Favouritism is a tendency parents and assets managers must both guard against. The kid who aces his GCSEs and plays the piano to concert standard will otherwise get better birthday presents than the brother whose grades are poor and bedroom malodorous. Similarly, lucrative hedge funds run by Aviva Investors were stuffed with successful bond trades by two in-house dealers. The pair tucked failed punts away in long funds with lower fees.

The Financial Conduct Authority has fined the fund manager £18m. Aviva Investors has been hurt more by bad publicity and the £132m cost of compensating short-changed clients. The scale of the payback for mere intraday trades implies there must have been a lot of these between 2005 and 2012. “Cherry picking”, as it is called, was a routine business for the rogue bondies.

The FCA identifies the pair only as “side-by-side” traders, referring to their brief to support separate funds in parallel. The implication of duplicity is unintentional but apt. Cherry picking is endemic to asset management, though usually less starkly manifested. Managers charged with running several funds may favour a new, heavily-marketed vehicle with their best investment brainwaves.

Aviva Investors could not have instituted a system more likely to tempt greedy people to succumb to conflicts of interest. The two-speed duo were able to wait and see how a trade panned out, before choosing which fund to shove it in. Hedge funds with 20 per cent outperformance fees naturally got the best deals. Traders pocketed £27.4m in hedge fund commissions during the period.

Aviva Investors’ fine was discounted by the FCA — the City equivalent of a con’s time off for good behaviour — for reporting the scam and coming quietly. But these soi-disant “historic issues” are still a poor advertisement for the fund manager, whose parent, Aviva, is taking over Friends Life partly in hopes of swelling assets stewarded.

Much is written about the need for tough oversight. But the average trader can run rings round internal audit as easily as Straight “A”s Kid can beat Slacker Bro at chess. Well-designed incentives do more to promote virtue. Aviva Investors says it has reformed. Growing regulatory interest in asset management suggests other conflicts of interest persist.

Happy torque

GKN aspires to be duller. That may seem odd, given that this £6bn FTSE 100 engineer attracts little notice in the first place. The kit GKN makes to transmit rotary power has the functional beauty of a nautilus shell or a finch’s beak and is used across the automotive business. But products such as the constant velocity joint are hidden in the innards of your jalopy.

The maturity of the business is reflected in profits linked to world economies and move only marginally most years. While pre-tax profits for 2014 crashed misleadingly due to non-cash revaluation of hedges, underlying earnings rose just 4 per cent.

Cyclicality makes GKN a risk-on/risk-off trade for short-term investors. Shares in the company have risen 35 per cent since October, as markets have rallied. The company, headquartered in the throbbing metropolis that is Redditch, would prefer a less volatile pattern driven more heavily by self-generated growth. Hence a push into aerospace, which now generates almost as much profit as automotive.

Car parts should not be dismissed lightly as a legacy business. GKN is making ever bigger chunks of cars. For example, it manufactures whole 4x4 transmission systems, barring the gearbox, for the likes of BMW and Jeep. New entrants to car making such as Google are tipped to source vehicles from groups of parts makers rather than incumbent manufacturers. So GKN, whose price-to-earnings ratio is close to historic highs at 13.6 times, may interest blue sky thinkers as well as risk-on bulls.

Promises auction

The Irish government and International Airlines are haggling over the group’s €1.4bn bid for Aer Lingus. The line of battle is defined by the five years IAG is willing to guarantee that Aer Lingus landing slots at Heathrow will be dedicated to serving Ireland. The Irish government wants longer.

The row might be easier to resolve if the Irish takeover code pinned bidders down as the UK one does. For many years the grey-cowled elders of the Takeover Panel regulated Irish as well as UK M&A. The Irish then set up their own panel on the reasonable basis that they already had their own government. However, the bifurcation means a gap has opened between the rule books.

The Takeover Panel reacted to Kraft’s broken promise to keep open a Cadbury factory by insisting such pledges should be binding. IAG is not exposed to the same regime in the Republic, which might otherwise give its commitments weight.


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