Tag Archives: institutional investors

07.28.16
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Mind the values gap on the CEO pay issue

Nothing ignites the anger and disgust of average employees and citizens upon discovering that the pay packet of a CEO is vastly inflated compared to the value they are perceived to add to a business. It is even worse if a business has performed poorly and a leader is pushed out the door with a ‘golden goodbye’ windfall payment.

The issue of CEOs’ pay is very often the first example used to demonstrate how out of touch the ‘elite’ classes are with the values of the average person. And studies show that big pay packets don’t necessary equal big performance. Why, we ask, do they need so much more money? Why do they think they deserve it? Why is the job worth that much compared to the average wage?

At the heart of the problem is a fundamental difference in what each party in the debate values.

For CEOs and the institutional investment community, the purchasing power of a salary package and whether it reflects the value of the job being done is irrelevant. A salary package is now about comparative value to peers and not about the dollar amount. And earning more than someone else, means more status and a place higher up the elite social totem pole.

The earners in this stratosphere are so far beyond worrying about providing the basics of life for that to be irrelevant to what has meaning in their lives. If you applied the notion of valuing these roles by the job being done, it would be hard to argue that a CEO of a global company in a particular field is exponentially more valuable than, for example, leaders of governments or a global humanitarian institution. But they are paid exponentially more. Money is the measure of status and social worth in that small, select group. Everyone else can eat cake.

When discussions about average or minimum wage earners are discussed, however, the debate focuses on ‘what is the job worth’ and ‘what can the business afford’, which is an entirely different value measure. People in this arena are worried about the ordinary issues of life like paying the rent or a mortgage, funding their children’s education, making sure they can afford healthcare. Businesses paying employees are worried about containing costs, meeting budgets and making a profit. Social status is secondary in the conversation.

And this is the point at which the disconnection occurs between CEOs, the institutional investors that support them and the rest of the world. The self-generated rhetoric that ‘we are worth it’ continues to widen the values gap as  the general public watches as KPIs are not being meet and company value is destroyed.

It is heartening that institutional investors are starting to question CEO pay packets and reject more outrageous ones but a broader conversation needs to be had about what is a reasonable salary. These CEOs are answerable to their shareholders. The institutional investors may be the named shareholders but they are the intermediary managers of capital owned by you and me, through our retirement savings, regular investments and through sovereign funds held by government in our name.

The values of both the CEOs, the boards and the institutional investors need to be more closely aligned with the values of the real owners of capital, who live back here on the ground, and not in the stratosphere of social entitlement.

06.23.16
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Market response to Brexit demonstrates why cheap passive funds aren’t good value for the economy

The volatility and volume of trading in the global market response to the surprise result of the Brexit vote on Friday is an excellent example of why cheap passive funds are not good value for the economy, or the markets.

The crashing market, provoked by the panic of what the vote result might mean, was exacerbated by passive funds scrabbling to meet their investment mandate, which is to replicate particular indices.

Passive investment managers aim to create a portfolio of stocks that replicates the performance of a nominated index, such as the S&P/ASX 200, the FTSE 100 or the S&P 500. Their investment decisions and trading activity only reflect changes to the index, not a considered investment decision by an investment professional. There is no consideration of what each company is doing and the economic value they are creating for shareholders, rather the trading is focused on responding to what other investors are doing.

This trend also reflects the rise of the importance of trading over investing. The desire for the quick return, matched with the short-term quarterly reporting culture rewards the buying and selling of assets rather than investing in companies that will produce longer-term growth.

The funds merely replicate an index, which is just a collection of companies that are acknowledged by size, rather than quality. And trading in and out of them is based on a logarithm that is adjusts to continually reflect the market, which moves based on other people’s decision making. It is not based on an assessment of the future growth of the company, the quality of the management and the value the company adds to the economy.

The rise of the passive fund management industry reflects the belief of quantitative analysis as a ‘cost-effective’ way to invest and not have your returns eaten away by asset management fees.

Indeed one of the great active management houses, Fidelity Investments, has decided to start offering passive funds on third party platforms in response to customer demand.

The Financial Times reported recently that passive funds have risen to have $US6bn, up 230 per cent since 2007 and growing at four times the rate of active fund management, according to Morningstar. The focus of passive investing is on the cost of the investment, rather than the value of the investment. Indeed, the marketing of passive funds has focused on the cheapest of the option to invest in a market, because over the long-term equity markets rise.

Active investors haven’t helped themselves with eye-watering fee structures for often ordinary performance. The ‘long-only’ funds, which are allegedly designed for fund managers to buy and hold equities they believe will grow over the long term, have vast pockets of mediocre performance, sometimes due to mediocre managers, sometimes risk parameters that make it nigh on impossible to produce a decent return and sometimes because the fee structure rewards average performance and robs the end investor.

Hedge fund managers, who market themselves as superior to long-only traders because they also bet against stocks they think will fall, leech about half of pre- fee returns  but very often produce mediocre returns as well.

Passive funds do not participate in corporate governance discussions, they do not add to the public debate about company decisions nor do they invest on the basis of good company management decision making. They may be cheap, but they add no value. Indeed, as the events of the past few days have shown they add to the problem.

Active managers need to be less greedy and prove how they can add the value that company management so desperately needs.

02.11.14
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The fruit of SPC Ardmona’s labour should not be closure

And so it has come to this. The Liberal government has washed its hands of supporting the last fruit and vegetable processor in Australia as part of its ‘age of responsibility’. But let’s be honest, this is more about their ideological stance about unions and a chance to make their point while attacking some of the lowest earners in Australia for having generous working conditions. I look forward to their attack on investment bankers…

Coca-Cola Amatil now has a decision to make about the future of SPC Ardmona, and the final decision will need to be seen as ‘investor friendly’. To its credit, unlike the car manufacturers, the company’s plan was to completely re-tool the plant to make it profitable into the future, with some federal government support. The question now is can they gain the support of institutional investors to make the entire investment themselves?

SPC Ardmona is a major employer in a region that has an unemployment rate that has been at least two per cent higher than the Australian average for at least four years.

The preservation of local food production is a personal passion of mine, not just in Australia but around the world. We have to eat every day and how we eat and what we eat really matters. Beyond that, the case of SPC Ardmona is a litmus test of the dominant values in our society. Is finding a way to preserve the Shepparton community and make money from our fabulous fruit and vegetables in the long term, more important than propping up the short-term market returns of a listed entity?

It is evident that the processor needs support to weather the perfect storm of circumstances in which it has found itself during the past few years, but it also needs a long-term sustainable business plan. Much time and energy is spent on the CC Amatil Sustainability Report, which also includes a section on workplace commitment. Perhaps the company could consider that making this investment would fit into that workplace commitment and create a real legacy which would have positive repercussions for generations.

According to its 2012 annual report, the Coca-Cola Company owned 29% of CC Amatil as at 31 December 2012, followed by a range of institutional investors.  All of these groups need to consider their role in this situation. Of course, it is hard to know who these institutional investors are because most of them use nominee companies, thus obscuring their investment from public view. But at 31 December 2012 the investors in HSBC Custody Nominees (17.65%), JP Morgan Nominees (13.32%) and National Nominees (9.69%), would all have significant influence over the board. The board and the investors need to understand that corporate social responsibility is more than ‘nice-to-have’ reputational insurance. Taking a financial hit now to save SPC Ardmona, and the community it supports, will make CC Amatil a leader of business reinvigoration and a true corporate citizen. It may even make it some money.

Well done Aldi for committing to use only SPC Ardmona for its 825g fruit product in Australia.

09.18.13
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Fat profits from empty calories

Is a rapid rise in obesity levels in poor countries an acceptable side effect of multi-national companies and their investors pushing hard into these markets to create new profits?

In June this year, the World Health Organisation (WHO) said the increasing number of people in low and middle income countries being overweight and obese was creating major long-term public health problems. WHO identified that more than 75% of the world’s overweight children lived in those countries that also suffered issues associated with under-nutrition.

One of the key problems was the rising availability of cheap, highly calorific, or energy dense, foods and drinks that had little nutritional value. Driving this increase of consumption was intensive marketing, by multinational food and drink companies, particularly to children, according to another WHO study. Marketing about unprocessed foods in these countries did not exist.

There is so much money to be made in these low and middle income countries from selling soft drinks and the junk food that companies are targeting these markets as their future. Indeed, Coca Cola was very excited about the profit-making potential of the poor. In a presentation to a Barclays Capital conference in September this year, Coca Cola’s  senior executive Ahmet Bozer talked about ‘seizing the moment’ in sub-Saharan Africa with their ‘sparkling drinks’ (read the calorific Coke and the like) leading their charge into the market.

Bozer identified that there was a target consumer base of 6.1 billion people in Coca Cola’s International business and 37% of these were under 21. A core strategy was to drive sales growth through the flagship ‘sparkling’ market. Coca Cola was in the market for young drinkers to become loyal buyers of their product throughout their life, not as an occasional treat drink but as an everyday choice.

Some of the biggest American institutional investors in the world have major stake in Coca Cola. As at 30 June 2013, Berkshire Hathaway held 9% of the company, followed by Vanguard at 4.8%, State Street at 3.8%, Fidelity at 3.4% and BlackRock at 2.6%. Vanguard, State Street and BlackRock also have large stakes in PepsiCo.

Imagine if these institutional giants, who manage the money of the citizens of the US and others, actually told Coca Cola to revise their strategy.

What would happen if these investors told Coca Cola they would not sell their stock if Coca Cola took responsibility for the impact of their products on the health of their consumers (many of them without the benefit of the same level of health education as those of us in high income countries)? What would happen if Coca Cola focused on pushing their bottled water and healthier choice drinks into these markets instead? What impact would that have on this impending major health issue?

It doesn’t mean Coca Cola can’t make money, but rather make money out of products that don’t leave a trail of long-term health issues for its customers, the very people that will keep the company in business.

It doesn’t mean that investors can’t make returns on their investment in Coca Cola, but if nothing changes, what it does mean is that we, as the people that ultimately provide the money for institutional investors, value wealth over our health and the health of others less fortunate than us.

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08.28.13
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Who pays for Woolworths’ bigger piece of pie?

Woolworths reported another increase in its net profit after tax today and shareholders will receive an increased dividend. This is great news for short-term investors, but with Woolworths casting a bigger and bigger shadow over our retail sector, it is also important to look at how the pursuit of these numbers impacts our society.

For instance, despite consumer price deflation, Woolworths has managed to increase its profit margin on its continuing operations to 26.94%, its fifth straight rise and an increase of more than one per cent on five years ago. So the question is, if prices are dropping but profit margins are rising, who is being squeezed?

The Federal Government’s FOODMap report, released in July 2012, analysed the Australian food supply chain. According to the report, Woolworths and Coles account for 68% of all food and liquor sales in Australia in 2010/2011. The report found that increased pressure from these food retailers for cost savings and larger scale has led to further rationalisation in food production. That means more people going out of business and fewer people producing more at lower margins. Further pressure is placed on these producers from cheaper imports being substituted for local product.

Both Woolworths and the Wesfarmers-owned Coles are pushing hard into the ‘own label’ space in their supermarkets and this has given them enormous, and uneven levels of power in the supply chain. Smaller, local producers have no bargaining power and those that want to stay in business must agree to the retail giant’s terms. This doesn’t just affect food producers, but all of the suppliers to the business.

So while the stock markets may revel in the results of this retail giant today, surely as ultimate investors in the company, we have to ask what other costs are we prepared to pay for Woolworths to generate these profits.

We, as members of superannuation funds and other investment vehicles, provide the capital to the likes of Woolworths, and we can use our collective power to get them to be more transparent about their activities. We just have to get the institutional investors who manage our money on our behalf to be more active.

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08.08.13
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We own the companies

Did you know that every person with a superannuation fund is part of the largest group of owners of Australia’s equity market and bond (debt) market? Probably not. Most people don’t.

Around 40% of the Australian equity market and 30% of the bond market are owned by institutional investors, who manage our money in superannuation funds and other pooled funds.  With more than 70% of adult Australians having some form of superannuation savings, we are a formidable ownership group that is growing all the time.

The same is true of other Western economies. Some  44.9% of the UK’s equity market is owned by pooled accounts, such as UK pension funds, and mutual funds own 24% of the US stock market.

So why is it, that we are becoming  more concerned about corporate behaviour but feel less able to influence decision making?

Well, we outsource the management of our money to institutional investors. Institutional investors include the superannuation funds, pension funds and professional asset managers who are sub-contracted to manage our money. Once we invest in funds, it is hard to get information about what they invest in and how active they are on our behalf.

Perhaps it is time we get involved and start asking questions. Making a profit is not a bad thing, but it is important we start weighing up what is the cost of prioritising endless profit growth.

Collectively, we could be more powerful than we think. We could use our power to get companies to manage for our long-term economic and social future again and not for the short-term gains of the stock market.

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