Money & Me with Lord Stanley Fink

Well, thank you, Graham. Please call me Stanley. Most people do. Thank you very much.

Well, I think my father, for most of my very young life, actually was a manufacturer of wire lampshades that people used to cover with raffia. But he had a split from his brother, his business partner, and his brother bought the business, and my father ended up taking his share of the proceeds and investing it in the grocery business. So he was really a grocer for the latter part of his career, probably from my teenage years onwards. In my case, it was a different life because in the first business, my mother had not really worked; she'd been a stay-at-home mom. But once my parents bought the grocery shop, she was working full-time. We used to sometimes in the holidays go and help, and I think it does give you a real hands-on experience of the real world and the customers and the lives they live in a way that many other businesses don't. So I think it does give you a connection with the real world.

It wasn't discussed as a sort of abstract topic, but I think as you sort of live through the experience with the family business and good months and bad months, you realize certain values your parents had and certain philosophy. For example, my parents were savers. They had debt; they believed in mortgage debt, a minor amount of business debt at some points, but really they tried to degear pretty quickly and believed it was better to be a saver than a spender. Putting things aside for a rainy day was very much part of their philosophy. And I guess they grew up in an area where the welfare state wasn't as prevalent and people really did have to look out for themselves.

It's a very good question. I knew that I wanted to end up in business. I didn't specifically know which business, except saying it probably wasn't going to be the grocery business. But I didn't know at the time I went to university that the subject of economics existed. My school was probably one of the last in Britain to do economics, and in fact I gave an overall lecture to the pupils probably seven or eight years ago, so it was really late. I'd done science up to A-level, and I really was more of a scientist and lawyer. But I thought a law degree gave me some skills I would need on my journey to become a rounded businessman. And frankly, despite not really enjoying my law degree, I do find it very useful both in many of the businesses I've been involved in and also as a parliamentarian. The amount of legislation one reads, I don't know how people without legal training understand what they're reading, actually.

Again, it was serendipity. I joined Man having worked with them when they were a banking client of mine. I was at City Bank, and I really liked the firm. I spent an intensive period with them looking at how they would pass on the firm from the old generation to the younger generation by effectively selling the business in a leveraged buyout, or LBO as it were. I really got to know the managers in order to prepare the credit; I really had to understand the business. I think they were impressed with what they saw, and they offered me a job shortly after the exercise finished, even though the exercise never ultimately happened. But we did get credit approval from the bank. I felt that it was a business that was young and dynamic at the time. Most of its businesses were in the commodity business and the agricultural commodities: coffee, cocoa, sugar. Indeed, the commodity business still exists today but as an independent company. I joined in a main finance role. I was fortunate then to get involved in a couple of loss transactions that helped grow the company, and then I became the CFO, finance director, and I helped float the company in 1994. It was only after the IPO that I was asked to take a sideways move in effect and become the head of its rather small hedge fund business.

Sure. My definition, it's one that I've not really checked, would be a universal one. But for me, a hedge fund is a fund that is going to look for an absolute return, not a return relative to an index. It's a fund that can go short of markets as well as long. It can use leverage and derivatives in a way that many standard mutual funds can't. It generally has management who are motivated through incentive fees so that they are aligned with their clients. So those are the typical characteristics, but the range of instruments and strategies are just enormous. The type I was mainly involved with were funds that traded the futures markets, which were historically commodities, but nowadays interest rates, stock indices, even emission derivatives are part of what a modern CTA-type hedge fund trades.

For me, if one is looking at a personal level rather than going through a consultant, one of the key things is to look for a strategy where management can articulate what they're doing. I've met many hedge funds where you speak to them and they cannot actually explain to you in words that make sense what their strategy is. So make sure the strategy makes sense, make sure that there's some sort of track record or experience, have an understanding of the biggest loss that has occurred and could theoretically occur, and ideally look at the way that the performance of that hedge fund fits the rest of your portfolio. One of the reasons I've always liked the managed futures area is it tends to have a very low correlation to both the stock market and things like the property market. So it often does very well in bear markets because it can go short equally as well as it can go long of markets.

I think there will always be rich pickings for people of certain styles. If the markets really go into a sort of bear market, then CTA managers who follow trends, like the one I work with, Isam, would do very well in that sort of market. If the markets are more range-bound, then it would be different strategies that would do well. But no, there will almost certainly be a hedge fund type that does well in virtually every market scenario. It's just making sure you're in the right type at the right time, or you're looking at one that over time makes good returns.

The only type of hedge fund that really can benefit in all market strategies are fund of funds or multi-strategy funds. They do have issues because there can be two levels of fees, etc. Individual hedge funds tend to do well in most market conditions, but there are very few that can do well in all market conditions.

In our average Man Group retail product, particularly the ones focused around AHL, the main product, they would typically be earning 15 to 20% returns with about 15 to 20% annualized volatility. So a Sharpe ratio of about 0.8 to 1 in terms of risk return.

It's a good question. I think my philosophy was very much driven by wanting to spend the balance of my life doing something really meaningful for society. I'm very fortunate; I've got three wonderful, well-adjusted children who all have good independent careers of their own. I was able to have a portfolio that I knew was pretty balanced and safe and conventional, but I wanted to invest in new business because it's business and new business that fascinates me, particularly businesses that can have a sort of social and utilitarian purpose as well as making money. By doing that, you can recycle the capital. So I'm interested in a range of businesses which vary from some very green businesses, renewable forestry, New Forest Capital, businesses that measure the impact of human activity on the planet. I'm invested in a business called Ecometrica that really does that and helps companies measure the impact of their carbon footprint, etc. I'm invested in a number of businesses that supply things that are really important, like Ethiopia, which is looking at new ways to build homes in more affordable, greener ways, and in businesses like British Pearl, which help bring a new way for individuals to invest in the property market, get their foot in the property market without having either the sum of money or the time to manage their property investments personally in the way that a buy-to-let landlord would have done. So it's really finding that balance.

It's a very good question. We have, after realizing one or two investments, I did share some of my wealth around the family. I'm fortunate in that my oldest son and more recently my youngest son work in the financial world as well. It was actually my older son Alex's idea to have a family investment club where we literally looked at investments together and made decisions together about where we would invest. While there will be some investments that perhaps I'll do that they won't because my pockets are deeper and perhaps my risk tolerance is higher, it's a really fascinating process to hear from them the sort of businesses they want to invest in and see the way they operate, because you get to see your children as grown-up businessmen in their own right, whereas most of the other ways you interact with your children, you end up seeing them like children even though they're in their 20s and 30s. So it's been a really nice experience both from a social interaction point of view as well as helping us get enthusiastic together about businesses.

Absolutely. As I once said to my wife when two or three of the early investments we made didn't go well, I said to her, 'Lemons ripen faster than plums.' Unfortunately, that was true. We did have a couple of plums ripen, but no, we've had a number of investments that didn't work out for a variety of reasons: either over-optimism by the management, or a factor we ignored, a competitive factor, or a critical mass issue. The important thing is to recognize failure early, to have an open and frank dialogue with management, and to decide in advance what your risk tolerance is. I think the biggest mistakes I've made with hindsight is continuing to fund investments hoping they'll turn around with a bit more money. I think having the discipline to, while showing support to the investments you make, and I've never been somebody who cuts and runs at the first sign of adversity, while being properly supportive and explaining to the investments what your criteria would be to reinvest and to try and help them through the difficult times, because all businesses have some difficult times. It's having a certain point to say enough is enough. That is where I kick myself, the areas where I carried on too long. There are probably one or two of those, and they are things that, of all the things in our marriage, my wife berates me about the most.

It does. British Pearl is a really good way for people to take an exposure to property that's appropriate for their overall portfolio. But if you think about it, most people live most of their lives short of property. Either they're not on the property ladder and they can see it going up and they get frustrated by it, or they're in a house but they know at some point the family is going to grow and they're going to need to buy a bigger house. The problem is, having been in both positions, in a rising market it's very painful that as you make savings, the property you might want to buy goes up more. Particularly if you look at a year like this where the stock market's probably down about 10% on the year, if you've saved from the beginning of the year in stocks, if you've bought low-risk ISAs, you'll probably have made 2% in the year. There is the chance, for example, in buy-to-let property, to make in British Pearl today you can make over 4% tax-free in an ISA in a loan product through them. And the equity properties are only put on the platform when they're pre-let, so there's probably been an 8 to 10% return in terms of income and capital gain in properties where you invest in the equity of British Pearl properties. That's all secured by property, so it's not debt that could go to zero in theory, but it would have to mean properties worthless, so it's relatively safe as an investment strategy.

Yes, I think some of the changes to root out some of the most artificial avoidance by changing legislation is sensible. But I think we should be very clear as a society to separate tax evasion, which is absolutely illegal, from tax avoidance, which has sort of become a dirty word. Perhaps it's fair when there are schemes that are particularly artificial, but actually it's one of those difficult subjective words because most people who write a will or do estate planning, you could argue that's tax avoidance. You could even argue that buying your whiskey as you cross over an airport duty-free is tax avoidance because all things being equal, it would be easy to pick up your whiskey from your local supermarket and pay tax on it. So I think one's got to be very careful. My personal view is if people think things are wrong, they should change the law and try not to do it retrospectively. That's very much how I was brought up. I think some of the problems the House of Lords was talking about in the balance is probably to do with the merger between the Inland Revenue and Her Majesty's Customs and Excise, because Customs and Excise have always had wider powers and probably been more aggressive historically. I think it's the combination of those two that has led to the specific situation that was spoken about. But that's something that in political terms is well above my pay grade to comment about. I've had most of my dealings over the years with the Inland Revenue, and most of the time they've been very fair to deal with.

I think in terms of investment, I'd say diversify. Don't put all your eggs in one basket. Don't think because you've got a lot of equities it's great, because equities have in the past gone down and stayed down for quite a long time. So having an element of bonds or cash, an element of property either directly or through a vehicle like British Pearl, is a good thing. Diversification is the nearest thing to a free lunch you get in a financial market. I also think you earn a living by what you earn, but you build a life by what you give. Some of the most emotionally rewarding things I've had is to be involved in some major philanthropic projects, and in particular to involve my children in some with me and my family along the way. So that's been a great journey, and I've met some remarkable people both in terms of the practitioners who help people within the charitable projects and also some of my fellow donors who I've met, who are people I would not have met in my normal business life.