On the $400 million donation to Harvard by John Paulson
Over the weekend, Quartz noted the ‘injustice’ of John Paulson’s recent $400 million donation to Harvard. Melvin Backman notes that this endowment was larger than the top 10 donations in 2014 to HBCUs (Historically Black College and Universities). While Backman’s point here is largely irrelevant, racially speaking, it does speak more towards how funding should be allocated across both public and private colleges in the US. Melvin points out that Howard University have been struggling with budget cuts and further, their bonds downgraded by Moody’s. So does Backman have a point when saying, “So if the billionaires of the world want to put their money into education and avoid accusations of deepening inequality, their dollars would probably go further at black schools?” I think he makes a strong case for how the money should be donated, rather than where the money should be donated.
An important book that has been recently published on today’s inequality is Thomas Piketty’s Capital in the Twenty-First Century, and if you don’t feel the need to purchase it (assuming you haven’t already), watch the way he defends his ideas against the vultures of the panel, namely Stephanie Flanders of JP Morgan.
On the expected change of HSBC’s headquarters
Stuart Gulliver, HSBC group chief executive, recently disclosed that Jamaica and the Netherlands have approached in becoming the next headquarters for the group. What are the reasons for moving its headquarters? On the face of it: greater economic and geographic pivot towards its Asia-based businesses that should help generate greater long-term stability in the wake of concerns of tougher rules imposed by the EU and some mysterious concern that the UK will depart from the EU. What is the consequence of such a move? An expected 25,000 job cut, approximately 10% of its current workforce. More importantly, most of the job cuts will result from commercial and retail banking which arguably, provides the least transition in comparison to those in global banking and markets.
It is expected that the next headquarters of HSBC will be in Hong Kong to position itself for the China-led growth, and thus, any approach by Jamaica and the Netherlands are simply bogus. However, in the moving of its headquarters, will there be a spinoff of its UK retail businesses? Perhaps back to Midland Bank when it was acquired by HSBC in 1992 which represented the largest acquisition in banking history, thereby gaining much needed exposure to the European market as HSBC acquired Marine Midland Bank in 1980 to give it exposure to the US market. As the Financial Times points out, “This is the latest evidence of globalization going into reverse. [Previously,] HSBC, alongside peers such as Citigroup, were planting flags in dozens of markets, rebranding their acquisitions as they went.”
So who’s to blame? Regulation: more stringent capital and liquidity lowers the overall operating efficiency on a global level, under the assumption that an alternative, less stringent jurisdiction is a viable alternative.
However, let’s not get too nostalgic about the history behind Hong Kong and Shanghai Banking Company Limited, as its founder, Thomas Sutherland, once said that he wanted a bank to operate on “sound Scottish banking principles,” a tall order given the ugly history of John Law’s involvement with the banking industry in Europe in the 17th-18th century. What does seem important today is the growth prospects for the HSBC primary listed stock on the SEHK and FTSE 100:
On the quiet and giant role of asset management firms
In terms of the 10 largest US asset management firms, Blackrock, Vanguard and State Street lead at $4.7 trillion, $3.1 trillion and $2.5 trillion respectively. So how does this stand in comparison to the largest ‘commercial’ banks? JP Morgan manages $1.7 trillion and Goldman Sachs manages ‘just’ $1 trillion, yet what are the implications? As the financial market is probably one the most democratic system around, the recent proxy fight over the appointment of directors to DuPont Chemical saw Ellen Kullman, DuPont CEO, and Nelson Peltz, and activist investor from Triand Fund Management (TFM), highlighted both the quiet and giant nature that asset management funds hold in the pecking order. TFM owned around 24 million shares in DuPont, one-sixth of the combined 150 million shares that BlackRock, Vanguard and State Street (“BVS”) held. In the end, who came out the winner? It appears (on the surface) Kullman and (behind the scenes), Larry Find (BlackRock CEO), Bill McNabb (Vanguard CEO) and Joseph Hooley (State Street CEO). Okay, but who was the loser? I would argue that it was not Peltz nor TFM, but DuPont shareholders who had absolutely no say in the matter.
We have all heard about the activist investors: Icahn, Einhorn, and Ackman. A recent article by Fortune suggests that these activist investors amount to little more than a tweet in comparison to the proxy powers of BVS. How do BVS dwarf over the activists? Ownership. The article highlights that TFM owned only 2.7% of DuPont, whereas BlackRock, Vanguard and State Street owned 6.3%, 5.5% and 4.9% respectively. Furthermore, 68% of DuPont shares were held by 1,359 institutions, of which 16.7% owned by the three largest and 35% owned by the 15 largest. Why are the likes of BVS coming out of the wood works now? Simple: “The combined assets under management of BlackRock, Vanguard and State Street have nearly quintupled over the past decade.”
The focus of BVS is now towards the long-term vision, direction and management against which their asset holdings will perform. More importantly, there are two primary reasons: passive management by BVS and autonomy of asset managers. Firstly, BVS specialize in indexing or passive management and thus, the article highlights how passive management pursues profit, rather than active management which tries to beat the market, “Passive managers have only one way to improve their returns: influence their portfolio companies.” Secondly, pension funds of large MNCs have previously heavily invested in asset managers, thus restricting the managers from getting involved ‘actively’. The reintroduction of defined-contribution plans has ‘unshackled’ asset managers.
So is there a shift from short-term horizon management to longer-term? I think yes. It appears that BVS and the like are more concerned with good governance, healthy companies with books in order, and the ability for their investments to pay dividends rather than just capital gains. This is reminiscent of a famous quote by Warren Buffet who said, “Our favourite holding period is… forever.”
What are the implications suggested thus far? Firstly, the role of activist investors will be dwindled down to just being another voice in the crowd, albeit one that is a little louder than the average investor. Secondly, proxy advisory firms will begin to lose out on their monopolistic grasp of advising pension funds, endowment funds, and other funds on how to vote their holdings. This is in contrast to how the likes of BVS will use internally generated metrics to bring about a decision on their voting rights. Should ISS and Glass Lewis move with the times? It would be wise to do so. Thirdly, it seems that the golden age of CEOs has been and gone. The interaction between management and their major investors will become increasingly important, a stark contrast to the family-owned corporations previously. Lastly, as the likes of BVS strive for better managed companies, a take no prisoners approach will be applied to non-revenue generating or under-performing companies as part of streamlining the cost structure of conglomerates.
Is there a darker side to this story? There must be. A bull dog doesn’t get to where it is without some dirt under its paws. As we saw pre-2008 financial crisis and even after, the growing size and influence of financial institutions means a greater concentration of power among a fewer elite number of firms. It seems that commercial banks have been through their fair share of public scrutiny, if the likes of BVS begin to make bad decisions, especially politically sensitive ones, their ability to influence employment (due to restructuring as a result of M&A) and industry competitiveness (due to short-term losses as a result of M&A) could change the way they passively deal with the public.