Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
A discussion about investing, with Kerry Stevenson, the founder of the annually held Gold and Alternative Investments Conference.
The event features experts from around the world in the gold, silver and cryptocurrency space, along with numerous ASX-listed precious metals mining companies.
Note she is not a professional investment manager.
An important discussion with Steve Mickenbecker, Group Executive, Financial Services & Chief Commentator at Canstar. Super is fraught with issues, which can squash returns. What can be done to maximise them?
Note: DFA has no commercial relationship with Canstar.
[We had some issues with audio sync over Zoom, fixed in post as best we could]
Australian banks have been dialing back their wealth management businesses in response to the Royal Commission, fees for no service issues and the confusion about advice models. The focus has been towards the simplification of their businesses with a focus on mortgage lending, despite this being at a time when lending growth, according to the RBA is at historic lows, and low cash rates are crushing margins, and competition destroying fee income. Housing credit to December was at a low 3.1%.
Elsewhere, especially in the US, the large investment banks are pivoting away from trading markets and lending TOWARDS wealth management. Bloomberg for example reported that Morgan Stanley has agreed to buy discount brokerage E*Trade Financial Corp. for $13 billion, pushing further into the retail market in the biggest acquisition by a Wall Street firm since the financial crisis.
The all-stock takeover adds E*Trade’s $360 billion of client assets to Morgan Stanley’s $2.7 trillion, the companies said Thursday in a statement. Morgan Stanley also gets E*Trade’s direct-to-consumer and digital capabilities to complement its full-service, advisory-focused brokerage.
“Our clients increasingly want digital access and digital banking, and their clients want wealth-management advice,” Chief Executive Officer James Gorman said in an interview. “It’s the continuing evolution of Morgan Stanley into a stable, well-diversified business.”
In reshaping the firm since the financial crisis, Gorman has been emphasizing Morgan Stanley’s wealth-management powerhouse. Purchasing E*Trade helps him add clients who are less wealthy than its traditional customers. The New York-based company has lost some business to the retail brokerages in recent years as those firms invested heavily in their web platforms.
“Wall Street banks continue to covet Main Street customers,” Greg McBride, an analyst at Bankrate.com, said in an email. The acquisition “gives them access to brokerage customers, employees with company stock, and the lifeblood of financial services — low-cost retail bank deposits.”
The retail-brokerage industry is being reshaped by price wars and consolidation. In early October, Charles Schwab Corp. eliminated commissions for U.S. stock trading, spurring other brokerages to follow suit and sweeping away an important revenue stream.
The following month, Schwab agreed to buy rival TD Ameritrade Holding Corp. for about $26 billion and create a mega-firm with $5 trillion in assets, forcing smaller brokerages like E*Trade to contend with a much more formidable competitor.
For Morgan Stanley, the deal “deepens the ‘safe’ wealth-management franchise — rich in fees and stability,” credit analyst David Havens at Imperial Capital wrote in a note to clients. “It reduces reliance on the more mercurial trading and markets businesses.”
Quirks in the superannuation system in Australia means that some who save more will get less. This highlights again the limitations of the current arrangements.
https://thenewdaily.com.au/finance/superannuation/2020/01/26/pension-super-income-backwards
We look at a recent report on the future of retirement. There are some big issues on the horizon.
https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-research-institute-publishes-study-urging-rethink–202001.html
When the world’s largest fund manager tells its clients that it plans to swiftly exit its thermal coal investments over the next six months, this should tell us something important.
BlackRock manages around USD$7 trillion of funds on behalf of investors and up to now has been cautious in its response to climate change and slow to participate in investor campaigns. But that just changed, for good economic reasons. Recent analysis published by the Institute for Energy Economics and Financial Analysis (IEEFA), estimated that BlackRock lost as much as USD$90 billion in investment value due to poor investments in fossil fuel companies in 2019. The IEEFA assessment also found that investments in just four fossil fuel companies, ExxonMobil, Chevron, Royal Dutch Shell and BP accounted for around three-quarters of the USD$90 billion loss.
Now, in a letter to clients, BlackRock’s Global Executive Committee, led by company founder and CEO Laurence Fink, explained that the company would be withdrawing its investments in thermal coal producers, including any company that sources more than a quarter of its revenue from thermal coal production.
Announcements of this kind have come out steadily over the past couple of years. Virtually all the major Australian and European banks and insurers, and many other global institutions, have already announced such policies. According to the Unfriend Coal Campaign, insurance companies have stopped covering roughly US$8.9 trillion of coal investments – more than one-third (37%) of the coal industry’s global assets, and stopped offering reinsurance to 46% of them.
A separate letter to CEO’s starts with a clear reference to BlackRock’s ‘fiduciary duty’ to its investors. BlackRock’s own analysis shows global financial markets will be materially impacted by climate change, reflected in the Bank of England’s analysis of $20 trillion at risk. “BlackRock concludes that this stranded asset risk is not yet priced into the market, so as a fiduciary, BlackRock really has no choice but to act.”
“Thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts. With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector,” the letter says.
“As a result, we are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020.
Environmental, Social, and Governance (ESG) Criteria are coming to the fore – Environmental – a set of standards for a company’s operations that consider how a company performs as a steward of nature. Social – examines how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Governance – how its deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
“As part of our process of evaluating sectors with high ESG risk, we will also closely scrutinize other businesses that are heavily reliant on thermal coal as an input, in order to understand whether they are effectively transitioning away from this reliance.”
The move will see the investment giant dump around USD$500 million (A$725 million) in thermal coal investments.
And firms should note that Blackrock is going to flex its influence. “Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” Fink said.
So, Blackrock’s Fink seems to have figured out the huge impact that climate change will have on not just money, but the world.
“Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?” Mr Fink wrote in his letter to CEOs.
“What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?” he said.
BlackRock also announced that it would join the Climate Action 100+ initiative, that supports investors to actively engage with the companies they are invested in to assess, disclose and address the risk that climate change and the energy transition poses to the company and the value of investments. The Climate Action 100+ initiative includes the Australian based Investor Group on Climate Change, which supports Australian institutional
In 2019, the UK-based think tank InfluenceMap released a report that showed BlackRock was the leader of the asset management pack in terms of fossil fuel ownership. As at June 2018, the oil, gas and thermal coal reserves controlled by fossil fuel producers it holds represented an aggregated 9.5 gigatonnes of carbon dioxide emissions equivalent, with just under half of these emissions in thermal coal and equivalent to 30 per cent of total global energy-related carbon emissions in 2017.
“Among the 10 asset management groups with the largest aggregate fund AUM, BlackRock holds the most coal-intensive portfolios,” the report said. A -100% indicates full divestment while positive values indicates adding coal to the portfolio during the period 2011-2016.
“However, there are key differences between BlackRock’s passively and actively managed funds,” the report noted. “The group’s passively managed funds show a thermal coal intensity in 2018 of 680 t/US$m AUM, while its actively managed funds show a much lower TCI of about 300 tons/$m AUM, well below the global fund benchmark.”
And significantly ESG investment strategies are growing in profitability, with new geographic trends adding to their value, according to Amundi Asset Management who analysed the performance of 1,700 companies across five investment universes. Their research – ESG investing in recent years: New insights from old challenges – found that ESG strategies tended to penalise ESG investors between 2010 and 2013, but rewarded investors after 2014. “We have observed a massive mobilisation of institutional investors on ESG,” they said. The global responsible investment is estimated to be $30.7 trillion USD, or two fifths of assets under management. This is a 34% growth in two years.
But here is the problem. Most of the money that BlackRock manages is wrapped up in passive investments, which track indexes. Indexes tend to contain the shares of the sort of companies that BlackRock’s active arm is now divesting from. So, what exactly BlackRock can do about that? Is this more than greenwash?
Mr Fink has said that BlackRock will be doubling its offerings of ESG ETFs and will work with index providers to expand and improve the universe of sustainable indices. The company will also simplify the process by which investors can integrate ESG into their existing portfolios by adding a fossil fuel screen and has also expanded its impact investment strategy.
But the contradiction between the company’s new activist stance and the passive replication of an energy-heavy index such as Australia’s is obvious. One solution might be for large mining companies such as BHP to dump their coal assets in order to remain part of both Blackrock’s actively managed (stock picking) and passively managed (all stocks) portfolios. This was discussed in a recent “The Conversation” article.
Another might be the development of index funds from which firms reliant on fossil fuels are excluded. It is even possible that the compilers of stock market indexes will themselves exclude these firms.
But once bond investors follow the lead of Blackrock and other financial institutions, divestment of Australian government bonds will likely follow. This process has already started, with the decision of Sweden’s central bank to unload its holdings of Australian government bonds.
Taken in isolation, Sweden’s move had virtually no effect on Australia’s bond prices and yields. But the most striking feature of the divestment movement so far is the speed with which it has grown from symbolic gestures to a severe constraint on funding for the firms it touches.
The fact that the Adani corporation was unable to find a single bank willing to fund its Carmichael mine is an indication of the pressure that will come to bear.
The effects might be felt before large-scale divestment takes place. Ratings agencies such as Moody’s and Standard and Poors are supposed to anticipate risks to bondholders before they materialise.
Once there is a serious threat of large-scale divestment in Australian bonds, the agencies will be obliged to take this into account in setting Ausralia’s credit rating. The much-prized AAA rating is likely to be an early casualty.
That would mean higher interest rates for Australian government bonds which would flow through the entire economy, including the home mortgage rates mentioned in the Blackrock statement.
So the government’s case for doing nothing about climate change (other than cashing in on past efforts) has been premised on the “economy-wrecking” costs of serious action. But as investments associated with coal are increasingly seen as toxic, we run an increasing risk that inaction will cause greater damage. So yes, Blackrock’s announcement is a real wake-up call, like it or not.
https://www.blackrock.com/au
https://theconversation.com/blackrock-is-the-canary-in-the-coalmine-its-decision-to-dump-coal-signals-whats-next-129972
https://www.theguardian.com/environment/2019/nov/15/swedens-central-bank-dumps-australian-bonds-over-high-emissions
https://www.theguardian.com/environment/2017/apr/28/big-four-banks-all-refuse-to-fund-adani-coalmine-after-westpac-rules-out-loan
https://growaldfamilyfund.org/institute-for-energy-economics-and-financial-analysis-ieefa.html
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http://www.climateaction100.org/
Tony Locantro from Alto Capital and I reflect on the year, consider the trajectory ahead and share a few lighter moments to boot!
A perfect Christmas diversion. Does he still hold to his 45% fall in property prices over the next few years?
In this extended show I discuss property investment, asses classes, risks, and fractional reserve banking (versus credit creation) with Adam Stokes, who runs a channel on YT with a focus on Crypto.
This is my version of the show, Adam posted his at https://youtu.be/OrXUlTuBBqE
You can find our earlier discussion here: https://youtu.be/m8RQztfl78c
AMP Financial Planning Pty Ltd (AMPFP) ceased providing managed discretionary account (MDA) services on 10 December 2019 following the imposition of tailored licence conditions by ASIC.
In March 2019, following a surveillance of AMPFP’s MDA services and advice business, ASIC granted AMPFP’s application to vary its Australian financial services (AFS) licence to provide MDA services, subject to some tailored licence conditions (19-078MR). The tailored conditions formalised commitments made by AMPFP, in response to ASIC’s concerns, to improve monitoring and supervision of its discretionary investment services and related financial advice.
Under the tailored licence conditions, a Senior Executive of AMPFP was required to provide an acceptable attestation to ASIC by 30 September 2019 confirming that AMPFP had complied with and was complying with the tailored conditions. This was to ensure that all of the required improvements to monitoring and supervision practices had been implemented and were operating effectively.
AMPFP did not provide ASIC with an acceptable attestation in relation to its provision of MDA services. The attestation provided by AMPFP had exceptions and ASIC informed AMPFP that the attestation was not acceptable to it, and AMPFP ceased providing MDA services in accordance with its licence conditions.
MDAs create particular risks for retail clients because when a client enters into a contract with an MDA provider, they give the provider authority to make investment decisions on their behalf on an ongoing basis without seeking the client’s prior approval.
The risks increase if the person recommending the MDA service and making or influencing the investment decisions are the same because the clients may not be receiving impartial advice about the decision to enter into or remain in the MDA service. ASIC expects AFS licensees to consider the risks involved with the financial advice and investment activities of their representatives in their monitoring and supervision practices.
Frank Uhlenbruch, Investment Strategist in the Australian Fixed Interest team, Janus Henderson provides his Australian economic analysis and market outlook.
Australian government bond yields initially followed offshore yields higher on optimism that a trade deal was imminent. However, sluggish domestic economic data and Reserve Bank of Australia (RBA) commentary on unconventional monetary policy saw government bond yields end the month lower. Improving sentiment supported equity and credit markets. Overall, the Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rose by 0.82%, with price appreciation from modestly lower yields boosting the income return.
Three and 10 year government bond yields rose to their highs of 0.88% and 1.30% following reports of a ‘Phase 1’ trade deal between the US and China and stronger US services sector data. Yields then rallied as it appeared a trade deal may be delayed and RBA commentary on unconventional monetary policy was seen as dovish. Australian three and 10 year government bond yields ended the month 16 basis points (bps) and 11bps lower at 0.65% and 1.03%.
Australian data releases remained consistent with growth running at a sub-trend rate, with limited signs of recent fiscal and monetary easing boosting domestic demand. Retail sales for September were sluggish, gaining 0.2% over the month but falling by 0.1% in volumes terms over the quarter. While there was an improvement in consumer sentiment in November, confidence levels remain subdued with indications that uncertain consumers are saving rather than spending recent gains from tax rebates and lower mortgage rates.
Despite a small improvement in business conditions in the October NAB Business Survey, both confidence and activity measures remain below longer-run measures and have yet to show signs of a meaningful response to earlier policy stimulus. Consistent with sluggish survey readings, construction work done fell 0.4% in the September quarter, while private capital expenditure fell by 0.2%. This data, along with weak retail sales, point to another quarter of subdued growth in the upcoming release of the September quarter national accounts.
Labour market conditions softened, with employment falling by 19,000 in October, the first fall in 16 months. The unemployment rate lifted from 5.2% to 5.3% and the participation rate fell from 66.1% to a still historically high level of 66%. Wages growth remained modest, with the Wage Price Index lifting by 0.5% over the September quarter for a yearly growth rate of 2.2%. RBA commentary suggests that they expect to see wages growth around these levels persist for some time before lifting as labour market slack is eventually absorbed.
Against the backdrop of sluggish activity and perceived dovish central bank commentary, markets moved to factor in further easing over 2020 after largely ruling out a December move. Markets are assigning a 60% chance of a February 2020 easing and have a 0.50% cash rate fully priced by May 2020. By the end of 2020, markets are assigning a 40% chance of the cash rate falling to 0.25%, the effective lower bound.
Credit markets benefitted from the improvement in trade-related risk sentiment and investors’ ongoing search for yield, with the Australian iTraxx Index rallying 3bps to end the month at 56bps. Primary markets were active as companies looked to finalise debt funding ahead of the end of the year. Notable deals included residential mortgage-backed securities (RMBS) issued by Bendigo and Adelaide Bank, ING, and CBA, with the latter being the first RMBS deal to replace the historically used Bank Bill Swap Rate (BBSW) with AONIA (Australian Interbank Overnight Cash Rate) as a reference rate for the payment of coupons to investors.
Our base case remains for an extended period of accommodative monetary policy that will only be unwound once the RBA has confidence that inflation will settle in the middle of its target band. The latest set of forecasts from the RBA saw them downgrade their near-term economic growth forecasts by 0.25%, although they left their 2020 and 2021 GDP forecasts unchanged at 2.75% and 3%. With spare capacity being absorbed at a slower rate, the RBA pushed back the timing of when core inflation reaches 2% from mid-2021, to the end of 2021.
While the RBA considered easing monetary policy at its November meeting, it chose instead to join the US Federal Reserve and other central banks in pausing to wait and see how policy easing to date flows through into the broader economy, how trade developments unfold and the extent of any fiscal easing.
The RBA maintains an easing bias and is of the view that further cuts would provide additional net stimulus. In a landmark speech, the RBA Governor signalled that a 0.25% cash rate reflected the effective lower bound for the cash rate. The Governor saw negative interest rates in Australia as extraordinarily unlikely.
If further support for the economy was required when the cash rate was at the lower bound, then the RBA would consider unconventional policy measures, with the main focus on purchasing government bonds, including state government bonds, from the secondary market to drive down the risk-free rate that affects all asset prices and interest rates in the economy. If such policy support was required, the Governor noted that a combination of policy responses, including fiscal, would deliver the best results.
With little signs of recent policy stimulus and a turnaround in house prices showing up in activity, labour market and confidence indicators, we look for a further rate cut in February 2020 which would take the cash rate down to 0.50%. The prospect of the Government bringing forward ‘Phase 2’ tax cuts worth around $13.5bn in the May 2020 Budget, which would come into effect on 1 July 2020 , would significantly reduce the burden on monetary policy and rule out the need for a further cash rate cut and unconventional measures. This is our central case view and we see the stimulus from these measures raising the prospect of the cash rate lifting over the latter part of 2022.
We see nearer term risks tilted towards our low case scenario, where the cash rate falls to 0.25% and a lack of fiscal easing forces the RBA to initially extend its forward guidance. A lack of a coordinated policy response would see the RBA embark on a government debt purchase programme that flattens the domestic yield curve. Overall, we see three and 10 year government bond yields of 0.66% and 1.05% (at the time of writing) as offering little opportunity to express strong views on duration.
We continue to remain attracted to maintaining a core exposure to inflation-protected securities in an environment where policy is being firmly directed to boosting growth and lifting inflation back towards central bank targets. Despite a modest and ongoing lift in breakeven inflation rates from the record low levels experienced in late August, current pricing suggests markets still have little confidence that recent policy moves will gain much traction. However, with the cost of buying inflation protection now so low, we feel it makes sense to position for the prospect of a cyclical lift in inflation over the next few years, especially if one contemplates even more extreme policy measures to reflate economies.