Getting to grips with which assets have edge as hedge

We shall see. However, if and when quantitative easing starts again, it will be accompanied by a chorus of comment worrying about the return of inflation. Nor should we be surprised. To many economists, printing money in heroic quantities must diminish its value. They stick to this view despite the contradictory experience of Japan in the 1990s, when the authorities practised QE for years without any discernible effect on the price level.

What this does do, however, is make all the more timely a paper published yesterday by three academics from London Business School, Professors Elroy Dimson, Mike Staunton and Paul Marsh. Every year around this time and in conjunction with Credit Suisse, they publish an invaluable analysis of long-run investment trends from 1900 to the present day.* They also mine the data to pursue a specific line of research. This time, they have set out to discover which assets provide the best hedge against inflation.

Most people would think the answer is equities but the paper shows it is not that straightforward. In the long run, equities tend to outstrip inflation and provide protection, but that is not the same as a hedge. Rather, it is mainly a reflection of the risk premium - the fact that investors need to be compensated for the volatility they are exposed to in holding equities.

A hedge requires a direct link between inflation and the asset used as the hedge, and equities do not provide this. Nor do property or bonds.

Indeed, they find that in this context only gold does the business. Over the long term, of course, it is a different matter. Apart from equities, residential property is not bad at keeping up, commercial property less so. The other threat we hear a lot about these days is deflation. This is where bonds come into their own as a hedge, with no other asset class coming close.

*Global Investment Returns Yearbook 2012: Elroy Dimson, Paul Marsh and Mike Staunton, London Business School.

The perils in a punt on Facebook

Almost all modern corporate disasters have been caused by an over-dominant chief executive whom the board failed properly to control. Fred Goodwin at Royal Bank of Scotland is one example, John Mayo at Marconi another and Robert Maxwell a third.

So the main thrust of corporate governance in recent years has been the introduction of checks and balances and the separation of powers between chairman, chief executive and senior independent director to ensure that no board can ever again be railroaded by a single dominant personality.

They do things differently in the US, which means in the context of corporate governance they barely do it at all. Anyone tempted to buy shares in Facebook needs to understand this. Though it will soon be a public company, Facebook will still be very much under the control of its founder Mark Zuckerberg.

Robert Willott, one-time technical director of the Institute of Chartered Accountants, has gone through the prospectus and does not like some of what he finds. Writing in the newsletter Marketing Services Financial Intelligence, he points out that under US rules a publicly listed company where one shareholder is dominant is excused from some of the corporate governance safeguards a shareholder might reasonably expect.

It is not required to have a majority of its directors independent; or to have a compensation committee, and it will be for the existing board to nominate any new directors. In addition, the prospectus says that as long as he retains his shareholding, "Mr Zuckerberg will effectively be able to control all matters submitted to our stockholders for a vote as well as the overall management and direction of our company".

The trouble is that, though Zuckerberg has been brilliantly successful, public companies have to be run differently from private ones, and can no longer be run as a private fiefdom. That is a price entrepreneurs have to pay for being able to solicit money from the public.

Willott says there are so many examples of dominant directors abusing their power or autocratically steering their empires on to the financial rocks that "it beggars belief that the US Securities & Exchange Commissions would still tolerate such a situation".

It is hard to disagree.