Sunday, 20 January 2019

Loyalty: a few initial thoughts

This tweet from Which? caught my eye the other day, and is something I've been thinking about a lot lately:



The tweet (which is currently pinned!) referred to the cost of sticking with the same broadband providers, and it reminded me of a similar tweet from ex Adam Smith Institute dude Sam Bowman before xmas:


And when I Googled "loyalty doesn't pay" I found other examples with the same message, like this:



In a way there's nothing new here. You'd expect advocates of market forces to argue that people (consumers) should move around rather than being "loyal" to a particular provider. They are typically very attached to "exit" as a discipline.

And obviously it's good advice on one level. There's not much point being loyal to an energy provider if you're paying more than using a competitor. If the amount involved is big enough to overcome the faff involved in switching it makes sense.

In the corner of the world that I inhabit, loyalty is not a prized value either. In fact incentives for loyalty are extremely unpopular. A significant case for me was DSM back in 2007. The company was seeking to introduce a loyalty dividend so that if you held the shares for longer you got slightly higher dividends. But it was attacked by asset managers and eventually scrapped.

At the time I was surprised, these days I am not surprised at all. A subsequent report on loyalty incentives by Mercer and Generation issued in 2013 found institutional investors opposed to loyalty rewards:
Respondents identified four main obstacles in utilising loyalty rewards as a means to overcome the root cause of the short term pressures found in the full investment chain: 1 – Discrimination between shareholders due to belief in “1 share, 1 vote” 2 – Risk of unintended consequences 3 – Administrative complexities 4 – Uncertainty that loyalty driven securities would incent a significant change in behaviour and address the root causes of short-termism
Just to be absolutely clear: investors oppose rewards for loyalty on principle even though they have the potential to gain from them. They do not want to see "exit" disincentivised (relatively). Perhaps views have changed in the 6 years since the Mercer report, but I doubt it.

I would argue that there has been a similar development in employment. Many employers have sought to shed their obligations to their workforce and they increasingly seek to deny an "employment" relationship at all. One of the most interesting books I read last year was The End Of Loyalty by Rick Wartzman (nice review here), which is all about the changing relationship between employers and employees (and their unions) from the immediate post-war period to the present day. The big theme is that as organised labour's power diminished so employers became less willing to offer long-term security to employees. Loyalty was undermined. Notably, he also sees the shift to shareholder value / shareholder primacy as part of the explanation.

Finally - and perhaps this is a bit of a reach - I personally find complaints from politically active and knowledgeable people that they are "politically homeless" a bit jarring. To me, they come across as betraying quite an entitled and transactional mindset - a political party should align with all my views and values or it cannot count on my vote. There's a great quote about politics that I read some time last year which was along the lines that loyalty that doesn't cost anything is meaningless.

I think there's a lot in all this worth exploring but here are a few initial thoughts. I think that to many actually existing humans, loyalty is an admirable quality, not something to be discouraged. Loyalty is at the core of some of the things we care most about. We actively profess loyalty to our football team, or our country, or our political party and, yes, sometimes even to brands and products. What's more, we demonstrate (and measure) loyalty by the length of our commitment and by what we endure along the way. We respect those who suffer for their support and loyalty, and denigrate those who only profess allegiance in the good times and/or go missing when it gets tough. In political/moral psychology, loyalty/betrayal is one of the pillars in the moral foundations theory associated with Jonathan Haidt.

Yet look at that Which? tweet again. Yes, there is a context but the message is very very clear: loyalty costs you, it's a self-defeating trait. I wonder what kind of reaction this creates. My gut feeling is that, rather than eliminating the concept of loyalty in this field (presumably the objective), it engenders distrust. If loyalty is a concept with which I make sense of the world (and likely it's part of my mental make-up for evolutionary reasons, so it's not something I can just "switch off"), and I discover (or am told, in this instance) that certain organisations will take advantage of my loyalty then I am not going to think highly of them. If I learn/am taught that my loyalty will be exploited by an entire sector (insurance companies, in Sam Bowman's tweet), I am likely to conclude that the whole sector will betray me and therefore cannot be trusted. I think it's less likely that I will conclude that my sense of loyalty is the problem.

When I look at the way that institutional shareholders react to loyalty rewards - which some would no doubt consider to be economically rational - I wonder what the reaction in turn of the humans working for companies like DSM is. Again, my gut feeling is that it suggests - or confirms - that you shouldn't trust asset managers. I think this is why the question of asset managers shorting their own clients jars with me. I don't believe that the human beings who are executives at the companies being shorted simply think "fair enough, that's how the systems operates, and they have Chinese walls". I think it will sting emotionally, at least some of them. I know some of them consider institutional shareholders to be entirely mercenary.

And in the world of employment, I suspect that we are still only starting to see the counter-reaction to the reduction of employer loyalty to employees. In the past a lot of employees felt some loyalty to their employer, it was part of their identity. But, if you read a book like Hired you can see that sense of loyalty is gone, along with social clubs and defined benefit pensions. If millennial workers don't trust employers (because of the lack of loyalty) we perhaps can't be surprised if they demand a lot to come onboard / stay onboard, because they expect to get shafted.

So perhaps the widespread distrust in institutions at least in part results from the violation of loyalty. And emphasising the desirability of "exit" - and the foolishness of remaining loyal - exacerbates this. (I think there is a link to the idea of self-interest as a norm, that I blogged about a few years back.)

Anyway, I think this is a theme I'll be blogging about more in future.

Friday, 18 January 2019

More short stuff

Again, huge caveat that the data in these charts is only 0.5%+ short positions, but some interesting stuff I think. At the end of play yesterday the FCA had disclosed 581 current short positions of 0.5% and above in UK shares. So I looked at which firms had the most shorts, and - of that group - what their average, median and largest short positions were.



Blackrock has the most shorts in total, and also the second largest individual short of the sample. Odey has the largest single short and average short. AQR has the largest median short, second largest average short and third largest individual short.

A rough (and pretty obvious) reading of this is that the hedge funds that make shorting a significant part of their strategy take a small number of bigger positions. I am surprised by the sheer number of Blackrock shorts (and there must be a lot more under 0.5%) which makes me wonder if a lot of this is hedging. Also quite surprised to see both JP Morgan Asset Management and Merian Global Investors (formerly Old Mutual) in the mix.

For info I had an arbitrary way of picking firms - just those with 10 or more shorts in the list.

PS - 20 largest shorts and the funds that have them:

Thursday, 17 January 2019

Long, short and managing the pension scheme

Long



Short





Managing the pension scheme


Even More Duplicate Reporting 2: The Boilerplate Strikes Back

Neptune (looks like an old statement, but hey)

We will continue any dialogue with the company over an extended period where deemed necessary. Escalation of our engagement activities, including any engagement with other investors, will depend on the company’s individual circumstances and the nature of the concerns identified.

......

Neptune recognises that in many instances joint action by shareholders has the potential to be more effective than acting alone. This is especially the case where shareholders have a clear common interest, such as in times of significant corporate or wider economic stress, or when the risks posed threaten to destroy significant value. Neptune will pursue opportunities for collaborative engagement in such circumstances and will engage with other investors through formal and informal groups when it is necessary to achieve their objectives and ensure companies are aware of concerns.

......

Neptune fund managers and research analysts maintain regular dialogue with companies which forms part of their research notes published internally to the investment team. This communication allows Neptune to monitor the development of companies in areas such as;  overall strategy;  leadership;  business planning;  capital structure, including any internal or external developments that may drive the company’s value and risk;  company reporting;  proposed acquisitions or disposals; and  corporate responsibility and governance.

River & Mercantile

We will continue our dialogue with the company over an extended period if necessary. Escalation of our engagement activities will depend upon the company’s individual circumstances. Actions may include communications through the company’s brokers, direct engagement with the chairman or non-executive directors or joint intervention with other shareholders, and where appropriate, voting against board proposals

....

We recognise that in many instances joint action by shareholders has the potential to be more effective than acting alone. This is especially so where shareholders have a clear common interest and at critical moments. Our policy is to pursue opportunities for collaborative engagement in such circumstances. In considering participation in collaborative engagement initiatives we take into account potential conflicts of interest, concert party rules and our policy on insider information.

......

RAMAM’s fund managers and analysts maintain regular dialogue with companies. This dialogue allows us to monitor the development of companies’ businesses, including areas such as overall strategy, business planning and delivery of objectives, capital structure, proposed acquisitions or disposals, corporate responsibility and corporate governance. In addition, we engage with other stakeholders to enhance our own views on company performance. Whilst we may attend company general meetings, our preference is for meeting one-on-one with companies.

Nomura (another old one?)

We will continue our dialogue with the company over an extended period if necessary. Escalation of our approach will depend upon the company's individual situation, and the country and jurisdiction to which it belongs. Escalated action might include communication through the board of directors or through channels other than our usual contacts.

NAM’s portfolio managers, research analysts and corporate governance specialists maintain regular dialogue with the companies into which they invest on behalf of clients. These communications allow us to evaluate key factors determining our investment decisions, such as the development of companies’ business operations, capital structures and financial standings, and strategic plans; as well as to monitor essential elements concerning a company’s sustainability, such as corporate governance and corporate social responsibility activities. We believe this continuous dialogue with companies will encourage them to give due consideration to their corporate responsibilities.

Napier Park

We will continue our dialogue with the company over an extended period if necessary.
Escalation of our engagement activities will depend upon the company’s individual circumstances. Actions may include communications through the company’s brokers, direct engagement with the chairman or non-executive directors or joint intervention with other shareholders, and where appropriate, voting against board proposals.

......

Napier Park recognise that in certain instances joint action by shareholders has the potential to be more effective than acting alone. This is especially so where shareholders have a clear common interest, such as in times of corporate distress. Our policy is to pursue opportunities for collaborative engagement in such circumstances.
......

Napier Park’s fund managers and analysts maintain regular dialogue with companies within their particular business sphere. Such dialogue allows them to monitor the development of companies’ businesses, including areas such as overall strategy, business planning and delivery of objectives, capital structureproposed acquisitions or disposalscorporate responsibility and corporate governance.

Tuesday, 15 January 2019

Even more duplicate reporting...

Well, here's something. In a previous blog I noted that Liontrust Asset Management is apparently both a Tier 1 and a Tier 2 signatory of the Stewardship Code (though the statement is the same in both links).

Well, I had a bit of a Google around and I found that the Liontrust statement on the Stewardship Code bears more than a passing resemblance to a Martin Currie statement: GOVERNANCE OVERSIGHT OF INVESTEE COMPANIES AND PROXY VOTING

A couple of examples below.

Liontrust:

Martin Currie:


Liontrust:


Martin Currie:


Ho hum.

Here's another one. Try sticking the following into Google without quotes "The materiality and immediacy of a given issue will generally determine the level of our engagement"

I don't know where that sentence came from, and perhaps just a coincidence. But look at this Blackrock paper and this ValueCap stewardship statement.

Blackrock:


ValueCAP:


Thankfully the lack of a mechanistic process is also referenced in ValueCAP's PRI reporting.

More hedge fund cut 'n' paste fun

I had some fun last year exposing the boilerplate blah that many hedge funds (and a few bigger firms) were using to "explain" their non-compliance with the Stewardship Code. Many thanks to Responsible Investor for recently giving this a plug.

Anyway, I thought I'd have another look. In the list we submitted to the FRC and FCA last year, I had found 34 examples using pretty much the same text. So are there any more out there? Yes. Loads.

Below are some I didn't find first time around. I haven't included all the blurb - the full text includes words to describe their approach to engagement with issuers which, miraculously, seems to be the same across dozens of firms. Incidentally, a couple of the URLs are interesting. One uses the word "template" and another includes "UK_Stewardship_Code_Applicable_BUT_firm_chooses_NOT__to_commit_and_explains_why"

These are just from the first three pages of Google results (even I get bored of this stuff). There are a lot more.

Somerset Capital Management:
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to it.

Marine Capital (this one looks reasonable, to be fair):
MCL invests directly in shipping assets and therefore it has no exposure to UK listed companies. Therefore, whilst MCL generally supports the objectives that underlie the Code, the nature of its investment strategy makes it impractical and unnecessary to engage with investee companies through voting rights. The Firm has therefore chosen not to commit to the Code at this time.

Baker Steel
Consequently, while the Firm supports the general objectives that underlie the Code, the Firm has chosen not to commit to the Code. Given the investment strategies of the Funds, the principles of the Code are generally not relevant to the type of trading currently undertaken by the Firm. If the Firm's investment strategy changes in such a manner that the provisions of the Code become relevant, the Firm will amend this disclosure accordingly.

Sagil Capital
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code.

Pamplona Capital Management
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen to not commit to the Code.

Avenue Capital (this is the one that includes "template" in the Google results)
As such, while the Firm generally supports the objectives that underlie the Code, the Firm does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction.

Hadron Capital
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code.

Blue Whale
While Blue Whale supports the objectives that underlie the Code, Blue Whale is not in a position to commit to the Code in its entirety.

Nextam Partners
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code.

AKO Capital
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code.

Partners Group 
Whilst PGUK generally supports the objectives that underlie the Code, it has chosen not to commit to the Code at this time.

Clearance Group
While the firm generally supports the objectives that underlie the Code, the firm has chosen not to commit to the Code. 

Edgbaston Investment Partners
Whilst Edgbaston generally supports the objectives that underlie the Code, it does not consider it appropriate to commit to any code of practice relating to any individual jurisdiction.

Markham Rae
Consequently, while the Firm supports the objectives that underlie the Code, the provisions of the Code are not relevant to the type of investment currently undertaken by the Firm.

RAB Capital
While RAB generally supports the objectives that underlie the Code, it has chosen not to commit to the Code.

Atlas Square
Hence, while the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. 

KAM Portfolio Management
While the firm generally supports the objectives that underlie the Code, KAM has chosen not to commit to it.

Glen Point
While the firm generally supports the objectives that underlie the Code, Glen Point has chosen not to commit to the Code. 

Sturgeon Capital
While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code.

Saturday, 12 January 2019

The challenge (to unions) of pension fund 'socialism'

The Unseen Revolution by Peter Drucker is (like the Modern Corporation and Private Property) one of those books that has had a big influence on the world in which I inhabit, but also which is often misunderstood. Lots of people have probably heard the basic idea - that through the equity held by pension funds workers essentially "own" companies, and therefore we have a form of latent "socialism" if people would just wake up to it.

There are some obvious problems with even the outline - shareholders own shares not companies; not all pension schemes hold equity; pension fund coverage in many countries is skewed by class, gender and so on, so not everyone is a meaningful shareholder in practice; and day to day many pension funds act like any other financial market participants and aren't really friends of labour.

Nonetheless the basic idea is one that many on the Left are interested in and many people (me included) have spent years trying to make something like it meaningful.

But back to Drucker. Because a lot of people only know the outlines of the argument, they miss a lot of the really insightful stuff he wrote about the challenges that pension fund equity ownership creates. One of the most interesting bits is about the dilemma faced by trade unions, and to me Drucker seems to find this dilemma quite enjoyable. So here are some chunks of it.
Whatever the role of the labour union under pension fund socialism, it has to decide among equally dangerous alternatives, each challenging its cohesion.
The employees - the people whose organisation the labour union asserts itself to be and whom it claims to represent - are now increasingly both "employees" and "owners". Increasingly, they have an interest both in their job and its wage or salary, and in the performance and the profitability of enterprise. And increasingly, they stand in two relationships to the "system", which according to union logic and union rhetoric are mutually exclusive.
The labour movement can choose to ignore pension fund socialism. This would be the normal reaction for an American union leader - who does not challenge the "system" as such, but demands that one interest in it, that of the employee as employee, be given pride of place... The second alternative for labour is to try to use pension fund socialism as a means to expand union power by becoming the representative of the employees in their role as principal owners...
If America labour chooses to ignore the emergence of pension fund socialism, it runs therefore the one risk no trade union can possibly afford: the risk of a competing organisation's claiming to represent the employee. For if the union does not assume responsibility for the employee as owner, some other organisation will do so sooner or later. Such an organisation might take half a dozen different forms, but in any form it would be a competitor to the labour union. It would be an organisation of "labour" - not representing the employee as an employee against management, but ownership against management and employees alike...
The second alternative is equally risky: to accept pension fund socialism and to assert the labour union's role as representing the employee as owner. This would force the union into taking enterprise's even even management's side against the employee. The interest of the employee as an owner is by no means identical, at least not in the short run, with the interest of the employee as an employee. To an "employee", "profits" are something that is being "taken away from the worker," always seen as enormous and surely "excessive." To an "owner," on the other hand, profits are absolutely necessary; they are, in effect, the foundation of his future security. Instead of being excessive or exorbitant, they will almost always been seen as inadequate. To the employee, "productivity" is a dirty word... To an owner, "productivity" is what he pays management for.
Well, we know how this turned out. Unions have generally not sought to represent employees as "owners". No rival organisations have materialised to fill the gap, rather the influence that derives from equity ownership has largely accreted to financial intermediaries (asset managers). Overall the balance of power has significantly shifted since Drucker was writing away from labour and towards capital (and it is the latter interest that is given pride of place in today's corp gov). But the the power of capital is not utilised by those to whom it belongs. Both companies and asset managers act as if the capital belongs to the latter, and its influence is used to advance the interests of capital, not labour.

As I regularly argue, we would be better off acknowledging the conflicts here, and thinking about how they should be worked through. I know very few investors who are anywhere near this yet, but I think this is where the hard work will need to be done in the coming years.

PS - the thing that people often overlook about the Modern Corporation and Private Property is that Berle and Means conclude that the diffusion of share ownership (and thus control) means that corporations should be accountable to 'the community'. Yet the book is often cited in support of the need for companies to be accountable to shareholders.