"Best-advice" and the "true" mortgate term. Actuaries' endowment advice principles revisited

In 1999 the Financial Services Authority recommended that a standard repayment mortgage was the “best advice” for Independent Financial Advisors to give to essentially all new mortgage customers seeking the best value repayment vehicle. The FSA simply followed the recommendation of the 1999 Report of the Endowment Mortgages Working Party of the Faculty and Institute of Actuaries. This working party compared the relative returns and risks with repayment and endowment mortgages over a standard twenty-five year term. Endowment mortgages benefit from compound rates of growth, and so the underlying capital value available for repayment increases disproportionately the longer returns are allowed to accumulate. In selecting between repayment and endowment mortgages, the true mortgage term of repayment therefore becomes the critical determinant of which repayment vehicle is actually the best value. Crucially, the FIA assumed that any variation in the length of mortgage would lead to a reduction in the standard twenty-five term, thus giving further weight to the preference for repayment mortgages as exhibiting better value. This study challenges the FIA’s Working Party assumption about the typical term of repayment in two ways. First, we draw on economists’ recent developments in consumer theory to show that the variation in needs-based expenditure among households is large enough to allow for a considerable cohort of the house-owning population to select to extend their mortgage term beyond twenty-five years. There is therefore no reason in theory why twenty-five years ought to be the upper limit for mortgage debt repayment. We then present the results of a study of a sample of mortgage applicants in the South East of England. These individual case study data are extremely rare, and so the results particularly valuable; and the principal result is that the “true” mortgage term for the largest single cohort of consumers is longer than 25 years. The results indicate that among those applicants trading up (around half of all mortgage applicants) the average extension associated with each move is two years. When this 27 year period is then taken as the standard repayment term, the results of any comparison of the effectiveness of repayment and endowment mortgages changes dramatically in favour of equity-backed investment plans. Simulations based on historic data demonstrate that endowment plans are 19.2% and ISA plans 21.6% more efficient than straight repayment mortgages over the longer period. Furthermore, the risk of an equity-backed investment plan under-performing is halved when the typical mortgage term is extended from twenty-five to twenty-seven years. We therefore conclude that while the FSA’s “best advice” is indeed applicable to many borrowers, for the majority the reality is that equity-backed methods of mortgage repayment represent a significant improvement compared with the currently favoured repayment mortgages.

The True Distortions in the With Profits Market "If disclosure is not the problem, then more information is not the answer"

The Financial Services Authority’s review of With Profits policies has been motivated by a perception that consumer understanding of these products is insufficiently developed. This paper suggests that these concerns have not so much been overstated as misguided. With profits policies are complicated but consumers don’t need to understand them. 

Revisiting the psychic distance paradox: international retailing in China in the long run (1840-2005

This paper uses original research on the roles played by two sets of foreign entrants into Chinese retailing since the 1850s - the overseas Chinese entrants and western entrants - to explore the psychic distance paradox over the long run. It explains how the advantages of psychic closeness in Chinese retailing have always been important in reducing entry barriers, but that the increasing costs of technology have increased the significance of firm proprietary strengths in some formats, notably supermarkets, so reducing the relative importance of psychic closeness. The paper therefore illustrates how taking the long-term perspective enables more sophisticated conclusions to emerge. A cross sectional analysis of one sector – Chinese supermarkets – would confirm the psychic distance paradox; overseas Chinese have been unable to translate psychic closeness into superior performance. By contrast their historic performance in department stores and more recently in fashion chains has been superior to the format leaders. This long term perspective therefore suggests that the understanding of the psychic distance paradox needs to be moderated by additional conceptualisation.Psychic Distance, China, International Retailing, Internationalisation Process

Internationalising to create Firm Specific Advantages: Leapfrogging strategies of U.S. Pharmaceutical firms in the 1930s and 1940s & Indian Pharmaceutical firms in the 1990s and 2000s

Internationalisation is a useful strategy to gain firm specific advantages during periods of technological discontinuity. The pharmaceutical industry offers us two such episodes as examples: when the antibiotics revolution was beginning and when the possibilities of genetic routes to new drug discovery were realised. This paper compares the strategies adopted by laggard U.S. firms scrambling to gain capabilities in antibiotics, and Indian firms equally eager to acquire positions in new biotechnology based drugs and shows that both groups used internationalisation strategies to gain technological advantages and build up their firm specific advantages.Technological leapfrogging, Internationalisation Strategies, Indian Pharmaceutical industry, Antibiotics revolution, US Pharmaceuticals

The emergence of Agribusiness in Europe and the development of the Western European broiler chicken industry, 1945-73

This article presents new data on the emergence and growth of the leading Western European poultry industries after 1945. It shows that those countries where poultry output grew most quickly – especially the UK, Italy and Spain – were also the countries where the agricultural sectors adopted US technologies and US agribusiness organizational structures most vigorously. Elsewhere in Western Europe, poultry output grew much less quickly and the adoption of agribusiness structures lagged behind. By contrast, the poultry sector in the USSR was based on the Soviet collectivist system. This was the largest poultry sector in Europe, but also much less efficient. The article suggests therefore that the diffusion of agribusiness and the increase in poultry output were deeply entwined across Europe, with potentially important consequences for the different roles and impacts of agribusiness in Europe

Weetman Pearson in Mexico and the Emergence of a British Oil Major, 1901-1919

British overseas investment was one of the most powerful forces contributing to rapid global integration before World War 1. Approaching half of this total was in the form of foreign direct investment, as British entrepreneurs increasingly located their activities away from the mature domestic economy to faster growing, less-developed regions. Weetman Pearson was one of the most successful of all Britain’s overseasbased entrepreneurs of the period. Using original financial records, the paper shows how the Pearson group of companies became one of Britain’s most valuable industrial enterprises by 1919 having diversified from international contracting into the Mexican oil industry from 1901. The Pearson group highlights how British entrepreneurs were technically competent in managing large, complex infrastructure projects, able to navigate their way through various political systems, and adept at turning to whichever organisational form best suited their business interests; characteristics far removed from the outdated stereotype of the incompetent Late Victorian entrepreneur

Environment Agency review of methods for determining organic waste biodegradability and municipal waste diversion.

The Environment Agency is required to regulate the landfilling of biodegradable organic wastes and their diversion from landfilling. Simple, cost effective, reliable and widely applicable methods for the measurement of organic waste and its biodegradability are needed for this activity. A review of such methods was carried out in order to select promising methods for an experimental screening exercise. The review considered both biological and non-biological methods including simple methods that may provide a surrogate measurement of waste biodegradability instead of the time-consuming biological methods. The biological methods selected for further evaluation were the aerobic specific oxygen uptake rate (SOUR) and dynamic respiration index (DRI) tests, and the anaerobic biochemical methane potential (BMP) test. The non-biological methods selected for further evaluation were dry matter (DM), loss on ignition (LOI), total organic carbon (TOC), total nitrogen (TN), water extractable dissolved organic carbon (DOC), BOD and COD, the lignin and cellulose content and the cellulase hydrolysis method. These tests are being evaluated on a wide variety of typical organic materials that might be found in municipal solid waste (MSW) such as newspaper corrugated paper, compost, kitchen waste (vegetable and animal), garden wastes (grass and twigs), nappies, cotton and wool textiles