By “low returns” I mean returns on investment which are less than might be desired by, say, fairly aggressive investment bankers, stockbrokers or major international industrial companies; for the sake of example let’s call a low return 5 percent to 10 percent IRR. By “wimps” I mean people who are not strong, brave or confident.
From my observation nowadays when banks are paying something like 0.75 percent interest on deposits, the oligarchic kind of local investor seems to have an expectation of anything between 20 percent and 30 percent IRR. Any investment prospect much below this would be scoffed at. In most of the developed world, returns of 10-15 percent would be considered quite good.
The inflated local expectations must be a direct result of monopolistic practice, lack of regard for quality, the outrageous price of land and political and regulatory capture. Life is good, for some. I would find it difficult to believe that the high returns are due to quality customer service and business efficiency in the face of competition—the sorts of things that text books would claim should lead to fat profits.
But that said, is it really necessary for investors to always pursue the absolute maximum possible return? I don’t think so. They do it because they want more for themselves and in order, they will say with justification, to retain the confidence of the market—to get funds and punters to give them yet more money to invest and produce decent dividend payments.
Problem is that this need for big returns for attracting more money for “growth” keeps pushing the bar ever higher. To announce at a stockholders meeting a plan to make some low return investment for a social good would meet with [a lot]less than majority approval. When Shell recently put to stockholders the idea for shifting from a fossil fuel company to a renewable energy company, 99 percent voted against the proposal.
Pension funds are big investors and I remember once at a conference hearing a lady who was the head of a state pension fund was asked if she would favour putting some fund money into lower return investments that provided a social good. “No way” was her immediate response. “We need to get the biggest returns that we can,” she said.
Ethical investing which is becoming a biggish area ($7 trillion or 18 percent of the $37 trillion funds under management) is less about accepting low returns for social good than it is about not investing in sin type businesses such as tobacco, alcohol, armaments and even some medicinal drugs. There is little in the way of conscious investment in low return social goods, that sort of thing is considered best left to the charities.
Investment banks want to use the funds that they manage in prospects with minimal risk and maximum return. They get their 3 percent or 4 percent or more and high returns for their customers. Occasionally they will dream up some ill-conceived scheme—like trading suspect mortgages—which will bring the world’s financial markets to its knees. Then they will have to be bailed out by taxpayers as being “too big to fail.”
In the Philippines, the exceptionally high return expectation does not produce reinvestment and more jobs to the degree to which it seems that it should. The money just disappears. If it did, the lack of jobs situation would not be what it is, and in this context the OFW’s also have to be counted as people who would be unemployed at home adding about 25 percent or 30 percent to the official un- and under-employment statistics.
Enough real jobs need to be created to provide for the underemployed, the unemployed and most of the OFWs who, it is to be assumed, would prefer to work and live at home with their families.
It seems clear that the morality argument for the acceptance of low returns in exchange for social good does not impress; and that using taxation as a leveler just does not work. May be worthwhile giving some thought to statutory enforcement of the use of some reasonable proportion of profits for reinvestment in decent work creating opportunities, which do not pay too much regard to the expected level of profitability, at home. This may also have the benefit of increasing exports and reducing imports.
Mike can be contacted at email@example.com.