John Clarke is annoyed. Annoyed enough to take to the Wealth Manager and Financial Times online comment sections to wage war on the forces of ignorance.
Annoyed enough to take it upon himself to publicly debate Haig Bathgate – a man regarded as one of the smartest investment minds in British wealth management – at length, with citations. Annoyed enough to hand out his personal phone number to anyone who might need the matter clarified further.
The source of his irritation? For those who may have missed the original meeting of minds, Clarke, head of asset allocation at GHC Capital Markets, is bothered about quantitative easing – or to be more exact, a misunderstanding of what QE was expected to achieve, and how we should measure its success or failure.
He lays out his case with the patience of a man to whom all this is manifestly obvious.
‘QE’s primary objective is not to lower borrowing costs and it is certainly not intended to stimulate borrowing,’ he wrote in response to an article by Bathgate on the iniquities of monetary expansion.
‘Instead, its central objective is to compensate for the weakness in bank lending by directly increasing the quantity of money through the purchase of gilts from the non-bank private sector. As the non-banks’ money balances increase above desired levels relative to their income and wealth, they will seek to reduce these by acquiring other assets, most notably equities. QE works primarily through wealth and balance sheet effects.
‘It is simply nonsense to say “the asset purchase programme doesn’t work”. Without it, the quantity of money would be substantially lower than it is currently and so too would economic activity.’
Arguably this determination to fight one’s corner might be considered a prerequisite for a monetarist who trained at Warwick University in the early 1980s.
The school of economics was and remains both one of the most mathematically rigorous departments in the country, and one of the least sympathetic to his discipline (home to around 60 of the 364 economists who famously wrote to Margaret Thatcher opposing her monetarist anti-inflationary policies).
More than 30 years later, monetarism continues to underpin Clarke’s methodology and framework for targeting asset prices. It has led him to take punchy bets not just in the US, but more controversially in UK equity, which in his view currently has all the necessary ingredients to flourish.
After beginning his career in Whitehall, Clarke moved to [the then] Norwich Union and into private consultancy, advising some of today’s most successful private client practices from their earliest days, before joining GHC in 2004 to head its investment process.
Together with head of asset management Richard Harper and Paul Harris – the ‘H’ of GHC and the sole remaining founder partner still actively involved in the business – he has built the investment process into the engine of the business’s growth.
Beginning life as a broker in 1996, GHC now offers a number of investment services, from a range of Oeics to managed portfolios to fully bespoke discretionary management. The company employs 36 staff, around two thirds of whom are directly involved in investment, across offices in London, Leicester and Bath, although Clarke does much of his work from his home in the Norfolk countryside.
As of the end of 2011, the company catered for 1,214 clients, the majority of them IFAs. It manages a total of £370 million, levying a total expense ratio of up to 1.5%, dependent on mandate. The investable minimum is set at £25,000 for the model portfolio service and at £200,000 for a fully bespoke portfolio service.
Investment performance has generally been strong, combining Clarke’s asset allocation with Harper’s security selection. On a risk-rated scale running from two to eight, the most aggressive portfolio has returned 59.4% versus the Apcims Growth Index return of 53.38% over the three years to the end of March. A median balanced five rated portfolio has returned 42.7% versus the Apcims Balanced return of 48.29%.
Clarke has an explicit Libor-based target over a rolling three-year term with a secondary performance benchmark, although this is ‘basically there to stop me from just locking in gains’, he says.
‘If I generate outperformance in Q1, I could then lock that in and just sit in cash, which ultimately would be to clients’ detriment, so we have a secondary performance benchmark against a composite index,’ he explains.
Born in 1961 in Ilford, east London, Clarke’s first love was football and he was poised to begin an apprenticeship at Millwall before he was ruled out by an injury.
After graduation he went into the civil service as an economist, rising to the level of adviser before moving into the private sector as chief economist for Norwich Union in 1989.
Ten years later and following repeated consolidation, the job was moved to London. Clarke parted ways with the company, going it alone as an economics consultant, with a client base that included the young GHC.
The company appreciated his contribution enough that in 2004 it bought him in full time, buying out a 50% stake in John Clarke Economics. He continues to cater for a select list of clients, however, which now includes several companies that have grown to become some of the most respected independent managers in the UK.
‘A lot of investment houses buy in research or think that they are getting it for free from the sell side and, of course, these things are not always issued entirely objectively. One of the things fund managers always said to me when I was running John Clarke Economics was that they were independent, but they were getting all their data from the sell side.
‘I have no particular axe to grind for any single asset class – for instance, we have been out of European equity for almost 18 months.’
While his modelling relies on a broad range of indicators, his fundamental binary discipline comes back to broad money supply – the widest definition of the monetary base including cash in circulation among non-finance corporates and private individuals, described in the UK as M4. He says this is the single most important input to a healthy economy.
He is aggressively bullish on US equity, running a 50% overweight to the Apcims balanced index, due to rapid monetary expansion in Q1.
He also believes that after its long period of stagnation and retraction, the UK is at the beginning of a return to corporate health on tentative signs of monetary growth in Q1, and is beginning to increase his UK equity allocation.
‘Others are concerned about the state of the US recovery but I am pretty relaxed about it. The US recovery is underpinned by monetary growth, which was 5% in Q1. Because the [credit issues] of the US happened earlier, their banks are further down the road to recovery and getting to the point where it is profitable to lend to businesses and even consumers again.
‘The UK is a bit more complex, and the quantity of money is very volatile. [But] after retracting for two years the quantity of money grew something like 6% in Q1 – if that is sustained it is consistent with above trend growth, and I am convinced that will happen.’
He has also moved to an overweight in Japan on the central bank’s commitment to target a higher rate of inflation through financial easing, which he describes as a ‘turning point’.
However, he views Europe as being hopeless for the foreseeable future, with money growth either stagnant at the core, or continuing to collapse terrifyingly fast at the periphery – up to 31% since 2009, in the case of Greece.
And so we come back to QE.
‘[In Japan] they have been pursuing a form of QE since 1990, but they have been buying from the banks rather than the non-banking sector. [In the UK] people either don’t understand or can’t see the difference between whether the Bank of England buys gilts from banks or non-banks. The banking sector only owns short-dated gilts and the BoE was only buying longer maturities.
‘So the BoE must be buying from non-banks, who in the normal scheme of things would put that money on deposit. There are obvious reasons why they would not want to own cash, however, so they buy assets that appreciate from the value they would otherwise have been and the rising valuation generates a wealth effect for both corporates and individuals.’