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INSTITUTIONAL INVESTORS
I N GL O B A L M A R K E TS
Institutional Investors
in Global Markets

GORDON L. CLARK AND

A S H BY H . B. M O N K

1
 3
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
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contained in any third party website referenced in this work.
For our families and friends—supporters of
our project in so many ways.
 Preface

This book is about what institutional investors do, how they do it, and when
and where they do it: it is about the production of investment returns in the
global economy. Being a book about the production process, it also tackles
some of the key issues found in the academic literature on the theory of the
firm. This literature is rooted in studies of manufacturing firms in the heart-
land of the English Industrial Revolution. In many respects, given their
interest in the underlying principles framing the organization of firms and
in situating firms in context, Adam Smith and Alfred Marshall were both
economists and economic geographers. During the twentieth century, the
academic literature on the theory of the firm brought into focus industrial
corporations and then the management revolution that resulted in re-engineering
integrated corporations through intermediation as found in supply chains and
global production networks.
Our book shares with other treatments of the modern corporation an
abiding interest in the management and organization of the production
process. In our case, we focus on the global financial services industry,
where the building blocks underpinning the study of industrial corporations
are less relevant. In fact, they can be blind alleys when seeking to understand
the organization of the production process and its results as expressed in
global financial markets. One of the goals of our book is to explain how and
why the production of investment returns differs from that of manufactured
goods. Another is to provide an analytical framework that situates financial
institutions within the complex web of the intermediaries that dominate
developed financial markets. As such, the book is more than an analysis of
the organization and management of institutional investors; it is also an
analysis of the global financial services industry.
We came to the topic after having been involved in a variety of projects that
dealt with the role of endowments, insurance companies, pension funds, and
sovereign wealth funds in global financial markets. Over the past couple of
decades, we have come to realize that these types of organizations deserve
more recognition in the academic literature and, perhaps obviously, a degree
of engagement that can allow us to understand better how and why they do
what they do. As a result, our approach begins with the organization and
management of these institutions rather than with their place in the structure
and performance of global financial markets. In doing so, we share with Coase
(1992) and Davis (2015) an interest in what might be referred to as the
‘substance’ of firms and markets. In other words, we work from the inside of
viii Preface

financial institutions to the outside, instead of imposing the theories of

modern management studies and microeconomics on them. Nonetheless, we
take seriously the imperatives driving global financial markets in home juris-
dictions and offshore. We could hardly do otherwise.
In developing our project, we have been privileged to work with many
individuals and organizations in the global financial services industry. In our
acknowledgements, we give heartfelt thanks to those who have taken us inside
the industry. Like other academics able to report on what they observe in firms
and industries, we recognize that being privileged in this manner carries with
it certain obligations. Most obviously, we set aside detailed knowledge of
specific organizations to report on the logics or analytical principles that
give shape to an institutional investor and its place in the global financial
services industry. As importantly, we explain the interaction between institu-
tions and financial markets with reference to the management of the produc-
tion process rather than to the theory of financial market performance and
structure.
One thing we have learnt from writing up our research is that it is too easy
to idealize the management and organization of institutional investors. Had
we chosen simplicity and parsimony as the guiding principles underpinning
our analytical framework, we would have risked allowing abstract logic to
submerge the analysis instead of giving pride of place to the complex interplay
between manager authority and the domain-specific skills and expertise of
investment managers. We have tried as much as possible to walk a fine line
between analytical logic and the messy world of organizations, the apparent
competition for authority in them and the necessary compromises that any
organization must make if it is to reconcile the competing claims of interest
inside and outside its jurisdiction. In writing the book, we have been mindful
of what has gone on before, especially in organization theory and in the theory
of the firm. Here, then, is an opportunity to read our book, which we have
located at the intersection between the works of Coase, March and Simon,
Marris, and related theorists of organization and contract theory, as well as
between Williamson’s transaction cost economics and scholars like Bathelt
and Glückler, who emphasize relationships over formal contracts.
 Acknowledgements

This book was made possible by the support of numerous organizations and
we would, in particular, like to acknowledge that of our home institutions. For
Gordon Clark, these are the Smith School of Enterprise and the Environment, the
Saïd Business School at Oxford University and, further afield, the Department of
Banking and Finance in the Monash Business School at Monash University. For
Ashby Monk, they are the Global Projects Center (GPC) in the Faculty of
Engineering at Stanford University, and the Regents of the University of
California. Without the administrative and organizational support of our
home institutions and, in particular, the editorial support of Alice Chautard,
Angelika Kaiser, and Jennifer Sabourin, this book would have never seen
the light of day.
When developing a research programme based on in-depth knowledge of
the life of institutions and organizations, any researcher relies on whatever
access, information, and insights these organizations can offer. We were
privileged to have been taken into a wide range of investment institutions
around the world, including endowments, family offices, pension funds, and
sovereign wealth funds. It would be invidious to pick out specific organizations
and individuals while leaving others unidentified. We can, however, acknow-
ledge the open door provided to us by the Swedish government through its
review of the AP funds to which we contributed. We would like to thank the
panel for its interest in our ideas and members of the enquiry staff, including
Mats Langensjo and Åsa Sterte.
Closer to home, we would like to thank Roger Urwin from Willis Towers
Watson for his insights into pension fund governance and investment man-
agement. He is one of the stars in the field and it is difficult to imagine how we
could have become involved in these issues without his help and advice. He
was also heavily involved in the formulation of Chapter 9 of this book; we are
grateful for his willingness to share his ideas, resources, and key informants.
We are also conscious of the help provided by many other industry advisers
and executives over the past decade or so, including Keith Ambachtsheer,
Jagdeep Singh Bachher, Mark Burgess, Peter Curtis, John Evans, Don Ezra,
Eduard van Gelderen, Divyesh Hindocha, Heribert Karch, Mike Orszag, Nick
Sykes, and John Whiteman. Along the way, we have also benefited from
collaborating with industry groups such Allianz Global Investors (Elizabeth
Corley), Arabesque Asset Management (Omar Sharif), Conexus (Amanda
White), and Pensions & Investments (Chris Battaglia), as well as EuroMoney
Institutional Investor (Diane Alfano, Scott Kalb, and Michael Peltz) and
participants in the GPC’s research club.
x Acknowledgements

This book began life through two related projects. Keith Ambachtsheer of
the Rotman School of Management’s International Centre for Pension Man-
agement (ICPM) at the University of Toronto sponsored one on the govern-
ance and management of pension reserve funds. He has followed our research
with interest, provided encouragement, and underwritten the significance of
what we have sought to achieve. The other project to underpin this particular
book, which the Leverhulme Trust sponsored, was on the governance, man-
agement, and legitimacy of sovereign wealth funds. The Leverhulme Trust also
funded the book that resulted from it, which involved a number of our colleagues,
including Adam Dixon. In combination, these two projects gave us the oppor-
tunity to scour the world and talk to investment organizations, sponsors, inter-
mediaries, and governments.
We have also been fortunate in being able to present our research at
academic forums, industry conferences, various institutions’ board and senior
executive meetings, government-sponsored enquiries, and various roundta-
bles convened by interested groups. We were able to test out our ideas, hear
people’s comments on them, and, over time, refine and then further refine our
central message. We have relied on the support, ideas, and critical comments
of many academic colleagues, notably Harald Bathelt, Christine Brown, Adam
Dixon, Sabine Dörry, Dorothee Franzen, Eric Knight, Ray Levitt, Phillip
O’Neill, Debra Ralston, W. Richard Scott, Rajiv Sharma, and Dariusz Wójcik.
Most importantly, Sarah McGill provided key insights, argument, and enthu-
siasm during the latter stages of the project, which involved translating ideas
into this book. Without our colleagues’ support and advice, we would have
been unable to develop the project in all its dimensions.
Along the way, we published a number of articles on the project, some of
which formed the basis of chapters developed in this book. For permissions
to use material from our work previously published in their journals, we
therefore thank the following:
Pion Ltd—‘Financial institutions, information, and investing-at-a-distance’,
Environment and Planning A (2013) 45: 1318–36; and ‘The geography of
investment management contracts: The UK, Europe, and the global financial
services industry’, Environment and Planning A (2014) 46: 531–49.
Oxford University Press—‘The scope of financial institutions: In-sourcing,
outsourcing, and off-shoring’, Journal of Economic Geography (2013) 13: 279–98.
Regional Studies Association—‘State and local pension fund governance
and the process of contracting for investment services: The scope of diversity
and the problem of embeddedness’, Territory, Politics, and Governance (2014)
2: 150–72.
Association of American Geographers—‘The production of investment
returns in spatially extensive markets’, The Professional Geographer (2015)
67: 595–607.
 Acknowledgements xi

Taylor and Francis—‘Information, knowledge, and investing in offshore

markets’, Journal of Sustainable Finance and Investment (2014) 4: 299–320.
Sage—‘Ambiguity, contract and innovation in financial institutions’,
Competition and Change (2016) 20: 187–203.
Institutional Investor Journals—‘The outsourced chief investment
officer model of management and the principal-agent problem’, Journal of
Retirement (2017) 4(3).
Since we have relied on research sponsors for engagement and funding—
some of which are commercial entities—we declare that this book neither
serves the interests of any specific commercial party nor has provided the
authors with any direct financial benefit.
Finally, any long-running project such as this incurs many debts—
specifically the patience of our families and friends. We are grateful that
Shirley and Courtney, and Henry and Bea, have given life to our personal
and professional commitments. Likewise, we are very grateful for the help and
support that Peter B. Clark provided in getting us to be more serious about
what we can learn from institutions and how we might frame the conversation
in ways that can promote institutions’ long-term development.
Gordon L. Clark and
Ashby H. B. Monk
Oxford and Stanford,
August 2016
 OUP CORRECTED PROOF – FINAL, 24/4/2017, SPi

Table of Contents

List of Figures xvii

List of Tables xix
List of Acronyms and Abbreviations xxi

1. Introduction 1
Institutional Investors 2
Financial Risk and Uncertainty 6
Theory and Practice 6
Risk and Uncertainty 7
Learning by Doing 9
Methodology and Exposition 10
Outline of the Book 14
2. Institutions and Organizations 19
Nomenclature 20
Institutions in the Social Sciences 23
Organizations, Inside and Out 25
Organizations, Networks, and Resources 28
Building Blocks 31
3. The Architecture of Information 37
The Information–Industry Nexus 38
Institutional Size and Scope 40
Governance of Financial Institutions 42
The Architecture of Financial Information 45
Investment on the Margin 48
Pipeline Extensions 50
Pipelines and Buzz 51
Buzz 52
Conclusions 53
4. Production of Investment Returns 58
Coase, Contract, and Location 60
Financial Institutions: Building Blocks 62
Ecology of Finance 63
Managers and Workers 63
Coordination 64
Producing Investment Returns 66
Stocks and Flows 67
Small and Large Institutions 67
Flexibility and Adaptation 68
Global Financial Centres and Markets 72
OUP CORRECTED PROOF – FINAL, 24/4/2017, SPi

xiv Table of Contents

The Base Case: Co-location 73
The Base Case (Redux): Co-location on the Margin 73
The Intermediate Case: Global Market Integration 74
The Limit Case: Realizing Value in Emerging Markets 76
Implications and Conclusions 78
5. Scope of Financial Institutions 82
Theory of the Firm 83
Governance, Contract, and the Firm 85
The Institution and its Industry 89
Tasks and Functions 92
Insourcing 92
Outsourcing 94
Geographical Reach: Offshoring 95
Implications and Conclusions 98
6. Investment Management Contracts 102
The Nature of Contract 103
Financial Institutions and Financial Markets 105
Agents, Principals, and Fiduciaries 105
Geographical Structure of the Industry 106
Products Sought and Produced 107
Product and Financial Markets 108
Investor Strategy and Skill 109
Contract: Form, Functions, and Performance 109
Form 110
Functions 111
Performance 112
Choice of Jurisdiction 112
In Situ or Default Contracting 112
Contracting in London 114
Contracting in Offshore Jurisdictions 115
The Map of Contract 116
Implications and Conclusions 118
7. Public-sector Contracting for Investment Services 122
State and Local Pension Institutions 124
Pension Funds: Form and Functions 126
Governance and Management 126
Norms and Conventions 127
Contractual Relationships 128
Employment Contracts 128
Pre-contract Screening 129
Commercial Contracts 129
Contracts and Templates 130
Content of RFPs 130
Templates, Terms, and Conditions 132
Community Norms 135
 OUP CORRECTED PROOF – FINAL, 24/4/2017, SPi

Table of Contents xv
Commonalities and Differences 136
Implications and Conclusions 139
Appendix 143
8. Advisers and Consultants 145
Theory of Intermediation 147
Financial Intermediation 147
Capabilities and Resources 148
Organizational Form 149
What Do Advisers Do? 150
Case 1: Small Fund, Representative Board, Wholly Outsourced 150
Case 2: Medium Fund, Representative Board, Mixed Sourcing
Strategy 151
Case 3: Large Fund, Representative Board, Reliant on Insourcing 152
Contracts and Services 153
Ambiguity, Contract, and Financial Markets 157
Modes of Innovation 160
Market Disjuncture 160
Innovation in Form and Function 162
Innovation in Products and Services 163
Implications and Conclusions 164
9. Outsourcing and the Principal–Agent Problem 169
Convention and Financial Markets 170
Board Authority and Governance 171
Investment Models and Expectations 172
Market Position and Performance 172
Models of Management 173
Economies of Scale and Scope 174
Outsourcing Strategy 174
Four Ideal Types 175
Principles and Practices 177
Nine Principles 177
Practice as Contract 180
The Principal–Agent Problem 181
Identity and Responsibility 182
Two Institutional Factors 182
Governing OCIO Management 183
Implications and Conclusions 185
10. Cooperation and Collaboration 189
Returning to Fundamentals 190
Persistence and Competition 190
Economies of Scale and Scope 191
Contingency and Response 192
Objectives, Contract, and Authority 193
Objectives and Constraints 193
The Employment Relation 194
OUP CORRECTED PROOF – FINAL, 24/4/2017, SPi

xvi Table of Contents

Service Contracts 194
Authority and Convention 196
Modes of Innovation 196
Cooperation 197
Collaboration 198
Agency and Governance 200
Transforming Home Bias 201
Conferences and Research Clubs 201
Seeding-related Ventures 202
Partnerships, Informal and Formal 203
Investment Clubs and Shared Equity 204
Implications and Conclusions 205
11. Reframing Finance 208
A Reason for Being 209
The Case for Innovation 211
Prudent Innovation 213
Catalysts for Innovation 214
Extra-financial Objectives 215
Fees and Cost Transparency 215
Collaboration and Cooperation 216
Competitive Advantages 216
Innovation Implemented 217
Sensing 219
Seizing 219
Transforming 219
A Real-World Example 220
Some Final Thoughts 221

Bibliography 223
Index of Names 241
General Index 245
 List of Figures

1.1. Mapping risk and uncertainty 8

3.1. Financial institutions—pipelines of information 47
3.2. UK monthly thirty-year bond yields, 1996–2016 49
3.3. Expected and realized returns 50
4.1. Management strategies by the nature of labour contracts 66
4.2. Size of a financial institution and the inflows of assets 72
5.1. Contractual regimes 88
5.2. Sourcing options 88
5.3. Intangible assets 91
5.4. Strategic scope 96
7.1. Word count and clauses in IMAs 133
8.1. Stylized account of the consultant–client relationship 157
9.1. Models of governance 176
9.2. Models of management 184
 List of Tables

7.1. Contractual items shared by state and local pension funds (per cent) 134
7.2. Contractual items not shared by state and local funds 135
 List of Acronyms and Abbreviations

401(k) name of a retirement investment plan

AIG American International Group
AP Swedish National Pension Fund
AUM assets under management
Brexit Britain’s exit from the European Union
BRICS Brazil, Russia, India, China, and South Africa
CalPERS California Public Employees’ Retirement System
CDO collateralized debt obligation
CEM Customer Experience Management
CEO chief executive officer
CIO chief information officer
DAC divide-and-conquer
DB defined benefit
DC defined contribution
DCIO delegated chief investment officer
DNA Deoxyribonucleic Acid
EMH efficient markets hypothesis
ERISA Employee Retirement Income Security Act of 1974
FM fiduciary management
FOI freedom of information
FOIA Freedom of Information Act
FTSE Financial Times Stock Exchange
GAO Government Accountability Office
GFC global financial crisis
GP general partner
GPC Global Projects Center
HPI horizontal process of incorporation
ICPM International Centre for Pension Management
IMA investment management agreement
IMCA Investment Management Consultants Association
IT information technology
xxii List of Acronyms and Abbreviations
LACERS Los Angeles City Employees’ Retirement System
LP limited partner
LTCM long-term capital management
MoU memorandum of understanding
MPT modern portfolio theory
OCIO outsourced chief investment officer
OECD Organisation for Economic Co-operation and Development
OIC Oregon Investment Corporation
PBGC Pension Benefit Guaranty Corporation
PERF Public Employees Retirement Fund
PERS public employee retirement systems
PPP public–private partnership
PSERS Public School Employees’ Retirement System
R&D research and development
REE rational expectations equilibrium
RFP request for proposal
RTK right to know
SDF sovereign development fund
SERS State Employees’ Retirement System
TMT technology, media, telecommunications
 1

Introduction

Institutional investors come in many forms, shapes, and sizes. Throughout the
book, we work at different levels, looking at institutional investment vehicles
(endowments, family offices, insurance companies, pension funds, and sover-
eign wealth funds), the intermediaries who serve them, and the asset managers
of commercial organizations who often place assets in global financial
markets. We know more about asset managers than about asset owners.
Nonetheless, in many respects, asset owners deserve pride of place in any
analysis of financial market structures and their performance, for they are the
clients, whereas intermediaries like asset managers provide services to realize
their clients’ goals and objectives. In this chapter, we provide a brief overview
of the role and significance of institutional investors. We begin with asset
owners and extend our discussion to asset managers.
It is widely acknowledged that institutional investors underpin the structure
and performance of global financial markets. Whereas arguments are made
for and against viewing their investment strategies in terms of long-term
commitments as opposed to short-term opportunism—witness the UK Kay
Review (Kay 2012)—there is no doubt that the growth of institutional invest-
ors over the past fifty years has given global financial markets a remarkable
depth of liquidity and scope of activities. At the same time, institutional
investors rely heavily on financial markets to frame and implement their
investment strategies. Therefore, it is important to understand what is distinct-
ive about this environment compared with other industry environments,
especially manufacturing. In this chapter, we explain the significance of finan-
cial risk and uncertainty in the production of investment returns and provide a
brief overview of what can be termed the map of financial risk and uncertainty.
In subsequent chapters, these issues are developed in more detail using
conceptual building blocks from economics, economic geography, and finance.
In this chapter, we also provide a brief overview of our research methods and
mode of exposition. In short, we deliver a stylized representation of institutional
investment, the relationships between institutional investors and intermediar-
ies, and the logic and principles underpinning the production of investment
returns. We hardly ever refer to specific institutions or organizations. It is worth
2 Institutional Investors in Global Markets

noting that in Chapter 2 we not only directly tackle the conceptual status of
institutions and organizations, but also provide a rationale for our use of terms.
Meanwhile, however, we shall use the terms as they are used in the industry,
among regulators, and in a number of academic disciplines. Institutional
investors typically have a distinctive legal status, whereas organizations can be
thought of as assemblages of people and resources collected together to realize
certain objectives.

INSTITUTIONAL INVESTORS

Institutional investors are a key component of modern economies; they mobil-

ize savings to invest in traded and untraded securities (Davis and Steil 2001). In
many cases, they are portfolio investors, as opposed to direct investors who are
willing and able to apply their considerable resources to a specific investment
facility or option in which they own a majority or controlling stake. Much has
been written about the significance of institutional investors for global stock
markets, for they are the people who map the flows of assets around the world in
relation to opportunities at home and abroad. Likewise, considerable academic
research has focused on the role of institutional investors in facilitating global
financial integration. There was a time, not so long ago, when it was meaningful
to suggest that global financial integration would be so profound that the
investment and risk management activities of institutional investors would
come up with an organizational framework able to place assets around the
world against an unproblematic metric of risk and return, thus replacing both
space and time.
Notwithstanding the rhetoric accompanying the ‘end of geography’, insti-
tutional investors have learnt to deal with a world best understood as a
patchwork of heterogeneous expectations, rules, and regulations rather than
an undifferentiated surface of investment opportunities (cf. O’Brien 1992).
Moreover, institutional investors normally maintain a continuing commit-
ment to invest in their home jurisdictions. Investment is typically anchored in
the origin of the funds under management and in the immediate opportunities
for investment available in home markets. In part, the intimate connection
between the origin of funds and their investment destinations reflects the fact
that, as the volume of funds grew in the Anglo-American world over the
middle and later years of the twentieth century, the inflow of funds to financial
markets reinforced the significance of these markets for their nation-states and
beyond. If we add the global economic success of Japan in the decades imme-
diately after the Second World War, this gives us three global markets—Tokyo,
London, and New York—which became the switch points for flows of financial
assets around the world.
 Introduction 3

As these markets grew in significance over the second half of the twentieth
century, memories of the financial crises of the late nineteenth and early
twentieth centuries faded to be replaced by growing confidence in the stability
of these financial markets, especially compared with the margins of the world
(for example, Asia and Latin America). Underpinning the emerging hegem-
ony of these markets was an intellectual programme that sought to formalize
and systematize investment norms and conventions into an overarching set of
rules for investment. This movement has been described in many ways (see
Bernstein’s 1996 treatment of risk management). Modern portfolio theory
(MPT), followed by the ready acceptance of the Sharpe ratio, the efficient
market hypothesis (EMH), the Black–Scholes theorem, and much else besides,
all played a part in the emerging paradigm of investment theory and practice.
This paradigm was so significant that it drove a wedge between the primarily
asset-owning institutional investors who acted on behalf of others, including
beneficiaries, and the asset managers who provided the capabilities and
resources necessary to realize the benefits of modern investment theory.
It was widely accepted that best-practice investment management was to be
attained through intermediation. Here, asset owners, such as pension funds,
endowments, and foundations, would contract out the strategic and tactical
investment decision-making (along with the investment of assets) to asset-
and style-specific investment managers. At the limit, the investment-related
activities of asset owners were conceived and implemented through a network
of service providers whose contracts were notionally performance related but
were, in fact, more often based on convenience and past commitment than on
a long-term value proposition. In time, risk management via portfolio diver-
sification was extended to service provision, with the result that both large and
small asset owners tended to hold numerous providers with overlapping
mandates. In the vernacular of the industry, the search for better performance
was conducted through ‘beauty parades’—namely presentations by service
providers to fund boards and executives loath to fire incumbent providers.
When contracts were standardized, fees normalized and markets grew, every-
one became a winner.
Just as the golden era appeared to have no end in sight, problems were
emerging. Harbingers of the future came in different guises. The Asian
financial crisis of 1997, while significant for the core markets of the global
financial system, was absorbed and the moment of instability explained by
reference to something that had happened elsewhere. The failure of long-term
capital management (LTCM) in 1998 surprised the market in part because the
principals of the fund were so reputable; in this case, a rescue package was quickly
put in place and, once again, markets absorbed the costs of instability. The
technology, media, telecommunications (TMT) bubble of the first years of the
twenty-first century was home grown and represented converging expectations
on the promise of technological invention and innovation for sustained high
4 Institutional Investors in Global Markets

levels of economic growth. Public recognition of the causes and consequences of

the bubble were, however, smothered by the terrorist attacks of 11 September
2001 and the ensuing war on terror. Thereafter, Chinese economic growth
masked the softening of the US economy. Just around the corner, however,
with the onset of the global financial crisis (GFC) and now the Brexit crisis, the
euro crisis profoundly disrupted confidence in the virtues of developed financial
markets. It has now become commonplace to speak about the systemic risks
apparent in developed markets around the world (Haldane and May 2011).
Sophisticated institutional investors have drawn a variety of lessons from
the past twenty years. An obvious one has been that risk management is an
essential ingredient in a successful long-term investment strategy and that
financial markets do not always price risk in ways that reflect underlying
factors. A second lesson has been that risk management through portfolio
diversification works well in ‘normal’ conditions, but may be quite inad-
equate in extreme conditions when risk management is, in fact, at a
premium. A third lesson has been that the interests of asset owners and
asset managers are not symmetrical: during good times, when markets are
on the rise, both parties benefit from a standard contract, even if relatively
poor performance may come at the same cost as relatively good perform-
ance. During moments of crisis, when markets are dysfunctional and risk
pricing fails, asset owners can lose a large portion of the value of their assets,
while asset managers continue to claim fees for an investment performance
that is not as bad as that of their competitors. A fourth lesson has been that the
size of an institutional investor is no guarantee of superior performance—there
is a premium to be had from effective governance and management in
crisis conditions not otherwise evident in ‘normal’ conditions (Clark and
Urwin 2010).
Our book takes as given the evident tensions between asset owners and their
service providers in the aftermath of the GFC and continuing global financial
uncertainties. Sources of uncertainty are to be found, for example, in the euro
crisis and in the growth prospects of China and emerging markets. At issue is
whether the model of intermediation, conceived and put in place in the second
half of the twentieth century, is a viable blueprint for institutional investors
over the first half of the twenty-first century. We show that one response to
recent events has been disintermediation—in other words, the paring back of
service providers to allow asset owners more control over (and oversight of)
the formation and implementation of investment strategy. A related response
has been for asset owners to insource the formation and implementation of
investment strategy—thereby becoming investors in their own right. Yet
another response has been reintermediation—managing the formation and
implementation of investment strategy through partnerships and relationships
with external providers whose interests and incentives are aligned with those of
the asset owners.
 Introduction 5

Crucially, our research is framed with reference to institutional investors

with long-term commitments, but notwithstanding the ever-present tempta-
tion to maximize short-term investment returns. In this regard, we include
asset owners like pension funds, endowments, family offices, foundations,
sovereign wealth funds, and, on the edge, insurance companies. We do not
ignore the issue of short-term returns, but set it in the context of how best to
realize long-term objectives through effective investment governance and
management. Equally important for our research has been a concern to situate
institutional investors in their home markets and in what we term spatially as
extensive financial markets. As we show, one of the challenges that institu-
tional investors face when pursuing strategies of disintermediation, insour-
cing, and reintermediation has been the spatial disconnect between their
home bases and national and international financial markets. A related chal-
lenge has been to realize the evident opportunities to be found in emerging
markets otherwise controlled by global asset managers. In this respect, we
place explicit emphasis on time and space for the governance and manage-
ment of institutional investors wanting to refashion how they manage
themselves and their partnerships.
Our book is about a world being turned upside down—intermediation has
become an important political issue and an issue of governance and manage-
ment. Even so, many asset owners have been around for decades; they are
embedded in particular economic and political environments with attendant
expectations and constraints on innovation. Few asset owners face competi-
tors over their obligations and responsibilities; in many cases, they have a legal
right to represent the interests of ‘captive’ beneficiaries. Likewise, the largest
asset managers tend to dominate the global investment management industry;
they absorb competitors when seeking to innovate, while allowing redundant
or yet-to-be-proven tasks and functions to be spun off into the market for
investment management. We are interested in the leading edge of the invest-
ment management industry, the search for organizational innovation and the
reconfiguration of existing institutions given what is possible. This book is
about how to meet long-term commitments by investing away from an
institution’s home base in a world increasingly dominated by investment
opportunities at a distance from either established institutions or accepted
norms and conventions.
To frame our analysis, we return to first principles. Most obviously, we
explain how and why institutional investors are different from other kinds of
organizations—notably those that dominate microeconomic textbooks. This
includes consideration of what counts as a productive ‘asset’ in an investment
house. It also includes distinguishing between the tangible assets of plant and
equipment used to characterize manufacturing firms, and the intangible assets
of human capital, as well as the decision-making protocols and procedures that
are so important to investment institutions. Learning is obviously important
6 Institutional Investors in Global Markets

in both kinds of organizations. Nonetheless, as we show, formal and tacit

knowledge in investment houses are contingent on the structure and per-
formance of financial markets and cannot be honed to perfection as is often
the case in manufacturing companies. We focus on how investment returns
are produced in these types of organizations. We explain the difficulties
facing senior managers in promoting innovation in the production of
investment returns. Inspired by Coase (1937, 1992) and others interested
in the internal logic of economic organizations, we emphasize the organiza-
tional logic underpinning the production of investment returns and the ways
in which intermediation, disintermediation, and reintermediation may play
roles in that process.

F I N A N C I A L RI S K AN D U N C E R T A I N T Y

Like other industries, the production of financial services, including invest-

ment management, relies on economies of scale and scope within and between
markets for financial products. These markets are regional, national, and
international in scope, for financial institutions pool dispersed financial assets
and liabilities in a handful of global financial centres to reap economies of
scale in processing and placement (Wójcik 2011). For many years, insurance
companies and pension funds employed external asset managers to produce
planned returns through various financial strategies and products. As we
show, large asset owners have begun to bring the production of investment
returns in-house, partly because of the high costs of intermediation associated
with outsourcing. To appreciate our approach to this issue better, in this
section we provide a schematic overview of three key factors affecting the
production process.

Theory and Practice

The EMH dominated financial theory and practice for more than a generation.
In sum, it stood for the idea that market prices incorporate all available
information and thereby sustain rational expectations (Fama 1970, 1991). It
justified a presumption in favour of markets in the sense that behaviour
inconsistent with rational expectations would be priced accordingly and
driven out of the market. In the first instance, behaviourists disputed
the EMH by demonstrating the persistence of behaviour at odds with
theoretical expectations (Akerlof and Shiller 2009; Shiller 2005). Informed
by a research programme led by Kahneman and Tversky (1979), others
suggested that the EMH could not account for behavioural biases and
Another random document with
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 “I never catch cold, thank you,” said. Miss Methvyn. Mr. Guildford
fancied she spoke stiffly, and was annoyed with himself for the
suggestion. “That is not a bit of your business,” he imagined her
manner to imply. But her next words reassured him. “Perhaps it is
not wise to stand still so long,” she said, and she set off walking
round the little garden.
There was an opening at the other side in the shrubs and trees
that surrounded the enclosure of flower-beds. Here Miss Methvyn
paused. “By daylight there is such a pretty view from here,” she said.
“You can see Haverstock village, and the church, and the little river.
Even now you can see it gleaming—over there to the right, over
there where the railway bridge crosses it.”
“Ah! yes, I see. Do you think that the railway spoils the landscape,
Miss Methvyn?”
“I don’t know. I never thought about it,” she said. “It has always
been there. Charlie used to be so fond of watching for the white
feathers of steam coming into sight and disappearing again. He liked
the railway, because he had a notion that any day, if he ran to
Haverstock, he could get to his mother at once. The fancy cheered
him when he first came to live here, and she went away. I have
never cared to see the trains go by lately.”
As she spoke a shrill whistle sounded in the distance. Cicely
turned and began to retrace her steps.
“Associations must sometimes be terrible things,” said Mr.
Guildford gently.
Something in his voice encouraged Cicely to say more. “There is
a still more painful feeling that I have never heard described,” she
said. “I have often wondered if other people have felt it. The sound of
that railway whistle put it into my mind, and the speaking of Charlie’s
fancy about it. What I mean is a sort of hatred of everything tangible
—material rather. It came over me dreadfully after he died. It seemed
to me that even the material things he had loved now separated me
from him. Just as he, in his innocence, loved the railway, because he
thought it would take him to his mother, so I could not endure to see
it, because I felt that it—that nothing material could take me to him or
bring him back to me. Everything, except memory, seemed to
separate me further from him. I have had this feeling twice; yes, I
think, twice in my life,” she repeated. “Did you ever feel it, or is it only
a womanish feeling?”
Mr. Guildford had listened to her with some surprise, but still with
attention and a wish to follow her meaning.
“I think I understand you,” he said thoughtfully. “It seems to me
your feeling must somewhere have affinity with what I—like every
student of practical science—realise incessantly; the utter
insurmountability of the barrier between matter and spirit. It sounds
very commonplace, but it is the puzzle. We are so hedged in, in
every direction the old hitting one’s head against the wall. And the
only thing to be done is to turn round and work one’s hardest inside
the limits.”
“Yes,” said Cicely. “Yes. I understand.” Then she was silent for a
minute or two. “I suppose,” she said at last, “I suppose if we could
put our feelings into words, we should always find some one who
shared them.”
“I suppose so,” he said. “Not that I have ever felt your special kind
of revolt against our prison bars, Miss Methvyn. I have never been
separated by death from any one that I cared very much about.”
“You have been very happy then,” she said.
“I don’t know. There are two ways of putting it. Perhaps the truth
is that I have never had any one to care enough for, for separation to
be or seem terrible,” he answered, in a tone not very easy to
interpret.
They were close to the window again. Geneviève’s music had
ceased, and glancing up, Cicely saw her cousin standing inside the
glass door looking out.
“Mr. Guildford,” she said hastily, “will you just come to the end of
the walk again for a moment. I have wanted to ask you something all
this evening, and I thought you might be annoyed at it. I want to
know what you think about my father. I cannot tell you why I ask you
—there—there is something that depends upon it. And I know you
are very clever. You must not think me very strange. I am so at a
loss,” she hurried on with what she had to say, in evident fear of Mr.
Guildford interrupting her with some cold expression of disapproval
or annoyance; for she could see that he looked grave and perplexed.
“What do you mean exactly, Miss Methvyn?” he said formally. “Do
you want to know if I think Colonel Methvyn in a critical state, or
what?”
He thought her inquiry uncalled for and hardly delicate. He felt
surprised, and a little disappointed. She was her father’s heiress;
Colonel Methvyn had told him so. Could it be—surely not—that she
was eager to claim her inheritance, making plans contingent on her
speedy succession?
“Yes,” she replied, “that is partly what I want to know. I also want
to know if any vexation—being thwarted about anything on which he
had set his heart, for instance, could do him harm.”
“Most assuredly it would,” he said somewhat sternly, “the very
gravest harm. It is very early for me to give an opinion,” he went on,
feeling anxious to avoid saying much. “I never saw Colonel Methvyn
till to-day, but I have seen similar cases. I should say he may live as
he is for many years, provided his mind is kept at ease, and that he
is not thwarted or exposed to vexation. The effect of any great
shock, of course, I could not predict.”
“Thank you,” she said very gently, almost humbly, “you have told
me what I wanted to know.”
Why did she want to know? he asked himself. She stood still for a
minute or two, as if thinking of what he had said. The moonlight fell
full on her fair face, and as she looked up with her clear honest eyes,
his heart smote him for even his passing misgiving that her motives,
her reasons, could be but of the purest and best.
“She is not a commonplace girl,” he thought, “and she won’t be a
commonplace woman; but she is too self-reliant for one so young.”
It was almost with a feeling of relief, or what he imagined to be
such, that he turned to Geneviève, who had opened the glass door
and stood waiting for them.
“How charming it is!” she said; “but, my cousin, my aunt fears lest
you should take cold.”
“I am coming in now, mother,” Cicely said as they came within
hearing, “do come here for a moment and look at the beautiful
moonlight.”
Mrs. Methvyn rose from her seat by the table, and joined the little
group at the window.
“Yes,” she said, “it is lovely, but it is rather cold.” She shivered as
she spoke, and retired to the fire. The others were following her,
when suddenly a whistle was heard, not a railway whistle this time. It
sounded at some little distance away, down among the shrubberies.
Cicely stopped, and seemed to listen.
“What was that? It surely can’t be” The whistle was repeated. “Go
in, Geneviève,” she said, “I shall be back directly.”
And almost before her cousin and Mr. Guildford saw what she
was doing, she had started off and was lost to sight among the
bushes.
Geneviève and Mr. Guildford looked at each other in surprise.
Then Geneviève came into the library again and spoke to her aunt.
“My cousin has gone out again, aunt,” she said; “shall we leave
the door open till she returns?”
“Cicely gone out again!” exclaimed Mrs. Methvyn. “How very
foolish! Do you see her Mr. Guildford?” she asked, for the young
man was still standing by the window.
“No, I don’t,” he replied; “Miss Methvyn ran off so quickly. We had
better shut the door in the meantime, however.”
He came inside and closed it. Mrs. Methvyn looked annoyed and
uneasy.
“I can’t understand what Cicely is thinking of,” she said.
 “There was a—what do you call—siffle, siffle—a fistle—wistle?”
said Geneviève, “down in the garden, and then Cicely ran.”
“What do you mean, my dear?” said Mrs. Methvyn with slight
impatience. “Do you know, Mr. Guildford?”
He was half annoyed and half amused.
“It is just as Miss Casalis says,” he replied. “We heard a whistle at
some little distance, and Miss Methvyn ran off at once.”
“Was it a peculiar whistle, like two short notes and then a long
one?” inquired Mrs. Methvyn more composedly.
“Yes,” said Mr. Guildford; “I heard it twice; it was just that.”
“Then the Fawcetts must have returned,” exclaimed Cicely’s
mother. “How surprised every one will be! They intended to stay
abroad till July.”
“The Fawcetts!” repeated Geneviève impulsively.
“Yes, of course,” said Mrs. Methvyn, “the Fawcetts—our nearest
neighbours Colonel Methvyn’s cousins. Mr. Fawcett has been in the
habit of coming here at all hours since he was a boy, and there is a
short cut through the fields that saves a couple of miles,” she went
on, in a sort of generally explanatory way; “it comes out at the little
gate in the laurel-walk. By the bye, I wonder if Cicely has the key. We
generally keep it locked, for a good many tramps come round by the
Ash Lane, and Trev—Mr. Fawcett, always whistles, on the chance of
our hearing him, before coming round the other way by the lodge.”
“Cicely had a key to-day,” said Geneviève. “We went through the
little gate when we were out, and my cousin unlocked it.”
“Ah! that is all right, then; she often carries it in her pocket,”
replied Mrs. Methvyn.
She went to the glass door, and opening it, stood listening as if for
approaching voices. Geneviève sat down by the table and began idly
turning over some photographs. Mr. Guildford stood at a little
distance, wishing the carriage would come round that he might go.
From time to time, however, he could not help glancing at the face
bent over the photograph book. In profile it was hardly so perfect as
when in full view; still it was very lovely—every feature so clear, and
yet rounded, the long black eyelashes sweeping the delicately tinted
cheek, the expression so innocently wistful.
“I doubt if that little southern flower will take kindly to this soil,”
thought Mr. Guildford.
Just then Geneviève happened to look up, and catching sight of
the young man’s eyes fixed upon her, blushed vividly. Pitying her
discomfort, and annoyed with himself for being the cause of it, he
hastily made some remark about the pictures she was looking at,
thinking to himself as he did so of the shallowness of the popular
notion that French girls were more artificial, less unsophisticated and
retiring, than English maidens. Geneviève was on the point of
replying to his observation, when the door opened.
“The carriage for Mr. Guildford,” said the footman.
Mr. Guildford turned to Mrs. Methvyn, and was beginning to say
good-bye, when voices were heard outside—cheerful voices they
sounded as they came nearer—Miss Methvyn’s and another, a
deeper, fuller toned voice, and in a moment their owners appeared at
the glass door.
“Mother,” said Cicely, and to Mr. Guildford her tone sounded bright
and eager, “mother, here is Trevor, are you not astonished? Did you
think me insane when I ran off in such a hurry?” she went on
laughingly.
“We only arrived this afternoon,” said the gentleman, “two months
before we were expected. You can fancy what a comfortable
reception we had at Lingthurst. My mother and Miss Winter ended by
discovering they had lost all their luggage, that is to say, only twenty-
nine boxes turned up, and there was such a to-do that I came off.”
“It was very good of you, dear Trevor,” said Mrs. Methvyn. “It is so
nice to see you again. But why have you come home so soon?
Nothing wrong, I hope?
“Everything wrong,” said the young man laughing. But as he came
into the room he caught sight of Mr. Guildford, and, further off,
Geneviève seated by the table, but with her face turned away from
the others. “You are not alone,” he said hastily, his tone changing a
little. The change of tone, slight as it was, was enough to make Mr.
Guildford wish that his goodbyes had been completed before the
appearance of the new-comers, but almost ere he could realise the
wish Miss Methvyn had come forward.
“It was very rude of me to run away in such a hurry, Mr. Guildford,”
she said gently, “but I did not like to keep my cousin Mr. Fawcett
waiting. I was afraid he would think we had not heard him.”
“I was just about going round by the lodge when I heard your
tardy footsteps, Miss Cicely,” said Mr. Fawcett. “I had whistled till I
was tired and was thinking of trying a verse or two of Come into the
garden, Maud, for I am very tired indeed of being here at the gate
alone.”
“It would not have been at all appropriate,” said Cicely, a very
slight shadow of annoyance creeping over her face. Then there
came a little pause, which Mr. Guildford took advantage of to finish
his good-nights this time without interruption. He carried away with
him no very distinct impression of the new-comer, only that he was
tall and fair and good-looking, and that his voice was soft and
pleasant.
“She said he was her cousin,” Mr. Guildford repeated to himself.
“Ah! well, I am not likely ever to know more of her, but I almost think
she is the sort of woman one might come to make a friend of.”
CHAPTER VI.
 “LE JEUNE MILORD.”

“He is as sober a man as most of the young nobility. His fortune is great. In
sense he neither abounds nor is wanting; and that class of men, take my word for
it, are the best qualified of all others to make good husbands to women of superior
talents. They know just enough to admire in her what they have not in
themselves.”

Sir Charles Grandison.

HE was tall and fair and very good-looking. He had pleasant

somewhat sleepy blue eyes, and a pleasant somewhat sleepy
manner. Take him as a whole he was a favourable specimen of the
upper class young Englishman of a certain type, prosperous,
amiable, well-principled according to his lights, very fairly satisfied
with things as he found them, little disposed by nature or education
to dive below the surface.
In the little bustle of Mr. Guildford’s leave-taking, the figure of the
girl sitting quietly by the table had almost escaped Mr. Fawcett’s
notice. But Geneviève had risen to say good-bye to the doctor, and
before she sat down again Mrs. Methvyn addressed her.
“Geneviève, my dear, don’t stay over there all alone. By the bye I
must introduce a new cousin to you. Not exactly a cousin certainly,
but as you both call me aunt, it seems something like it. This is Mr.
Fawcett, Geneviève, and this, Trevor, is my little niece—niece ‘à la
mode de Bretagne,’ as your mother says, Geneviève—Geneviève
Casalis who has come to us all the way from Hivèritz. You must have
been near there not long ago, Trevor. I think your mother,” but she
stopped short in her sentence, startled by a sudden expression of
surprise from the young man.
“By Jove,” he exclaimed, but recovering himself almost
immediately, “I beg your pardon, aunt,” he went on, “I was so
astonished at seeing Miss Casalis again. I had no idea—”
Geneviève had come forward when her aunt first spoke to her,
and when Mrs. Methvyn had gone on to introduce the so-called
cousins, Mr. Fawcett had naturally turned towards the young lady,
obtaining thus for the first time a full view of her face, her lovely
blushing face, with timid up-looking eyes; the face that not many
weeks ago had rested white and unconscious on his shoulder, which
he had often vaguely wondered if he should ever see again. This
very evening, as he had stood waiting by the gate, something had
recalled to his mind the accident at Hivèritz, and he had thought to
himself that he would tell Cicely about it and try to describe to her the
girl’s beautiful face.
“If she could see her, she would want to paint her I am sure,” he
thought. “She would make such a stunning gipsy, or Italian peasant
girl, or something like that. I wish Cicely could see her. She is so
ready to admire pretty girls. I never knew any woman like her for
that. Even my mother and Miss Winter began criticising that lovely
girl. My mother said she had no manners—poor little soul! she was
frightened out of her wits—and Miss Winter found fault with her
dress.”
And within ten minutes of his standing at the gate, and thinking
over the adventure of Hivèritz, behold the heroine of it standing
before him in the flesh! It was enough to excuse a pretty forcible
expression of astonishment.
Mrs. Methvyn looked bewildered in the extreme.
“Do you mean that you and Geneviève have met before?” she
inquired. “You never told us so, Geneviève?”
“Perhaps she did not know Trevor’s name,” suggested Cicely,
fancying that Geneviève looked shy and embarrassed.
“I knew it was Fawcett,” said Geneviève, “but I knew not but that
here in England there are many Fawcetts.”
“Of course,” said Mr. Fawcett eagerly. “Of course. I only wonder
you remember the name at all.” He could not have explained why,
but he certainly was rather pleased than the reverse to find that
Mademoiselle Casalis had not talked about their former meeting.
“When was it you met Mr. Fawcett before? On your way through
France?” inquired Mrs. Methvyn of Geneviève.
“Oh! no, dear aunt. It was while I was still at the home. Before I
knew that I should come to England at all,” the girl replied simply
enough. And then she told about the accident, how kind “Miladi
Fawcett” had been, how thankful “maman” had felt that it had done
her no harm—all in her pretty, broken English, stopping here and
there for a word, or glancing up appealingly with a “how do you say
so and so?”—all just as it had happened; Mr. Fawcett now and then
joining in with some observation; reserving only to herself her
mother’s recollection of the English family’s name and speculation as
to whether the Fawcetts of her youth and those of Geneviève’s
adventure could be the same. For the mention of this would
assuredly have led to a repetition of the question, “Why did you not
tell us about it before?” a question that Geneviève was not prepared
to answer, for the simple reason that she could not really exactly say
why she had not done so. It would have been only natural, girlishly
natural, to have inquired of her aunt or cousin if among their
neighbours were any family corresponding to her description, but
though natural to most girls, to Geneviève anything so frank and
straightforward was the reverse. To her the question, “Why should I
not tell?” less frequently presented itself than the reverse, “Why
should I?”
Perhaps the only definite reason she could have given for her
reserve, was one she might certainly be excused for keeping to
herself—a foolish, vague, half-romantic, half calculating anticipation
of the effect and possible result of her sudden appearance before old
Mathurine’s ‘jeune milord,’ the hero of the girl’s latest day-dream.
So she told her little adventure simply and prettily, with here and
there a timid blush, and a suspicion of tears in her eyes as she
recalled her mother’s thankfulness, the anxiety and terror of ‘cette
bonne Mathurine.’
“It is quite a curious coincidence,” said Mrs. Methvyn with interest.
“I must take you to see Lady Frederica some day soon Geneviève.
She will be pleased to meet you again. In any case she would be
glad to see you, for she remembers your mother. In one of her letters
to me she said so, and was sorry I had not given her Madame
Casalis’s address in case of your passing through Hivèritz, Trevor. It
was too late then, for you had already been there.”
“Yes, what a pity,” exclaimed Mr. Fawcett. “I remember my mother
saying something about it when we were in Switzerland. She could
not remember where Madame Casalis lived. We little thought we had
already made her daughter’s acquaintance.”
“Did you not hear Geneviève’s name?” inquired Cicely.
Trevor looked a little bit annoyed—he hardly liked to own that
while the young lady had remembered his, hers had completely
escaped his memory.
“We did hear it, we must have heard it,” he said. “I think Miss
Casalis mentioned it when I was telling our courier where the
coachman was to drive to. But, I suppose it was the stupidity of my
English ears—I did not catch it clearly.”
Geneviève smiled sweetly, as if in condonation of the offence, but
in her heart she was wishing, oh! so earnestly, that she had not
prevented “Miladi Fawcett” from accompanying her home to the Rue
de la Croix blanche, that Sunday evening, to see her safely in her
mother’s care. What would it have mattered that the house was
small and shabby, and that Madame Casalis herself had to open the
door, if, as would almost surely have been the case, the familiar
name of Fawcett had caught her mother’s ears, and led to a mutual
recognition! What pleasant results might not have followed!
Geneviève felt exceedingly provoked with herself, and Mrs. Methvyn,
unconsciously, added to her vexation.
What a pity,” she too exclaimed. “If Caroline and Lady Frederica
had met, it would probably have been arranged for Geneviève to
have travelled some part of the way here with your party, Trevor, for I
know Madame Casalis was very anxious at that time to hear of a
suitable escort. And you would have seen something of Paris, my
dear, as you wished so much,” she added, turning to Geneviève,
“instead of having to hurry through with Monsieur
Rouet.”—“Geneviève came under the care of a pasteur who had to
attend some meeting in London,” she went on to explain to Mr.
Fawcett.
“And had to travel second-class all the way, and saw nothing of
Paris,” added Geneviève in her own mind (though not for worlds
would she have said it aloud), feeling too disgusted with herself even
to smile. Her one day in Paris had been a Sunday, which the
Reverend Joseph Rouet, faithful to his charge, had caused her to
spend among the Protestant brethren at Passy, attending two
services in a stuffy meeting-house,—Geneviève, whose soul had
long ago soared far beyond the homeliness of the Casalis’ narrow
little circle at Hivèritz, whose imagination had pictured drives in the
Bois de Boulogne, shopping in the Boulevards, nay (‘comble de
bonheur,’ hardly to be thought of but with bated breath), even a visit
to the theatre itself, as blissful possibilities of a few days in Paris!
“It was really a chapter of cross-purposes,” continued Mrs.
Methvyn. “I wonder your mother did not remember the name
Fawcett, when you told her of your accident, Geneviève?”
“Perhaps I did not rightly pronounce it,” said the girl. “And mamma
was much occupied in her thoughts just then, I remember.”
 She happened to catch Cicely’s eye as she spoke, and blushed
vividly. A slight look of perplexity crossed Miss Methvyn’s face.
“I hope Geneviève is not afraid of me,” she thought to herself.
“What was there to make her look so uncomfortable just now! I am
so anxious to be kind to her and win her confidence, but I fear I
seem cold and distant to her, poor girl!”
But no more was said on the subject of Geneviève’s former
meeting with the Fawcetts.
“Shall I come to see your mother to-morrow, Trevor?” said Mrs.
Methvyn as she was bidding Mr. Fawcett good night. “Or will she be
busy?”
“She will probably be rather in a state of mind if the missing boxes
haven’t turned up,” said the young man. “I’ll look in some time to-
morrow and tell you. I have to drive to the village to call on the new
clergyman, and I may as well come round this way.”
“Oh! then the new clergyman has come,” said Cicely. “I am very
glad. I don’t like driving to Haverstock Church half as well as going to
Lingthurst. The walk through the woods is so pretty, Geneviève,” she
added; “I almost think it is what I like best about our Sundays here.”
“Cicely, my dear!” said her mother in a somewhat similar tone to
that in which Mrs. Crichton had reproved her brother for the avowed
reason of his predilection for church.
Cicely smiled. “Well, mother dear,” she said coaxingly, “the walk to
church was really more edifying than what we heard when we got
there, in the old days. I am so glad Sir Thomas is getting a new
organ,” she went on. “We hear Mr.—I don’t think I have heard h is
name—is a zealous reformer.”
“Tremendous,” said Mr. Fawcett. “I don’t think my father had any
idea what he was bringing upon us when he gave the living to Mr.
Hayle.”
“Mr. Hayle, oh! that’s his name, is it? But I thought he was not
coming for two months,” said Miss Methvyn.
 “So thought everybody except Mr. Hayle,” replied Mr. Fawcett.
“There was some mistake about it, and it turned out he had made all
his plans for coming at once; that was one of the things that made us
come home sooner. But I must be going. Good night, aunt. I shall be
sure to look in to-morrow.”
That night when the two girls went upstairs to their rooms, Cicely
accompanied Geneviève into hers. She stood for a moment by the
dressing-table idly playing with some pretty little toilet ornaments that
stood upon it. They were unusually pretty little trifles, and belonged
to a set which had been given to her by an old lady who was a
connoisseur in such things, and Cicely had placed them in her
cousin’s room to please her eye on first arriving. The sight of the little
ornament seemed to remind her of what she had to say, or perhaps
to encourage her to say it.
“Geneviève,” she began, and her blue eyes looked earnest and
thoughtful, “I want to say something to you. I am afraid I seem cold
to you, and it would grieve me if you thought I felt so. I am not
naturally very demonstrative, and since my father has been so ill, I
have had to learn to be even more quiet and calm in manner. And
being the only one at home, I have had to do what I could to help my
parents, and I fear it has given me a sort of decided, managing
manner that may strike you disagreeably. I want to ask you not to be
afraid to tell me if I ever seem either cold or hard. You don’t know me
yet; you can’t trust me all of a sudden; I should not wish it. But when
you know me better, I hope you will believe that I don’t feel cold and
indifferent, and that I am very anxious, dear, to make you happy.”
Considering that the burden of the speech was herself and her
own feelings, it was an unusually long one for Cicely. But the simple
words betrayed no egotism; the kind, true eyes expressed their
owner’s real feelings. Impressionable Geneviève threw her arms
round her cousin’s neck.
“I do trust you, dear Cécile,” she exclaimed impetuously. “I love
you and trust you, and I think you so good and so wise. I wish I were
good like you, but I am not. I am foolish and discontent, and at home
I did not help the mother and think for her, as you do for my aunt.
Teach me to be like you, dear Cécile; let me trust you and give you
all my confidence.”
Cicely smiled. It was no sudden friend ship she was asking of her
cousin, no romantic compact of girlish devotion which she was
proposing—such things were little in her way. But she would not for
worlds have chilled Geneviève’s affectionate impulse, so she
submitted with apparent satisfaction to a kiss on each cheek, and
kissed her again in return, saying as she did so, “Good night, dear
Geneviève, and thank you. Now you must ring for Parker and go to
bed. It is rather late and you look tired.”
Coming along the passage after leaving Geneviève, Miss
Methvyn met her mother.
“I was looking for you, dear,” said Mrs. Methvyn. “It is late, but
your father is very comfortable to-night. He is still reading the
papers.”
They were close to the door of Cicely’s little sitting-room. They
went in and stood in silence for a minute by the mantelpiece. All
looked the same as on the night little Charlie died; the birds were all
asleep, the flowers looked fresh and cared for, the Skye terrier lay on
the hearthrug. Cicely sighed as she looked round, for her glance fell
on an object she had not yet had the heart to dislodge from its
accustomed place—a toy horse, Charlie’s favourite steed, stalled in
one corner, which he had called his stable.
But the sigh was quickly stifled. “What did you want me for,
mother?” she said.
“I was thinking, Cicely,” began Mrs. Methvyn, “that it would now be
well to tell Geneviève of your engagement—don’t you think so? It is
different now that Trevor is here again. It may seem strange to her
afterwards not to have been told of it.”
Cicely hesitated. “I would much rather she were not told of it just
yet,” she said. “She is so young, and I want so much to make her
feel quite at ease with me. Besides,” she went on, “you know,
mother, what we were saying this afternoon—my engagement is
rather an indefinite one; it is not as if I were going to be married
soon.”
“But if your father sets his heart upon it—the Fawcetts have
always wished to hasten the marriage, you know, Cicely dear—it
may not be a very long engagement after all,” said Mrs. Methvyn.
“I hope papa won’t set his heart upon it,” said Cicely with a faint
smile. But she did not oppose the suggestion as vehemently as a
few hours before.
“Then, you don’t object to my telling Geneviève?” asked her
mother.
“Of course not, if you think it best,” said Cicely. “I wish, however,
you would not tell her quite yet. Wait a few days. I think she is
beginning to feel more at home with me. She will not be surprised at
seeing Trevor often here; she knows they are our cousins.”
“Very well,” said Mrs. Methvyn.
Geneviève’s last thought that night before she went to sleep was
of Mr. Fawcett. To her girlish fancy the coincidence of their meeting
again was suggestive of all manner of speculations.
“How I wish Mathurine knew of it,” she said to herself; “how
delighted she would be! She thought him so handsome and
distinguished. So he certainly is, and his manners are so agreeable,
not at all like those of most Englishmen, cold and gloomy” (forgetting
her extremely limited experience of Mr. Fawcett’s countrymen). “And
then how rich they must be! Ah, how I should have enjoyed travelling
with them! No doubt they had a courier, an appartement au premier
—everything of the best.”
And another idea entered her silly little head. How delightful would
be a wedding journey to Paris with such a hero—rich, amiable, living
but to gratify her wishes! Such things had come to pass, thought
Geneviève; such good fortune had been the lot of portionless girls
far inferior to herself in personal attractions. She did not fear her
cousin Cicely as a rival; the idea never even occurred to her. She
liked Cicely, and was very well pleased to make a friend of her, but in
some respects she could hardly help looking down upon her a little.
“She is so good and wise,” thought Geneviève, “but so slow and
quiet. English girls never seem half awake. And her dress; bah! if I
had all the money she has to spend upon it, would I be content to
wear such plain things? She might make herself look twice as well if
she liked.”
Such was the maiden meditation, such the “fancy free” of the
pasteur’s daughter, who had been brought up in the seclusion and
simplicity of a French Protestant household, sheltered, as her
parents fondly thought, from every breath of worldliness or ambition.
Mr. Fawcett made his appearance again about luncheon-time the
next day. Cicely was alone in the morning room when he came in.
“I’ve been to see the new man,” he said, establishing himself on a
comfortable low chair and looking ready for a cousinly chat. “I’m
hardly fit to come in here, Cicely; I’m covered with dust.”
He looked dubiously at his boots as he spoke, and began
switching them lightly with his riding-whip.”
“Never mind,” said Miss Methvyn; “only please don’t send the dust
on to me.” She spoke laughingly; but her tone sobered into gravity as
she went on, “Black dresses catch dust so easily.”
“I beg your pardon,” he said. Then he looked up from his boots
and fixed his pleasant, good-tempered blue eyes on his cousin. She
was sitting at a little table near him,—writing, in point of fact making
up accounts. She had stopped when Mr. Fawcett first came in, but
had not altogether withdrawn her attention from the papers. before
her; and now in the intervals of his remarks, she ran her eye up and
down the neat little columns of figures, and jotted down the results of
her calculations.
“What are you so busy about, Cicely?” said Mr. Fawcett after a
little pause.
Miss Methvyn stopped to put down a figure before she spoke. “It’s
Saturday,” she replied laconically, glancing up for a moment, and
then putting down another.
“I didn’t say it wasn’t,” replied her cousin. “What about it?”
 His tone was perfectly good-natured. Something in it struck
Cicely’s sense of the ludicrous. She threw down her pen and began
to laugh.
“You’re very long suffering, Trevor,” she said, “and I’m very rude.
On Saturdays I have always to go over all the accounts; the bailiff’s,
the gardener’s, and all—and make a sort of summary of them for
papa. I generally do them upstairs in my own room, but Geneviève
was working at something up there this morning, so I brought them
down here.”
“It isn’t proper work for you. Your father should get a regular
agent,” said Mr. Fawcett.
“No he shouldn’t,” said Cicely; but the tone and manner disarmed
the abruptness of her speech. She glanced at her cousin with an
expression of half-playful defiance. He smiled.
There was a likeness of feature and complexion between these
two—a material resemblance, which seemed, in a sense, to render
more visible the underlying dissimilarity. Both pairs of blue eyes were
calm and gentle; but those of the young man told of repose from the
absence of conflicting elements; those of the girl, of the quiet of
restrained power. There was decision in both faces; in Trevor’s it
was that of a straightforward, healthy, uncultivated, not acutely
sensitive nature; in Cicely’s it was the firmness of an organisation
strong to resist where the necessity of resistance should be the
result of conviction, but at the same time exquisitely keen to suffer. A
glance at the man told you pretty correctly the extent of his mental
capacity. He was no fool, but there was small promise of further
intellectual development; such as he was, he was likely to remain;
but it took more than many glances to estimate justly the reserve of
power and depths of feeling hidden below the stillness of Cicely
Methvyn’s young face.
Something in the girl’s manner told Mr. Fawcett that the occasion
would not be an auspicious one for entering upon a subject he had
come half prepared to discuss. So he said nothing for a minute or
two, and Cicely went on with her accounts. As Mr. Fawcett watched
her, a slight expression of dissatisfaction crept over his face.
 “Cicely,” he said.
“Well,” said Cicely, without looking up this time.
“You’re not going to wear that deep mourning much longer, are
you?”
Cicely’s face lost its brightness. There was a slight constraint in
her tone as she answered.
“It is not very deep mourning,” she said, glancing at her gown.
“There is no crape on my dress. I dislike very deep, elaborate
mourning.”
“If it was handsomer of its kind, perhaps it would be more
becoming,” said Mr. Fawcett agreeably. “As it is, Cicely, I can’t say I
think it so. You are too colourless for that sort of dull-looking dress. It
might suit some people—your cousin, for instance; I dare say if we
saw her in a plain black dress like yours, we should think she
couldn’t wear anything that would suit her as well. She is so brilliant,”
he added reflectively.
“Yes,” said Cicely. “I dare say we should. But then, Trevor, I
strongly suspect we should think so whatever Geneviève wore. She
is so very lovely. But as for me, Trevor, you know I wasn’t thinking of
whether it would suit me or not when I got this dress.”
Her coloured deepened a little as she spoke, and the words
sounded almost reproachful.
“Of course not. I know that,” said Mr. Fawcett hastily. “Of course,
Cicely, you know I didn’t mean to speak unfeelingly. How curious it is
about your cousin by the bye,” he went on, as if anxious to change
the subject, “about our having knocked her down at Hivèritz, I mean.”
“Yes, it was very curious,” said Cicely. “But you knew a cousin
was coming to stay with us, Trevor; I mentioned it in several of my
letters.”
“Oh! yes. I knew a Miss Casalis was coming,” said Trevor, “but
somehow I didn’t fancy she would be that sort of a cousin.”
“What sort did you expect?” asked Miss Methvyn.