders; is
all, credit risk with the bonds backed by        stemming from tightening of oil supplies           a Trustee of Arts & Business, and is a member
                                                                                                    of the advisory board of Warwick Business
mortgages was taken to extremes, and hence       and somewhat associated price rises for            School.
the underlying credit quality of the mortgages   food, driven by the rush to bio fuels using
themselves became less and less important.       up agricultural land and the increasing            Anne’s weekends are split between houses
Bankers were ignoring the core risk in           wealth of and changing taste for food of           in Edinburgh and Devon. She enjoys sailing,
banking – whether a borrower could repay.        the Asia Pacific region doing the same, is         walking and cooking for friends.
                                                 overlaying a major spectre of inflation risk
14 nexus: summer 08 finance




crisis and currency
Professor Lucio Sarno addresses the question of the future of the currency ‘carry trade’ in the light of the
subprime crisis in the US

The subprime crisis that began in the
summer of 2007 has its origins in the                                                                                             the author in                  minute
generation of easy access to credit offered
to risky borrowers for purchasing real estate                                                                             Lucio Sarno is Professor of Finance at WBS and
in the US. While the origin of the problem                                                                                Director of Currency Research, AXA Investment
is localised (US-based) and confined to one                                                                               Managers.
specific asset class (real estate), the crisis
has affected several geographical areas                                                                                   He was previously fellow in Economics,
(Continental Europe, the UK, and various                                                                                  University College, Oxford; Research Fellow,
emerging economies) and asset classes (eg                                                                                 Dept of Economics, Oxford University; Rotary
equities, bonds, currencies), leading in turn                                                                             Ambassadorial Scholar, Department of
                                                                                                                          Economics, Columbia University, New York.
to instability of the financial markets and to
                                                                                                                          Lucio is currently Research Affiliate at the
a recession in the US that will soon spill over                                                                           Centre of Economic Policy Research, London;
elsewhere. The focus of this article is the                                                                               Consultant, International Monetary Fund, Bank
specific impact these events have had on the                                                                              of Canada, Bank of Norway, Federal Reserve
currency markets and on the widespread use                                                                                Bank of St Louis, USA; Committee Member
of the ‘carry trade’ as a simple investment                                                                               of the Macro Money and Finance Research
strategy.                                                                                                                 Group. He also provides consultancy for several
                                                                                                                          companies in Wall Street and the City.
The carry trade is a strategy where an investor
                                                                                                                          His research interests are: international
borrows in a currency with a lower interest
                                                                                                                          economics, financial economics, international
rate and uses the funds to purchase another                                                                               money and finance, monetary economics;
currency that yield a higher interest rate.                                                                               financial econometrics.
An investor who adopts this strategy is
attempting to capture the difference between
the two interest rates. This difference in rates    The sceptics have traditionally taken the                                     Cumulative returns from carry trades in currencies
can be substantial, depending on the amount         view that returns from carry trades represent                     12
of leverage the investor chooses to use.            anomalies, puzzles, inefficiencies, which
                                                                                                                      10
                                                    cannot continue forever in a rational
                                                                                                         Cumulative returns




The risk inherent in simple carry-trade             world. This cohort includes many academic                                 8
strategies is that an adverse movement in the       economists, policy makers and a small set                                 6
exchange rate will wipe out the gain from           of contrarian financial practitioners. With
the differential in the interest rate. According    the advent of the subprime crisis and the                                 4
to standard finance theory, based on the            huge losses of carry-trade strategies that have                           2
simplest version of the efficiency markets          followed, these sceptics have typically reacted
hypothesis (EMH), the return from a carry           by saying: ‘I told you so’. The main point of                             0
trade strategy should, on average, be zero.         this article is to argue that this reaction is at                                               Calendar time
                                                                                                                         -2
This is because the currency of the higher          best premature and, most likely, incorrect.                                   08.01.95    08.06.99         06.11.03     05.04.08
interest rate country should depreciate in          This is because the losses incurred by carry
the future to offset the differential in interest   trades (no matter how important one thinks           One thing is for sure: someone who has
rates, so that the returns from holding a low       the subprime crisis is) are nowhere near the         invested in carry-trade strategies for the past ten
interest rate currency and from holding a           magnitude that is required to offset the large       years is not going to be concerned about the
high interest rate currency should equalise         gains that these strategies have delivered in        subprime crisis at this stage and will persist with
once the exchange rate risk is taken into           the past.                                            the same strategy for the foreseeable future. To
account.                                                                                                 avoid any misunderstanding, I do not suggest
                                                    Figure 1 below shows the cumulative                  that carry trades are all that one needs to know
In contrast to the EMH, there is ample              returns from a simple carry-trade strategy           to be a successful investor. I do suggest that the
evidence in the data that carry trades              in a portfolio that has been invested in 20          dismissive view of the disciples of the simple
deliver positive risk-adjusted returns to           currencies since 1995. Note that the vertical        version of the EMH is far too simplistic to be
investors. Given their intrinsic simplicity,        axis shows the percentage cumulative return          taken seriously.
carry trades are used not only by hedge             divided by 100, ie 1 represents a 100 percent
funds, investment banks and other financial         cumulative return. If the EMH were correct,          Policy makers and regulators should continue
practitioners, but also a number of laymen          the graph of cumulative returns should               to think about the destabilising effects of
and housewives. Given the huge leverage             revert to zero over time. Instead, we note the       excess leverage and about designing a system
often involved in carry trades and their            dramatic positive trend in these returns. This       which prevents excess risk taking in carry
potential for disrupting financial stability,       trend has been mitigated by the subprime             trades, because – given the returns from these
these strategies have attracted a lot of            crisis, but clearly not sufficiently to affect the   strategies – the market is not going to moderate
attention from policy makers, regulators,           long-run gains from carry trades or to justify       their risk taking without some harder evidence
academics and the media.                            the statement ‘I told you so’.                       that carry trades are not profitable.
nexus: summer 08 finance                                                                                 15




aligning the objectives
Bo Kratz (FTMBA 1987–88) details his journey from Sweden via Warwick to Singapore

Leaving the shores of my native Sweden,
literally on a boat, I arrived at WBS in                                                             the author in                    minute
1987 to participate in the full-time MBA
programme. The year at Warwick was in                                                              Bo Kratz is Managing Director, Asia, at Permal
many ways an important milestone in my                                                             Group. Bo joined the Permal Group in 2006
life. Not only did I enroll in a fascinating                                                       and his main responsibility is to oversee and
academic programme, but I also became a                                                            coordinate the business activities in Asia Pacific.
passionate ‘cosmopolitan’. The most obvious
proof of the latter was the young Taiwanese                                                        Before joining Permal, Bo spent ten years with
girl that I met in my Tocil kitchen and with                                                       ABN AMRO Asset Management, the first five in
whom I now have two children. I enjoyed                                                            Stockholm, culminating as Head of the Equity
                                                                                                   Department. Between 2001 and 2004, he was
all of the courses at Warwick, but Finance
                                                                                                   CEO of ABN AMRO Asset Management in
and Organisational Behaviour were my clear                                                         Singapore and before joining Permal, he was
favourites. Consequently, the memories of                                                          Head of Institutional Sales Asia, based in Hong
Professors Andrew Pettigrew and the late                                                           Kong. Prior to joining the Asset Management
Anthony Steele are particularly strong.                                                            industry, he spent eight years in Stockholm as a
                                                                                                   research analyst and a stockbroker.
When I returned to Sweden (coincidentally
on the same boat), I took up a career                                                              Born in Sweden in 1962, Bo has a wife Lian and
                                                                                                   two children aged 15 and 11. His home is now
in stockbroking and subsequently asset
                                                                                                   in Singapore. He lists his personal interests as:
management. Anthony Steele’s words of                                                              everything on two wheels, photography, action
wisdom came in handy straight away as I got                                                        sports and admits to a craving for adrenalin.
my hands dirty dissecting corporate profit
and loss accounts. However, as I subsequently
drifted away from managing money into
managing people, I had the opportunity          races, religions and ethnic backgrounds            globally was great and again gave me the
to revisit some of the concepts from the        exceptionally rewarding. I saw the strength        opportunity to reflect on the behaviour of
Organisational Behaviour course.                in the diversity as opposed to an obstacle.        different organisations, or more importantly
                                                After three years in Singapore ABN asked me        of the people within them.
                                                to move to Hong Kong to take up a more
                                                regional role, which I did for about two years     In addition, after 18 years on the buy as well
        After 18 years [in] equity              until it was time to move on.                      as sell side of the equity markets, I became
        markets, I became                                                                          increasingly convinced that the future of
                                                My take from my ten years with ABN is that         mutual funds and investment products
   increasingly convinced that                  if you have aspirations and ambitions, do          in general lies in aligning the investment
   the future of mutual funds and               express them, even if they might seem odd          objectives with that of your clients as opposed
   investment products in general               and out of the normal. Good organisations          to that of the market as a whole. In other
   lies in aligning the investment              appreciate people with ambitions and if            words, creating a stable return that does not
                                                you can accommodate each other, a very             necessarily fluctuate with traditional asset
   objectives with that of your                 strong relationship is formed. Also, if your       classes such as equities and bond, not only
   clients as opposed to that of the            organisation doesn’t appreciate people             makes the private investor sleep better, but
   market as a whole.                           with ambitions, you are in the wrong place         also has an appeal for institutional investors
                                                anyway.                                            such as pension funds and insurance
                                                                                                   companies. Despite these obvious benefits, we
                                                Nevertheless, after ten years it was time to say   still spend a lot of time educating our clients
Fast forwarding to 2001: I was then heading     farewell to ABN AMRO. I was approached by          about so called ‘alternative’ asset classes.
up the investment function of ABN AMRO          Permal in 2006. Permal is one of the world’s
Asset Management in Stockholm. With             largest Fund of Hedge Fund managers. I was         Asia has become my home and the two
one eye on the needs of my two ‘Eurasian’       asked to further expand and strengthen their       large international cities of Hong Kong
children and one eye on future growth           organisation and presence in Asia. In addition     and Singapore both very much mirror the
prospect for me and for them, I quietly         to being one of the largest Fund of Hedge          composition of our family. We moved our
approached my company expressing a desire       Fund managers, Permal is also one of the           primary base back to Singapore last summer,
to work in South East Asia. A few weeks later   oldest. With 34 years in the industry, Permal      but still keep a strong link with Hong Kong.
they came back offering me the position of      brings not only a long track record but also       There is so much to do in this part of the
CEO in Singapore. My acceptance followed        a wealth of experience in an industry that is      world so I am pleased to say that my personal
swiftly and in the summer of 2001, we           generally perceived as young.                      and professional aspirations are very much
sold our house, the Volvo, and bought a                                                            aligned. Understanding my family helps me
one way ticket to Singapore. I found the        Going from an organisation of a few                to understand the dynamics of the region and
task of managing a team of many different       thousand to one with just over a hundred           vice versa.
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
Nexus Summer 2008
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Nexus Summer 2008

  • 1. 1 Warwick Business School Alumni Association magazine: summer 08
  • 2. Release your potential H The Warwick MBA Having studied at WBS, you already know the quality One of the world’s leading MBA programmes. For the of our expertise and teaching. But did you know that ultimate flexibility in work life balance, study full time, WBS can help you and your organisation at every by distance learning, or in modular format step of the way? H The Warwick MPA We offer a range of flexible, post-experience The public and voluntary sector equivalent of the MBA, qualifications for individuals, many of whom are study part time in modular format sponsored by their organisation. H Doctoral Programme Find out more about any of our programmes: To pursue an academic interest in a highly specialised W wbs.ac.uk area, study with one of the world’s top programmes T +44 (0)24 7652 4306 E enquiries@wbs.ac.uk H The Warwick Diploma in Applied Management A broad management course delivered part time in modular format over 18 months H The Warwick Diploma in Public Leadership & Management An 18-month, part-time modular course for middle to senior managers in the public sector H The Warwick Diploma in Service Leadership Delivered by WBS academics, at the Singapore Institute of Management (SIM), a modular course for middle and senior managers of customer facing operations H Financial & Management Accounting A highly focused development course for managers with little or no finance training. Launching Autumn 2008
  • 3. 3 message from the dean 3 2008 has been a momentous year embedded DNA of strong innovation a global perspective, we on many fronts and one I am sure will enhance our research output, through inter-disciplinary we will all have firmly placed in our initiatives and through dialogue and contribution from minds in the future. business, industry and government. We will develop our curriculum, our delivery and our accessibility. All of this Not only has the impact of sub- will be developed through completing the WBS building prime lending and mortgages been development on campus and by advancing our brand significant, but the importance globally through institutional and business partnerships and of strong leadership within advancing our global alumni network. business, industry and government is increasingly scrutinised. WBS has come a long way in a short period of time and we Organisations and countries are naturally striving to address have the wide community to thank for that – staff, students, increasingly pressing global issues – from liquidity, inflation, friends, donors, associates and you, our increasingly successful interest rates and investments, to climate change, carbon alumni body. Thank you. Working together we can achieve footprint, uncertainty and political instability. As a leading so much more which will benefit everyone in the WBS and European business school with an international faculty and Warwick community. curriculum, we are working with governments and business leaders to address many of these issues. So here’s to the challenges that lie ahead and embracing the solutions – from addressing global issues, to advancing the Last year the Vice Chancellor, Professor Nigel Thrift, service we offer through your Alumni Association, to securing announced a dynamic and challenging, but exciting, vision your help, expertise and support to build our global brand and to firmly place Warwick in the top 50 global institutions by improving our School offering. From our oldest graduates to our 50th anniversary in 2015 (Vision 2015). In parallel with our new alumni who have just graduated – we look forward the University at large, at WBS we have built upon our strong to working with you in the year ahead and sharing a mutually vision and mission, developing an overall strategic vision with beneficial relationship. supporting strategies to firmly place us in the top echelon of European business schools where we can seriously compete with the top global schools by 2015. We have a big challenge ahead of us, but we have never been an institution to rest on our laurels. As we build upon our contents focus on finance 4 development and alumni relations 5 alumni board 24 20 One of the key 6–9 WBS news values of WBS’ 10 holy simplicity? Alumni Association Professor Anthony Neuberger is our commitment 11 credit crunch to relevant lifelong Phil Ashdown learning in business 12 climate change and financial markets and management. Professor Mark Salmon 13 raising the standard In this edition of nexus Anne Gunther we focus on finance, 14 crisis and currency drawing upon research Professor Lucio Sarno 6 13 being undertaken by 15 aligning the objectives leading faculty at WBS Bo Kratz and from our alumni 16 the credit spread puzzle who are leaders within Professor Gordon Gemmill their field. 17 hurdles… what hurdles Rob Cooper and Jon Hill 18 raising funds for future leaders 19 WBSS update 20—22 UK event reviews, SIGs and regional groups 23 Overseas event reviews 24–26 alumni news 27 hot off the press 23
  • 4. 44 the development and alumni relations office on-line forums. We aim to advance the ways in which you can learn from and connect to the valuable research coming from WBS. We now have over 23,000 alumni, over 35 percent based overseas and you are all continually moving and wanting to connect. We aim to connect you better through technological advancements and through ensuring we have active networks and groups around the world. Finally, as Baroness Julia Neuberger DBE, (Chair, Commission on the Future of Volunteering), reflects, ‘Volunteering plays a vital part in the life of our communities, our nation and our world.’ But only where there is effective volunteer management in place. Many of you have offered to be and are active volunteers of WBS. We want to leverage this immense resource to enable you to advance your Alumni Association You will have noticed many changes over the past year in through our facilitation and management. To do this the your Alumni Association – from staffing to Board activity, Alumni Board is working with our regional, international and and events around the world to academic updates. We industry volunteer leaders to empower groups to become are continually striving to improve our service to you and more engaged and active, bringing value to the alumni body. to advance your involvement and support. Our sincere (Further details of this are shared by Gill Thewlis, Chair of the thanks for all your support over the past year. Alumni Board, P5). As we now move towards 2015, we have a clear set of We look forward to working with you to advance your Alumni objectives and supporting strategies to deliver greater Association and to see WBS and Warwick grow successfully. value and relevance to our global alumni body. There are three key values that will help us to achieve this – lifelong Alison Bond learning, global networking and volunteering. We are Deputy Director committed to provide relevant business and management Development and Alumni Relations learning throughout your lifetime – from your alumni magazine to tailored events, specific industry groups to contact details Alumni Association Kathryn Chedgzoy Tracy Lynch Charlotte Wilkes Warwick Business School Development and Alumni Relations Officer Development and Alumni Associate Director, University of Warwick (Corporate Affairs) Relations Officer (Student & Development Coventry CV4 7AL t +44 (0)24 7615 0515 Regional Affairs) T +44(0)24 7615 0075 United Kingdom e Kathryn.chedgzoy@wbs.ac.uk t +44 (0)24 7657 5835 E charlotte.wilkes@wbs.ac.uk t +44 (0)24 7652 2813 e tracy.lynch@wbs.ac.uk f +44 (0)24 7652 3719 Development and Alumni Relations In–house photography by E alumni@wbs.ac.uk Administration Faith Plevin John Weatherly W www.wbs.ac.uk/alumni t +44 (0)24 7652 2813 Development and Alumni E alumni@wbs.ac.uk Relations Officer nexus is the magazine of the Pam Barnes (Corporate Affairs) Alumni Association, Warwick Alumni Publications Officer Ann Jackson t +44 (0)24 7615 0372 Business School t +44 (0)24 7652 4396 Development and Alumni Relations Officer e faith.plevin@wbs.ac.uk T +44 (0)24 7652 4306 e pam.barnes@wbs.ac.uk (International Affairs) The views contained in nexus are those T +44 (0)24 7652 8197 Ben Plummer of contributors and not necessarily Alison Bond E ann.jackson@wbs.ac.uk Director of Development and those of Warwick Business School or the University of Warwick Deputy Director, Development Alumni Relations and Alumni Relations Paula Kersten T +44(0)24 7652 4188 T +44 (0)24 7652 4176 Events Coordinator E ben.plummer@wbs.ac.uk Design by Morse–Brown Design E alison.bond@wbs.ac.uk t +44 (0)24 7615 0171 w www.morsebrowndesign.co.uk e paula.kersten@wbs.ac.uk
  • 5. 55 alumni board Your alumni board has 15 members drawn from across the alumni community, as well as three student members and five WBS Staff members. Together we are focused on building engagement across the alumni body, with a specific focus this year on recognising our existing active volunteer base across the world, and building on it. To that end we are organised into four working groups, oriented around the main routes alumni can take to connecting with the alumni network. Gill Thewlis Chair of the Alumni Board FTMBA 1989–90 where we are... what we do... who we know... We all live and work Whatever discipline somewhere, and brought us to WBS our aim is to get in the first place, to the point where we have current every alumnus and professional interests alumna can access a either in terms WBS network close of our functional to where they live or specialism or our work. Manny Coulon Nick Jessett industry. There are Jemima Tomlinson Kate Spencer Manny Coulon leads the group high concentrations focused on this route of WBS alumni in many of the world’s largest Whenever we completed our studies at WBS, to connecting, so if you’ve volunteered in global organisations, and so there are many we were (or for current students, still are) the past to do something or represent the ways of connecting with the WBS network part of a ‘Class of…’ Many of our alumni network in your locality, particularly if you through your professional interests. Nick are keen to stay in touch with or re-connect are outside the UK, you can expect to receive Jessett leads the team focused on developing with the people they knew when at Warwick. some contact soon from Manny’s team. new Special Interest Groups and advising the We’re going to build a network of class central Alumni Relations and Development representatives, so that everyone can connect team on where to focus their energies in with someone they recognise from their class Manny Coulon FTMBA 1998–99 building WBS corporate partnership networks. – however long ago that was. We’re also keen Rob McCulloch BSc Management to make sure the existing student body see Sciences 1972–75 the value of connecting with alumni whilst Nick Jessett EXMBA 1985–89 Karamjit Singh MAIR 1973–76 still at Warwick. Jemima Tomlinson and Kate Issam Hamid FTMBA 2002–03 Spencer lead this group. Janet White DLMBA 2002–06 David Myers FTMBA 1999–2000 If you would like to help set up an alumni Paul Nicholson FTMBA 1971–72 Kate Spencer Current DLMBA student group in your area please contact Ananda Roy FTMBA 2005–06 Jemima Tomlinson EXMBA 2003–07 Alison Bond, Deputy Director at Cristiano Coppola Current FTMBA student e alison.bond@wbs.ac.uk If you would like more information on joining Paul Edwards WBS Professor of a Special Interest Group or establishing a and bringing the corporate partnership, contact Faith Plevin at Industrial Relations e faith.plevin@wbs.ac.uk Richard Hughes DLMBA 2003–06 network together… Francis Lootes Current Undergraduate David Allan leads the team focused on organising the first ever event and President of WBSS to bring as many as possible of our active volunteers together on 27 September 2008 at WBS, physically, virtually and in spirit. The If you would like to become a class programme is evolving but is already packed with activity and we hope representative or would like to nominate to shrink the world with technology so that as many people as possible someone from your class, please contact can take part. The day is intended to become an annual event and a core Tracy Lynch at e tracy.lynch@wbs.ac.uk part of supporting and thanking our active David Allan MPA 2000–04 If you would like to attend the Volunteer Day, volunteers – we look for- David Sykes FTMBA 1986–87 in person or ‘virtually’, please contact Tracy ward to seeing as many of Lynch at e tracy.lynch@wbs.ac.uk David Allan Mark Whitley FTMBA 1999–2000 you as possible on the day.
  • 6. 6 nexus: summer 08 WBS news winter graduation celebrations On 23 January around 620 people gathered at WBS to celebrate the successful completion of study by over 300 WBS students. Winter graduation is primarily for postgraduate students, and many of their families and friends came along and joined the celebrations. rankings The ever-present theme of ‘rankings’ brought some pleasing news for WBS. The first ever ranking of Distance Learning MBAs, carried out by the Economist Intelligence Unit, placed WBS third in the world and first in the UK. It was also good to see that our Full-time MBA rose into the top 30 in the Financial Times’ world ranking, climbing seven places in one year. MSc Finance prizewinners Thierry Cambray, Wael Hathout and Chan Tong Ong with Professor Howard Thomas, Dean of WBS Our undergraduate programme continues to remain in the top echelons in the UK. WBS Dean, Howard Thomas, commented: ‘Media-based rankings are student competitions now a fact of life for business schools and universities. Our aim is to be the best European, University-based business school and our rankings WBS undergraduates seem to have been even more involved than usual show that we are well on the way to this.’ this year in competing in external business student competitions. Five teams took part in the IBM Universities Business Challenge, with a a new masters degree team of second years making it through the semi-finals, coming top in their own stream of 8 teams. In January, a new Masters degree, the MSc in Business Analytics & Consulting (MSBAC), was launched, with the first intake starting in Other WBS teams were the Warwick Trio in the L’Oreal Brandstorm October. This 12-month full-time degree brings to ten the number of competition, and football4future, Frontier, and Potentia Events in the specialist masters courses on offer at WBS, which together with the Ernst & Young Profitunity competition. non-specialist Masters in Management, are aimed at new and recently- graduated students. The Warwick Bears in the Global Management Challenge, who finished in the top eight worldwide, beat over 1,000 students from over MSBAC will run as a sister programme to the existing MSc in 300 teams. All teams were a credit to themselves and to WBS. Management Science & Operational Research (MSOR), which has a strong reputation in the OR community and is the longest-running specialist masters course at WBS. W www.wbs.ac.uk/students/masters superbrand status WBS attained ‘business superbrand’ status in a survey highlighted in the UK’s Daily Telegraph newspaper in February. Stephen Cheliotis, Chairman of the Superbrands Council said, ‘It is no surprise that the high regard in which Warwick Business School is held by the international business community has translated into being recognised as a UK Business Superbrand. It is a brand that continues to gain momentum and every year is a more compelling challenger to its often older and more established rivals. As the most improved brand in its category, jumping almost 100 places in the rankings, it is clear that its influence on both experts and business professionals alike is growing.’ Members of one of the five WBS teams in the IBM Universities w www.superbrands.uk.com/bsb/index.html Business Challenge
  • 7. WBS news nexus: summer 08 7 staff successes student successes WBS Dean, Howard Thomas, was confirmed as Chair of both the Former British Olympic marathon runner and current DLMBA AACSB (the US-based Association to Advance Collegiate Schools of student, Richard Nerurkar has been working in Ethiopia for the past Business) and the ABS (UK-based Association of Business Schools) for seven years, staging athletic competitions for the Ethiopian public. 2007–8. Howard is the first Brit to hold the position at AACSB and Working with Olympic gold medallist Haile Gebrselassie, he has set the first to hold both posts. up the Great Ethiopian Run, an organisation which has now staged more than 35 races in different parts of Ethiopia for more than Another busy person is Martin Cave, director of the WBS research 200,000 participants. ‘These races are more than just athletic events,’ Centre for Management under Regulation. In February the UK explains Richard, ‘We also use the races as a way of publicising government asked him to lead a year-long review of the UK water health and social messages.’ industry, then in April came a request from the Secretary of State for Transport which he could not refuse! Announcing a review of the BSc Management finalist Philip Craig went to the University of economic regulation of the UK airport system, she appointed Martin Wisconsin-Madison for an extra year’s study last year, and ended up to chair a panel of experts to carry out this review. researching and delivering several lectures to fellow students! In April, Linda Dickens MBE, Industrial Relations & Organisational MSc in Management Science & Operational Research students won Behaviour group, delivered the annual Warwick-Acas Lowry lecture on a cash prize and certificates from business process analysis company campus to an audience of senior HR managers, trade union officials, The Lanner Group for the best consulting report. employment relations professionals and academics. She reviewed the last 25 years of employment relations and related legislation in the UK, arguing that the cumulative result of ad hoc responses to particular problems has been growing institutional fragmentation, complexity and an increasing lack of regulatory coherence. The Lanner Group prize winners In April, WBS hosted a successful conference organised by doctoral students for doctoral students from three of the world’s best business schools: Judge Business School at Cambridge, the Saïd Business This year’s Warwick-Acas Lowry lecture presenter Linda Dickens MBE (centre) School from Oxford, and WBS itself. Simon Collinson, Marketing & Strategic Management group, was one of a group of experts to speak on new perspectives in Chinese innovation at Demos, the independent think tank based in London. Other speakers represented organisations including the OECD, the Asia Pacific Technology Network, and the China-Britain Business Council. Simon’s two year research project, carried out through AIM Research (the ESRC-funded UK-based Advanced Institute of Management Research) interviewed managers from British, European and US firms operating in China. Also from MSM, Professor Nigel Piercy and WBS doctoral graduate Ken Le Meunier-Fitzhugh were awarded the US Marvin Jolson Prize for the Best Contribution to Selling and Sales Management Practice Concentration levels are high at one of the presentations for 2007 by the Journal of Personal Selling & Sales Management. This at the doctoral conference is the second time Nigel has won this award. Julia Kotlarsky, ISM, was joint author of an article on outsourcing published in the Wall Street Journal this May. A Corporate Social Responsibility paper by Industrial Relations Research Unit’s Paul For more news items, features, media coverage and podcasts visit our Marginson and Tony Edwards (IRRU associate fellow) and others, Press Centre W www.wbs.ac.uk/news/ following on from research on multi-national companies, has been placed in the top ten HR listings in the influential newsletter of the US-based Academy of Management (AoM).
  • 8. 8 nexus: summer 08 research review Dr Qing Wang, Associate Professor of Marketing & Innovation, has been the driving force in launching a new research network to explore key issues Qing Wang where marketing John Benington Jean Hartley Colin Clubb Shahed Imam and innovation meet with regard to fast-growing economies The 6th International Studying Leadership Research by Dr Shahed Imam and Professor such as China and India. The cross-border Conference took place at WBS in December, Colin Clubb, WBS Accounting group, with research network on Marketing, Innovation on the theme of Leadership: Purposes, Politics Richard Barker, Judge Business School, on and Chinese Economy (MICE) has already and Praxis. Academics convened for a two-day The Use of Valuation Models by UK Investment received funding for specific projects from the set of plenary sessions and individual papers. Analysts will feature in the European US-based Marketing Science Institute and the There were 59 papers and over 100 delegates. Accounting Review. Chinese Natural Science Foundation. There will be a special issue of the journal Leadership based on some of the papers, The study is based on semi-structured Main research themes include: edited by conference organisers Professors interviews with 35 sell-side analysts from ten • Firm’s marketing capabilities and John Benington and Jean Hartley, IGPM. leading investment banks and seven buy-side technological capabilities for radical vs analysts from three asset management firms; incremental innovations The conference got off to a strong start with and content analysis based on 98 equity • Consumer characteristics and behaviour for an introduction from the Deputy Dean of research reports for FTSE-100 companies really-new products and services WBS, Professor David Wilson, followed by an covered by the sell-side interviewees. • Aesthetics of innovation and the effect on electrifying keynote talk from Professor Jean- They conclude that, while the literature adoption intention: exploring cross-cultural Louis Denis from the University of Montreal, has focused on the technical merits of differences and similarities who spoke on the topic of The practice of alternative valuation models, analysts’ actual • Innovation and branding strategies of leadership in the messy world of organisations. usage of valuation models also requires Chinese high-tech firms. an understanding of social and economic Another highlight was the plenary session context and motivations. MICE members come from UK institutions with David Blunkett, MP and Sir Michael including WBS, Cambridge, Tanaka Bichard, in conversation with John Another research paper from Dr Shahed Imperial, and Sussex University, and four Benington, as they reflected on the purposes, Imam and Richard Barker, Judge, Analysts’ institutions in China including Tsinghua and politics and praxis of leadership from their Perceptions of ‘Earnings Quality will feature Zhejiang universities. The first workshop, in respective roles and working relationship as in the Accounting and Business Research collaboration with Tsinghua University, took former Secretary of State for Education and Journal. This research seeks to understand place on 30 March (see P23). Permanent Secretary for Education. earnings quality as interpreted by analysts w www.wbs.ac.uk/faculty/research/mice.cfm and then tests this interpretation against its Jean Hartley and actual usage in analysts’ research reports. An Lyndsay Rashman, inductive approach is used that combines In their work for interview data with content analysis, and the Warwick Local of the Institute of Governance and the findings are interpreted in the light Authority Local of findings from market-based and other Authorities Research Public Management, were commissioned research. Consortium, Acting Director by the UK’s Howard Davis and Renew Northwest Research papers by Dr Maggie Rust, Local Lyndsay Rashman organisation to Philip Stern, Associate Howard Davis Government Centre, see how public Professor, MSM, are have produced a service organisations can share knowledge to to appear in two guide to Understanding the Governance and bring about regeneration. Their report was leading international Accountability of Partnerships. Partnership published in April, and outlined a knowledge journals. working is an increasingly vital element of transfer framework including advice on how the day-to-day working of local authorities organisations can adapt the lessons learned Physicians’ Persistence and other local public services. by peers and competitors to meet their own Philip Stern and Its Implication specific needs. for Their Response to In early March LGC coorganised a seminar Promotion of Prescription Drugs (2008) with R to explore the challenges of urban transport Variable pay systems or collective bargaining? Jarakiraman, S Dutta, C Sismero will feature in governance facing city regions and other Research by members of the WBS Industrial Management Science. major urban areas in England in the Relations Research Unit (IRRU) found context of the Government’s emerging two major trends characterising recent Stochastic Modelling and Industrial Networks – city regions agenda. Attended by senior developments in pay setting in the UK: the Complementary views of organisational buyer officer representatives of the majority of city continued retreat of collective bargaining behaviour, co-authored with PhD candidate regions in England, the seminar sought to go in the private sector, and growing emphasis Jim McCabe, in the Journal of the Academy of beyond merely repeating the key elements of on variable pay systems (VPS). They looked Marketing Science. legislation by constructively challenging the at these two trends and found a complex Government’s proposals and considering the relationship, varying according to the type of practical and political issues concerned with VPS and features of the firms or organisations its implementation. involved.
  • 9. research review nexus: summer 08 9 Their paper provides a comprehensive evaluation of the short-horizon predictive ability of economic fundamentals and forward premia on monthly exchange rate returns in a framework that allows for volatility timing. They implement Bayesian methods for estimation and ranking of a set of empirical exchange rate models, and construct combined forecasts based on Bayesian Model Averaging. Their assessment of the economic value of the in-sample and out-of-sample forecasting power of the empirical models finds two key results: Pasquale Della Corte Lucio Sarno Ilias Tsiakas • a risk averse investor will pay a high performance fee to switch from An Economic Evaluation of Empirical Exchange Rate Models, co-authored a dynamic portfolio strategy based on the random walk model to one by Dr Pasquale Della Corte, Professor Lucio Sarno and Dr Ilias Tsiakas, which conditions on the forward premium with stochastic volatility WBS Finance group, featured in the top finance journal Review of innovations Financial Studies. • strategies based on combined forecasts yield large economic gains The paper recently appeared as a working paper for the CEPR (Centre over the random walk benchmark. These two results are robust to for Economic Policy Research). The authors also received an invitation reasonably high transaction costs. from VoxEU.org to write a short research column. Established by leading economists, this well-respected website provides research-based w www.voxeu.org/index.php?q=node/876 policy analysis and commentary. post-conflict reconstruction and governance Professor John Benington and IGPM up action is being planned and a proposal Kathy Johnson (a graduate from colleagues have begun to develop being prepared for a longer term programme our Postgraduate Diploma in Local of capacity building. Government Management) has been active working links with the new appointed to work in Juba for a year as a Governments of Sierra Leone and of research and policy officer in the office the Southern Sudan, both of which of the Minister for Commerce and Trade, are struggling to restore democracy to analyse the context, to assess needs on the ground, and to develop pilot training and public services after bitter civil programmes. war. Warwick IGPM has been invited to contribute to the training and The first of these development of Ministers and senior took place in Juba civil servants in each of these two in February 2008, Southern Sudan when John, Jean countries. Hartley and Kathy Johnson ran a Sierra Leone Southern Sudan one week training The elections which swept the All People’s Southern Sudan is in a very difficult period workshop on Congress (APC) into government in Sierra of transition, with peace and democracy ‘Managing People Leone in October 2007 have created a by no means yet certain. After more than Kathy Johnson and Performance’ historic moment of opportunity for this 20 years of civil war, the Comprehensive for the top 50 war torn country to make a significant Peace Agreement makes provision for a managers in the Ministry of Commerce. transition to peace, democracy and possible secession of the largely African and A second workshop on ‘Managing economic and social development. Christian South from the largely Arabic and Finance’ took place in June and a third on Muslim North. An interim Government of ‘Managing Projects’ in July. Moving quickly after the elections, John the Southern Sudan has been established, and IGPM associate fellow Mark Sheldrake and elections are planned for 2009 and a full W www2.warwick.ac.uk/fac/soc/wbs/igpm/ helped to run a one week workshop for all referendum in 2010. the new Ministers and their Permanent Secretaries, in Freetown in December. Having hosted a visit to Warwick in February They had the privilege of contributing 2007 by the Minister of Commerce and to a series of Policy Development and Trade in the Government of the Southern The spring 2009 issue of nexus will Strategic Leadership Forums for the Sudan and his Director General of Finance focus on Entrepreneurship. If you run newly elected Ministers and their senior and Resources, John Benington made a civil servants, sponsored by the Sierra visit to the capital Juba in June 2007 to your own business and would like to Leone government’s Public Service assess the Government’s development and contribute to your alumni magazine, Reform Programme and Institute of training needs. Subsequently John and then do email the editor Public Administration and Management IGPM colleagues have been developing pilot E pam.barnes@wbs.ac.uk (IPAM), and supported by DfID and Public programmes of support. Administration International (PAI). Follow
  • 10. 10 nexus: summer 08 finance holy simplicity Professor Anthony Neuberger examines the reality of the latest pensions policy reform Now that all the dust has settled, it is time to look back at what has been described the author in minute by Ministers as the most radical reform of pensions policy since Beveridge. The rhetoric Anthony Neuberger is Professor of Finance at suggests a grand and elegant vision. The WBS and current Head of the Finance Group. reality is rather more prosaic. His previous experience includes the Institute Rarely has such care and deliberation gone of Finance and Accounting, London Business into an area of public policy. A Pensions School (1985–2004), the UK Department of Commission, under Adair Turner, has Energy (1975–83), and he was a member of Central Policy Review Staff, UK Cabinet Office deliberated for three years, produced two (1973–75). major interim reports, and one final report. Evidence has been taken, White Papers Anthony consults for a variety of investment have been written, bills enacted, quangos banks, exchanges, government departments established. The timescale is leisurely. The and trade associations. reforms to the UK state pension system will only be implemented in full by 2080. His research interests are: derivatives; commodities; market microstructure; investment management; pensions policy. It is easy to mock the pretentiousness of the plan. What confidence can there be in any planned sequence of changes unrolling over such long horizons when the Department of Work and Pensions itself has only been in existence for seven years and when, during with pensioner income, and the savings present measures to dismantle past reforms its brief life, it has had no fewer than seven credit that first increases and then declines (such as the state earnings related pension) Secretaries of State? with income. as radical new initiatives. Complexity also makes it easier to provide goodies – by But the need for reform is patent. The The New Jerusalem to which we are heading relaxing a contribution requirement here, by Pensions Commission described the UK looks like a pretty messy, complex sort of adding a credit there – to buy off particular pension system as the most complex in the place. And that matters. pressure groups without spending too much world. Unravelling the complexity is bound money. to take time. Pensions policy is intended to enhance social security. It is hard to see how people Complexity is an effective device for can get security from a system that is so keeping costs down. The system will end complex that they cannot understand it. The up delivering what is in fact very close to Pensions policy is intended state provision is intended to complement a flat rate universal pension – the so called to enhance social security. occupational pensions and private pension Citizen’s Pension. But if there were a single, It is hard to see how people can savings. The complexity of the state system universal flat rate pension, the pressure to get security from a system that makes it hard to give sound advice to people raise the level of the pension would be hard on moderate incomes who may well be to resist. By having a system of multiple is so complex that they cannot means-tested in retirement. interlocking pensions and credits, the target understand it. of campaigners for change is diffused. Any Why the system has not really been proposal for changing part of the system simplified can be resisted on the grounds of its adverse Radical change creates losers. To create a effects elsewhere in the system. The Grand Design consensus for change you have to buy off the So what is the grand design towards which losers. But despite all the rhetoric, there is no Our mean and complex state pension system we are moving at such a stately pace? consensus to spend more on pensions. True, is likely to remain substantially unreformed By 2080 the UK will still have two state the expenditure on pensions is expected to because there is no desire to spend more on pensions: the Basic State Pension and the rise as a proportion of GDP, but not nearly the state pension, and the complexity makes State Second Pension. They will both be so fast as the proportion of pensioners in the the meanness politically feasible. flat rate, but will be computed on the basis population. The UK state pension system is of different criteria, with different rules of notably meaner than almost any other in the entitlement. Actually, it is not quite true developed world, and it will stay that way. that the state pension will comprise just two components. There will also continue I suspect that the real reason is that Ministers to be two other components of the pension are addicted to complexity. Only because the package – the guarantee credit that declines system is so poorly understood can Ministers
  • 11. nexus: summer 08 finance 11 credit crunch Phil Ashdown (FTMBA 1996–97) Director, Altima Partners LLP, gives his thoughts on how to prepare for the opportunities We have just experienced the worst financial markets since the 1930s. The the author in minute world’s leading financial institutions are successfully repairing their balance sheets Phil Ashdown has over 25 years of diverse having taken combined losses of c.$380bn experience gained within banking and advisory since last summer. Globally, central businesses. He is currently Director, Altima Partners bankers, regulators and governments have LLP and is responsible for building their credit engineered an unprecedented yet highly strategies business and is presently raising a bespoke successful coordinated approach to address stressed/distressed fund from institutional investors and family wealth offices, globally. Altima currently immediate liquidity concerns and systemic has in excess of $4.5bn assets under management. risk within the financial system. Despite the dramatic news flow around the credit Previously, Phil was Managing Director, Head of crunch, stock prices continue on the whole, Acquisition Finance and Sponsor Coverage for to be relatively robust (ex of the financial ING Bank in London, where he was responsible institutions sector). We can, it seems, look for the strategic development of an integrated business model covering, Acquisition and Leveraged back and be confident that the worst crisis Finance, Advisory and Debt Capital Markets. He has to impact financial markets since the 1930s successfully led financings for in excess of €20bn, is over. during his career. Or is it? The US economy is fully expected Phil became an Honorary Professor at Warwick Business School in May 2008. to enter into a recession, or at the very least a period of ‘sub-normal’ growth, since last summer house prices have fallen 14 percent in the USA, some cities have seen prices fall rate of economic growth within the BRICs they sought. Nevertheless, it is increasingly c.25 percent; Main Street is very wary of the continue to run at levels outside all historic likely that at the very least, timing and impending fall-out from Wall Street. The boundaries. Has there been a de-coupling of holding periods will be longer than perhaps US Fed economic policies are in complete emerging markets? There appear to be new envisaged/expected; equity returns will be divergence with the ECB, concerning fundamental drivers behind commodity, lower whilst risk has undoubtedly increased. differences of opinion over near term growth energy and food prices as a consequence of prospects and inflation concerns. In large the growth in BRICs. Does this underpin the However, growing realism amongst part this has lead to the rapid appreciation of sustainability of such prices at the current vendors (either ‘forced’ or ‘willing’) and the Euro/$ rate. trends/levels? What impact will this have on the substantial availability of liquidity and USA and Euro economies? capital appropriately structured for the new More broadly, currency rates have shifted post credit crunch environment will drive swiftly since last summer, impacting There is a paradox and we are I feel, just many excellent investment opportunities purchasing power parity, revenue and cost part way through the consequences of the over the next few years. Timing is critical. inputs aggressively. The UK is beginning credit crunch; the eye of the storm perhaps. The adage of ‘avoid the falling knife’ to experience a very real housing problem, Immediate concerns of systemic risk and strongly prevails. Some investors are with prices now expected to fall by as much liquidity within the financial services sector beginning to utilise their liquid resources as 7 percent this year alone (revised from appear to have been addressed; much credit now, time will tell whether they are right. +3 percent since last summer), the retail should go to the leadership taken by the Most probably, it is the eye of the storm and building and construction sectors are Fed in this regard. However, we are at the however. Huge opportunity is out there now operating under increased economic beginning of more fundamentally driven as the feedback mechanisms from the and financial strain. Globally, financial consequences of the credit crunch and their credit crunch impact fundamental drivers institutions have substantially tightened impact upon the wider and ‘real’ economy. across all sectors and asset classes. As more their lending criteria, risk spreads and Caution is the key watch word. fundamental drivers unfold, vendors and associated costs have risen dramatically. acquirers will be able to undertake robust Those long of assets, at the wrong time and diligent appraisal of valuation and assess Availability and cost of finance is a very real (notably 2006 and 2007 vintages) and with risk/reward, bottom up. issue for consumers and those corporates too much leverage will be harshly hit as the and sectors facing even just mild stress, consequences of the new post credit crunch On balance, it remains a little too early both in Euro-land and the USA. Default and environment become reality over the next to take advantage… get ready this is distress rates, across all forms of consumer two years. Globally, financial institutions undoubtedly an exciting time. Time and corporate debt are predicted to increase have seen this already (IMF has said losses compression is typically prevalent as markets from record all time lows of 0.8 percent could reach $1trillion globally). Those in the rapidly adjust downwards and strategic to in excess of 10 percent of total debt in fortunate position of having locked capital and sustainable competitive advantage can issue, by year end 2009. Whilst globally, and sufficient cash flow to ride out the next be rapidly built and/or expanded at this commodity, energy and food prices and the 2/3 years may ultimately achieve the returns juncture, for those ready and bold. Be bold!
  • 12. 12 nexus: summer 08 finance climate change and financial markets: risk or uncertainty? Professor Mark Salmon addresses the issue of how financial markets can be best employed to manage the risks associated with climate change The ability of financial markets to bear risk The major factors behind these escalating The extent to which the redistribution of is central to economic welfare and stability. costs are economic and population growth risks by financial markets (after securitisation Growth and economic wellbeing is inhibited with accompanying land-use changes of assets) can be a benefit or a danger to if financial markets are unable to transfer and movements of capital and people to society as a whole is a critical issue. How far resources efficiently from the suppliers of vulnerable regions. In other words, the main can we rely on financial markets to efficiently liquidity to risk takers or entrepreneurs. cause is global change and development price and transfer risks? The repackaging Ensuring a proper return to capital and risk is in its broadest sense. At the same time as and reselling of US subprime mortgage debt the function of a market and market stability such profound and sustained global change through CDOs exactly mimics the way in enables proper long run planning and the is occurring, it is expected that long-term which insurance has traditionally managed efficient allocation of resources to productive worsening of weather extremes due to or diversified risk through re-insurance. If activities. These statements underlie the free climate change will also accelerate if action recent experience has shown us anything market philosophy that drives our economy. is not taken. it has shown us that we currently can’t What happens when this belief system is price these instruments correctly and rating confronted with global warming? Specific events such as hurricanes Katrina agencies are unable to properly assign risks and Andrew in 1992, the Northridge so how can we hope that environmental There is real concern within the insurance earthquake in 1994, or even the bombing risks will be properly priced and traded in industry that the true costs of climate change of the World Trade Centre in 2001, have financial markets? Uncertainty is perhaps have not been fully recognised and hence all served to underline the increasingly more important than Risk. priced (see for instance the Swiss Re, Munich stretched capacity of global insurance Re, OECD, and World Bank web pages). markets. This has in turn sparked an These are some of the issues the Finance Equally there has been a growing realisation increasingly active debate among actuaries, group at WBS is currently addressing. that the capital base of financial markets has economists and politicians over how to be employed to manage the risks associated financial markets could, or indeed should, with climate change. The traditional route be used to hedge risk that has previously the author in minute of insurance and the diversification of risks been covered using other channels. A through reinsurance is simply unable to carry symptom of the debate and of the increasing the potential burden. The implications of linkage and possible convergence between liquidity failure and default on a large scale the insurance and financial markets has within the insurance industry could have a been the steadily increasing stream of major impact on the global economy. financial instruments that contain some form of insurance product and vice versa. We are faced with two options; either various climate-related insurance lines, say flooding, The lines between the industries have are simply withdrawn and environmental become increasingly blurred and this risks become uninsurable or we start to use has stimulated the tailoring of products financial markets to manage (and price) these to the risk preferences, capacities and risks. The issue facing us then is, given the demands of both buyers and sellers of risk uncertainty regarding the physical processes based products. Securitisation of risks in underlying climate change, how can financial both areas has generated a concomitant markets be best employed to manage the development in the pricing of products associated risks? containing both insurance and financial Mark Salmon is Professor of Finance at WBS elements, the result of which has been a and Director of the Financial Econometrics Research Centre (FERC), which forms part According to the 2003 report by the search for an appropriate class of processes of the Warwick Finance Research Institute. International Institute for Applied Systems to solve the problem of price determination He was formerly Deutsche Morgan Grenfell Analysis, more than 700 major ‘natural’ for extreme risks. Arguably one of the most Professor of Financial Markets at Cass Business catastrophes occur every year. Since the important aspects in this process is the way School, London. Mark previously held the 1950s alone, economic losses from disasters in which risk and perhaps more importantly position of Professor at the European University of either natural or man-made causes have uncertainty are handled in each discipline. Institute in Florence. He has been an advisor to increased 14-fold. Although the developed the Bank of England for the last five years and has many links with City institutions. world generally suffers the greatest absolute Uncertainty arises when we do not know the economic losses, when seen as a percentage probability distribution of random events, His research interests are: financial of GNP the losses in the less developed world risk applies when we assume we do. Finance econometrics; behavioural finance; are 150 times greater in terms of human has critically focused on risk not uncertainty asset pricing; knightian uncertainty; risk victims and apparently 20 times greater in and new methods of financial analysis need management; asset management. terms of economic loss. to be developed.
  • 13. nexus: summer 08 finance 13 raising the standard Anne Gunther (FTMBA 1989–91), Chief Executive of Standard Life Bank, examines the greater challenges of managing risk now facing the financial services industry Standard Life has been my working life for on top of the current liquidity risks. Risk the last six years and it’s proven to be far management, always the bankers’ bread and more fascinating than I ever imagined when butter, is now unimaginably wider, deeper I moved to Edinburgh. I was heavily involved and more complex than even ten years ago. in the run up to our demutualisation and our Initial Public Offering (IPO) in 2006, an Did my time at Warwick Business School event that wasn’t even on the horizon when prepare me for this? It certainly taught I joined in 2002. After IPO, my role began me to think much more globally, and to expand, from focusing on the Bank, our I remember, with mixed emotions, the mortgage and savings business, to a wider debates I had with Peter Doyle about the role increasingly looking across the retail Japanese approach to competing on the propositions used by Standard Life’s customer world stage. He also taught me the huge base of c.7m. importance of brand and brand values; not what a company’s advertising looks like but the overall image projected, ‘the sum total of Pundits had been asserting what everyone thinks and feels about you’. Your reputation is your single biggest asset that the US subprime and the risks I’ve discussed above, or rather mortgage problems wouldn’t lack of management of those risks, are the spread to the UK as our surest way to destroy your reputation. mortgage books were great My lasting impression of Warwick has quality and our securitisation therefore changed over the last 12 months issues were different. No-one as I’ve realised just how much it did teach had thought through the new me and how that has equipped me to help concept of contagion risk! my team manage through a very different Pundits had been asserting that the US environment. subprime mortgage problems wouldn’t spread to the UK as our mortgage books Looking to the future, my widening retail However, banking activities have become were great quality and our securitisation portfolio within Standard Life gives me centre stage, once more, as a result of the issues were different. No-one had thought plenty to think about as we move from a current credit crunch. It has become clear to through the new concept of contagion risk! traditional pensions company to a major the financial services industry, as a whole, If one market doesn’t know enough about asset managing organisation, working across that the challenges of managing risk have another market, the safest bet is to assume the full range of corporate and retail assets. become much greater with the impact of that it’s all the same. Hence, very quickly, globalisation which first showed up, truly, in UK institutions could no longer source the Stock Market crash following the dot com well priced long term funding through the the author in minute boom, coming into play across a much wider securitisation markets and the Northern range of risks than the traditional credit Rock implosion was the all too public Anne is currently CEO of Standard Life Bank risks associated with banking. 9 August 2007 face of this. Since then, write-downs of with further responsibilities as CEO Designate will remain engrained on many bankers’ unprecedented size, capital raising of equally of their Healthcare division and MD of memories as the day the structured finance unprecedented size and continued suspicion Customer Relationship Development. Prior markets, and the asset backed securitisation in the markets regarding who still holds the to SLB, Anne’s career began at NatWest as a Graduate Management Trainee, before moving market in particular, slammed shut. remaining subprime mortgage risks has led to Lloyds TSB, eventually becoming MD of to the Bank of England taking the major step Direct Channels. This market had been widely used by the of providing an alternative securitisation mortgage industry to diversify funding away market to begin to redevelop liquidity and Anne holds a degree in physics, a Warwick from total reliance on the retail savings confidence in those instruments. MBA and an honorary doctorate from market and to spread credit risk. In the US, Edinburgh. She has chaired the industry trade however, the ability to pass on most, if not Meanwhile, further shocks around inflation, body of the Council of Mortgage Lenders; is all, credit risk with the bonds backed by stemming from tightening of oil supplies a Trustee of Arts & Business, and is a member of the advisory board of Warwick Business mortgages was taken to extremes, and hence and somewhat associated price rises for School. the underlying credit quality of the mortgages food, driven by the rush to bio fuels using themselves became less and less important. up agricultural land and the increasing Anne’s weekends are split between houses Bankers were ignoring the core risk in wealth of and changing taste for food of in Edinburgh and Devon. She enjoys sailing, banking – whether a borrower could repay. the Asia Pacific region doing the same, is walking and cooking for friends. overlaying a major spectre of inflation risk
  • 14. 14 nexus: summer 08 finance crisis and currency Professor Lucio Sarno addresses the question of the future of the currency ‘carry trade’ in the light of the subprime crisis in the US The subprime crisis that began in the summer of 2007 has its origins in the the author in minute generation of easy access to credit offered to risky borrowers for purchasing real estate Lucio Sarno is Professor of Finance at WBS and in the US. While the origin of the problem Director of Currency Research, AXA Investment is localised (US-based) and confined to one Managers. specific asset class (real estate), the crisis has affected several geographical areas He was previously fellow in Economics, (Continental Europe, the UK, and various University College, Oxford; Research Fellow, emerging economies) and asset classes (eg Dept of Economics, Oxford University; Rotary equities, bonds, currencies), leading in turn Ambassadorial Scholar, Department of Economics, Columbia University, New York. to instability of the financial markets and to Lucio is currently Research Affiliate at the a recession in the US that will soon spill over Centre of Economic Policy Research, London; elsewhere. The focus of this article is the Consultant, International Monetary Fund, Bank specific impact these events have had on the of Canada, Bank of Norway, Federal Reserve currency markets and on the widespread use Bank of St Louis, USA; Committee Member of the ‘carry trade’ as a simple investment of the Macro Money and Finance Research strategy. Group. He also provides consultancy for several companies in Wall Street and the City. The carry trade is a strategy where an investor His research interests are: international borrows in a currency with a lower interest economics, financial economics, international rate and uses the funds to purchase another money and finance, monetary economics; currency that yield a higher interest rate. financial econometrics. An investor who adopts this strategy is attempting to capture the difference between the two interest rates. This difference in rates The sceptics have traditionally taken the Cumulative returns from carry trades in currencies can be substantial, depending on the amount view that returns from carry trades represent 12 of leverage the investor chooses to use. anomalies, puzzles, inefficiencies, which 10 cannot continue forever in a rational Cumulative returns The risk inherent in simple carry-trade world. This cohort includes many academic 8 strategies is that an adverse movement in the economists, policy makers and a small set 6 exchange rate will wipe out the gain from of contrarian financial practitioners. With the differential in the interest rate. According the advent of the subprime crisis and the 4 to standard finance theory, based on the huge losses of carry-trade strategies that have 2 simplest version of the efficiency markets followed, these sceptics have typically reacted hypothesis (EMH), the return from a carry by saying: ‘I told you so’. The main point of 0 trade strategy should, on average, be zero. this article is to argue that this reaction is at Calendar time -2 This is because the currency of the higher best premature and, most likely, incorrect. 08.01.95 08.06.99 06.11.03 05.04.08 interest rate country should depreciate in This is because the losses incurred by carry the future to offset the differential in interest trades (no matter how important one thinks One thing is for sure: someone who has rates, so that the returns from holding a low the subprime crisis is) are nowhere near the invested in carry-trade strategies for the past ten interest rate currency and from holding a magnitude that is required to offset the large years is not going to be concerned about the high interest rate currency should equalise gains that these strategies have delivered in subprime crisis at this stage and will persist with once the exchange rate risk is taken into the past. the same strategy for the foreseeable future. To account. avoid any misunderstanding, I do not suggest Figure 1 below shows the cumulative that carry trades are all that one needs to know In contrast to the EMH, there is ample returns from a simple carry-trade strategy to be a successful investor. I do suggest that the evidence in the data that carry trades in a portfolio that has been invested in 20 dismissive view of the disciples of the simple deliver positive risk-adjusted returns to currencies since 1995. Note that the vertical version of the EMH is far too simplistic to be investors. Given their intrinsic simplicity, axis shows the percentage cumulative return taken seriously. carry trades are used not only by hedge divided by 100, ie 1 represents a 100 percent funds, investment banks and other financial cumulative return. If the EMH were correct, Policy makers and regulators should continue practitioners, but also a number of laymen the graph of cumulative returns should to think about the destabilising effects of and housewives. Given the huge leverage revert to zero over time. Instead, we note the excess leverage and about designing a system often involved in carry trades and their dramatic positive trend in these returns. This which prevents excess risk taking in carry potential for disrupting financial stability, trend has been mitigated by the subprime trades, because – given the returns from these these strategies have attracted a lot of crisis, but clearly not sufficiently to affect the strategies – the market is not going to moderate attention from policy makers, regulators, long-run gains from carry trades or to justify their risk taking without some harder evidence academics and the media. the statement ‘I told you so’. that carry trades are not profitable.
  • 15. nexus: summer 08 finance 15 aligning the objectives Bo Kratz (FTMBA 1987–88) details his journey from Sweden via Warwick to Singapore Leaving the shores of my native Sweden, literally on a boat, I arrived at WBS in the author in minute 1987 to participate in the full-time MBA programme. The year at Warwick was in Bo Kratz is Managing Director, Asia, at Permal many ways an important milestone in my Group. Bo joined the Permal Group in 2006 life. Not only did I enroll in a fascinating and his main responsibility is to oversee and academic programme, but I also became a coordinate the business activities in Asia Pacific. passionate ‘cosmopolitan’. The most obvious proof of the latter was the young Taiwanese Before joining Permal, Bo spent ten years with girl that I met in my Tocil kitchen and with ABN AMRO Asset Management, the first five in whom I now have two children. I enjoyed Stockholm, culminating as Head of the Equity Department. Between 2001 and 2004, he was all of the courses at Warwick, but Finance CEO of ABN AMRO Asset Management in and Organisational Behaviour were my clear Singapore and before joining Permal, he was favourites. Consequently, the memories of Head of Institutional Sales Asia, based in Hong Professors Andrew Pettigrew and the late Kong. Prior to joining the Asset Management Anthony Steele are particularly strong. industry, he spent eight years in Stockholm as a research analyst and a stockbroker. When I returned to Sweden (coincidentally on the same boat), I took up a career Born in Sweden in 1962, Bo has a wife Lian and two children aged 15 and 11. His home is now in stockbroking and subsequently asset in Singapore. He lists his personal interests as: management. Anthony Steele’s words of everything on two wheels, photography, action wisdom came in handy straight away as I got sports and admits to a craving for adrenalin. my hands dirty dissecting corporate profit and loss accounts. However, as I subsequently drifted away from managing money into managing people, I had the opportunity races, religions and ethnic backgrounds globally was great and again gave me the to revisit some of the concepts from the exceptionally rewarding. I saw the strength opportunity to reflect on the behaviour of Organisational Behaviour course. in the diversity as opposed to an obstacle. different organisations, or more importantly After three years in Singapore ABN asked me of the people within them. to move to Hong Kong to take up a more regional role, which I did for about two years In addition, after 18 years on the buy as well After 18 years [in] equity until it was time to move on. as sell side of the equity markets, I became markets, I became increasingly convinced that the future of My take from my ten years with ABN is that mutual funds and investment products increasingly convinced that if you have aspirations and ambitions, do in general lies in aligning the investment the future of mutual funds and express them, even if they might seem odd objectives with that of your clients as opposed investment products in general and out of the normal. Good organisations to that of the market as a whole. In other lies in aligning the investment appreciate people with ambitions and if words, creating a stable return that does not you can accommodate each other, a very necessarily fluctuate with traditional asset objectives with that of your strong relationship is formed. Also, if your classes such as equities and bond, not only clients as opposed to that of the organisation doesn’t appreciate people makes the private investor sleep better, but market as a whole. with ambitions, you are in the wrong place also has an appeal for institutional investors anyway. such as pension funds and insurance companies. Despite these obvious benefits, we Nevertheless, after ten years it was time to say still spend a lot of time educating our clients Fast forwarding to 2001: I was then heading farewell to ABN AMRO. I was approached by about so called ‘alternative’ asset classes. up the investment function of ABN AMRO Permal in 2006. Permal is one of the world’s Asset Management in Stockholm. With largest Fund of Hedge Fund managers. I was Asia has become my home and the two one eye on the needs of my two ‘Eurasian’ asked to further expand and strengthen their large international cities of Hong Kong children and one eye on future growth organisation and presence in Asia. In addition and Singapore both very much mirror the prospect for me and for them, I quietly to being one of the largest Fund of Hedge composition of our family. We moved our approached my company expressing a desire Fund managers, Permal is also one of the primary base back to Singapore last summer, to work in South East Asia. A few weeks later oldest. With 34 years in the industry, Permal but still keep a strong link with Hong Kong. they came back offering me the position of brings not only a long track record but also There is so much to do in this part of the CEO in Singapore. My acceptance followed a wealth of experience in an industry that is world so I am pleased to say that my personal swiftly and in the summer of 2001, we generally perceived as young. and professional aspirations are very much sold our house, the Volvo, and bought a aligned. Understanding my family helps me one way ticket to Singapore. I found the Going from an organisation of a few to understand the dynamics of the region and task of managing a team of many different thousand to one with just over a hundred vice versa.