Low interest rates have been a challenge for savers in much of Europe and the US ever since the financial crisis, tempting many to seek out investments that promise high returns. The natural desire to make money can blind investors to risk — or encourage them to put their savings into products that are not properly regulated by financial watchdogs. That challenge has only been compounded by the pandemic as central banks everywhere have rushed to keep borrowing rates low to keep their economies afloat. The concern is that, faced with the prospect of an extended period of ultra-low or even negative rates, millions more savers will plough their hard-earned capital into speculative schemes.
It is against this backdrop that a long-awaited report into the collapse of British savings company London Capital & Finance should be read. Its conclusions — in particular the revelation of gaping holes in the UK’s financial regulation network — are especially timely. Close to 12,000 consumers lost most of their £236m savings when LCF collapsed into administration in 2019. The company had sold high-risk, unregulated mini-bond investments that promised high rates of interest. Many of the buyers were elderly; some used their life savings to buy the bonds.
The report of the inquiry, led by former judge Elizabeth Gloster, makes for uncomfortable reading for the financial watchdog, as well as for Andrew Bailey, governor of the Bank of England, who was chief executive of the regulator from 2016 until March this year. The inquiry found that the Financial Conduct Authority failed to “effectively supervise and regulate” LCF. The regulator, the report went on, failed to appreciate the significance of “an ever-growing number of red flags”. The report also expressed its “disappointment” at the attempts of certain individuals, including Mr Bailey, to deter the inquiry from singling out individuals.
Consumers are entitled to expect and receive protection from the regulatory regime, in particular when they invest their own savings. Yet one of the most alarming conclusions to be drawn from the LCF report is that neither consumers nor even the regulator’s staff fully understood what is regulated by the FCA and therefore covered by compensation — and what is not. Companies that are authorised by the watchdog can offer unregulated investments.
The FCA has said it accepts all nine recommendations in the report. It is important that these are followed through. They include sensible proposals such as training staff to recognise fraud and irregularities, as well as ensuring that information and data relevant to the supervision of a firm is available on a single electronic system. The FCA should also not reassure consumers about the non-regulated activities of a firm based on its regulated status.
Additional recommendations, however, about regulatory reform could have more far-reaching consequences. They will require careful consideration. Chief among these is that the Treasury should consider the “optimal scope of the FCA’s remit”, citing concerns over the broad scope of the watchdog’s responsibilities and the impact this has on its effectiveness.
Ultimately, regulation on its own cannot guarantee protection for consumers. One of the wider lessons from this scandal is the poor level of investment knowledge of many savers — and the importance of financial education. Against an uncertain economic backdrop as countries recover from the effects of the pandemic, understanding financial investment choices matters more than ever.
Securities Commission shares investment red flags for 2021 – Airdrie Today
The Alberta Securities Commission (ASC) has released a list of top investment risks in hopes of helping Albertans avoid falling victim to scams in 2021.
“We want to protect people from the scammers and fraudsters that unfortunately exist out there,” said Hilary McMeekin, director of communications and investor education with ASC.
McMeekin said fraudsters capitalize on people in any way they can, even if that means committing scams during the pandemic.
“They prey on our vulnerabilities,” she said. “We have seen an increase in activity when it comes to fraud services or products around the pandemic.”
In early January, the ASC released a list of six tips that McMeekin said will “arm Albertans with timely information to stay vigilant and protect their finances as we enter 2021.”
The first red flag on the ASC’s list involves investments related to COVID-19. According to an ASC press release, a common way fraudsters take advantage of global events is through “pump-and-dump schemes,” which promise an opportunity to invest in new products or services that will prevent, detect or cure COVID-19 – or otherwise aid in the fight against the virus.
These pump and dump schemes usually involve artificially inflating the price of a penny stock shell company through issuing false and misleading positive statements, according to the release. The price of the stock rises as people invest. However, the wrongdoers cash out their stock at a high price before the truth is revealed, and the price of the stock then falls dramatically, leaving investors with nothing.
Another scam ASC warns about is any investment that promises great expectations. According to McMeekin, the ASC has seen an increase in situations where investment is encouraged with the promise of high returns resulting from a proposed deal involving a letter of intent.
“Proposed deals can fall through, so if it’s being promoted as a sure thing, investors should be wary,” she said.
Affinity fraud, according to McMeekin, is another scam people should be on the lookout for this year. McMeekin said affinity fraud happens when victims are introduced to scams by someone they know, such as family members, friends or co-workers.
“Fraudsters will often target ethnic communities, religious organizations, social clubs or professional groups, taking advantage of the trust and relationships that exist within,” she said. “The fraudster becomes part of – or pretends to be part of – the community, flaunting their success or wealth and often enlisting unsuspecting ambassadors to spread the scheme to make it seem credible. Friends and family may unknowingly fall victim and encourage others to invest, too.”
Also on ASC’s list is a scam that promises quick profits by trading stocks at home. McMeekin said a lot of trouble can be avoided by just properly researching these promises.
“Research the company, research whatever the investment is for,” she said. “Really look into and understand what that product or service is all about. Learn as much as you possibly can.”
Particularly during a recession or pandemic, people can be interested in earning additional income. According to McMeekin, taking the time to research the validity of various money-making opportunities can save people a lot of hardship down the road.
“Take that time,” she said. “Our hard-earned money is worth taking the time to do the research.”
Quite often, McMeekin said, when scams are reported, the companies or persons involved have not been registered with ASC.
“The first question isn’t ‘are you registered?’ but it should be,” she said. “If they are not registered, that is a red flag.”
The ASC has a website, checkfirst.ca, which McMeekin said can help people find out if companies they plan on dealing or investing with have taken necessary steps to register with the commission.
“It’s a website that is full of unbiased and free resources for investors,” she said. “No matter what stage of investing someone is in, it can be helpful.”
Bitcoin’s Massive Swings Give Pause to CFOs Mulling Reserve Investment: Bloomberg – Yahoo Finance
Some traditions are too time-honored to shirk, and on Wall Street, the annual ‘top picks’ are one. Usually made at the very end or very beginning of a year, the Street’s analysts publish reviews on the stocks they believe will show the best performance in coming months – their top picks. The analysts have been analyzing each stock carefully, looking at its past and current performance, its trends on a variety of time frames, management’s plans – they take everything into account. Their recommendations provide valuable direction for building a resilient portfolio in the new year. With this in mind, we used TipRanks’ database to identify three stocks which the analysts describe as their ‘top picks’ for 2021. Talos Energy (TALO) The Gulf of Mexico has long been known as one of the world’s great hydrocarbon production regions, and Talos Energy, which produces some 48,000 barrel of oil equivalent per day from offshore operations in the Gulf, is an important player in the area. Talos finished the third quarter of 2020 running a net loss, but revenues, at $135 million, were up 53% sequentially. The company reported over $353 million in accessible liquidity to end the quarter, including $32 million in cash on hand and $321 million in available credit. In December of last year, and continuing into this January, Talos has firmed up its liquidity situation through issues of senior secured notes. The December issue, of $500 million at 12%, will be used mainly to pay down a previous note issue which comes due next year. The January issue, an additional $100 million, will be used to cover outstanding debt on the reserves-based lending facility. Both note issues are due in 2026. Highlighting TALO as his top E&P pick for 2021, Northland analyst Subash Chandra wrote, “TALO is one of the few companies that we are aware of trading at trailing PDP values without a good reason, in our view. The company has addressed the maturity wall and credit facility stresses with a December equity offering and refi. They enter 2021 with breathing room to cross the finish line with Zama and look for scaling opportunities in GoM.” To this end, Chandra rates TALO an Outperform (i.e. Buy), and puts a $19 price target, indicating the potential for 91% growth in the coming months. (To watch Chandra’s track record, click here) Overall, with five analyst reviews on file, including 4 Buys and a single Hold, Talos gets a Strong Buy rating from the analyst consensus. Shares are priced at $9.96, and their $14.33 average target gives ~44% upside on the one-year horizon. (See TALO stock analysis on TipRanks) Twilio (TWLO) Next up is Twilio, a Silicon Valley cloud communications company. Twilio’s software services allow customers to run their telecom service through their office computer servers, making available not just phone calls but chats, texts, and video conversations. The service includes security features such as user verification. The COVID pandemic, and the shift to remote work that was enforced on the economy, has been a boon to Twilio. The shift put a premium on stable and reliable remote connections and telecommuting, and the company’s revenues, which were already strong and showing sequential gains in every quarter, rose to $447 million in 3Q20. Subsequently, Twilio’s shares have skyrocketed 225% over the past 52 weeks. Oppenheimer analyst Ittai Kiddron sees the company on a solid foundation for continued growth, writing, “While some puts and takes are in place in 1Q21, Twilio’s long-term opportunity remains underappreciated by investors. We believe the company’s differentiated product portfolio (communications/data) and evolving GTM approach (hiring/GSI) can drive G2K/int’l adoption/expansion and enable >30% rev. growth at scale (>$4B/$6B) through CY23/24.” The 5-star analyst chooses TWLO as a ‘top pick,’ based on his upbeat analysis of Twilio. That comes with an Outperform (i.e. Buy) rating and a $550 price target implying one-year growth of 41%. (To watch Kiddron’s track record, click here) How does Kiddron’s bullish bet weigh in against the Street? Overall, Wall Street likes Twilio, a fact clear from the 21 analyst reviews on record. No fewer than 18 of those are Buys, against just 3 Holds. However, the stock’s recent share gains have pushed the price up to $388.65, leaving room for just 2% upside before hitting the $396.88 average price target. (See TWLO stock analysis on TipRanks) SI-Bone (SIBN) Medical tech is a field of near-endless possibility, and SI-Bone has found a niche. The company specializes in the diagnosis sand treatment of pain and dysfunction in the sacroiliac joint between the lower back and pelvis. The company’s revenues dropped off between 4Q19 and 2Q20, as the corona crisis put a damper on elective medical procedures. That turned around in Q3, when the economy began to open up; many industries, including the medical field, saw a burst of pent-up demand that has not yet dissipated. In raw numbers, SIBN reported a 42% sequential revenue increase for Q3, with the top line at $20.3 million. Year-over-year, revenues were up 26%. During the quarter, the company passed 50,000 iFuse procedures, handled by 2,200 surgeons around the world. The company had $132 million in liquid assets available at the end of the quarter, against $39.4 million in long-term debt. Looking forward, the company guides toward an 8% to 10% yoy gain in full-year revenue for 2020, expecting that top line at $73 million to $74 million. Analyst David Saxon, covering the stock for Needham, says, “SIBN has shown resiliency during the pandemic, and we believe its growth drivers can allow it to beat consensus revenue throughout 2021. Further, we expect SIBN’s 2021 sales force expansion, building momentum in surgeon training, upcoming product launches, and direct-to-patient marketing will all contribute to strong revenue over the next few years.” Saxon uses these points to support his ‘top pick’ status for SIBN. His average price target is $35, suggesting an upside of 23%, and fitting nicely with his Buy rating. (To watch Saxon’s track record, click here) All in all, SI-Bone gets a Strong Buy from Wall Street, and it is unanimous – based on 5 positive reviews. The shares are selling for $28.48, and their $33.80 average target implies room for ~19% growth over the course of 2021. (See SIBN stock analysis on TipRanks) To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights. Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Researchers Hot Stock Tip: Avoid This Type of Investment Fund – SciTechDaily
Specialized ETFs invest in trendy, overvalued areas, study finds.
“Buy low and sell high” says the old adage about investing in the stock market.
But a relatively new type of investment fund is luring unsophisticated investors into buying when values are at their highest, resulting in losses almost immediately, a new study has found.
The lure? Buying into trendy investment areas like cannabis, cybersecurity and work-from-home businesses.
“As soon as people buy them, these securities underperform as the hype around them vanishes,” said Itzhak Ben-David, co-author of the study and professor of finance at The Ohio State University’s Fisher College of Business.
“They appeal to people who are not sophisticated about investing. They may have an extra $500 and decide to try to make what they think is easy money in the stock market.”
The research was presented earlier this month at the annual meeting of the American Economic Association and is available on the SSRN preprint server.
These investment funds are a particular type of Exchange Trade Funds, or ETFs, which were first developed in the mid-1990s. ETFs are investment funds that are traded on stock markets and are set up like mutual funds, holding a variety of other stocks in their portfolios.
The popularity of ETFs is growing quickly. By the end of 2019, in excess of $4 trillion was invested in more than 3,200 ETFs. The original ETFs were broad-based products that mimicked index funds, meaning that they invested in large, diversified portfolios, such as the entire S&P 500, Ben-David said.
But more recently, some companies have introduced what Ben-David and his colleagues call “specialized” ETFs, which invest in specific industries or themes – usually ones that have received a lot of recent media attention, like work-from-home opportunities.
“These specialized ETFs are often promoted as the ‘next big thing’ to investors who are wowed by the past performance of the individual stocks and neglect the risks arising from under-diversified portfolios,” said study co-author Byungwook Kim, a graduate student in finance at Ohio State.
For the study, the researchers used Center for Research in Security Prices data on ETFs traded in the U.S. market between 1993 and 2019.
They focused on 1,086 ETFs. Of those, 613 were broad-based, investing in a wide range of stocks. These are the Walmarts of ETFs, appealing to value-conscious consumers, Ben-David said.
The remaining 473 were specialized ETFs, investing in a specific industry, like cannabis, or multiple industries that are tied by a theme. These are the Starbucks of ETFs, appealing to consumers who are willing to pay more for what they see as higher quality, he said.
“The securities that are included in the portfolios of specialized ETFs are ‘hot’ stocks,” said co-author Francesco Franzoni, professor of finance at USI Lugano and senior chair at the Swiss Finance Institute. “We found that these stocks received more media exposure, and more positive exposure, than other stocks in the time leading up to the ETF launch.”
In 2019, the new ETFs included products focusing on cannabis, cybersecurity and video games. In 2020, new specialized ETFs covered stocks related to the Black Lives Matter movement, COVID-19 vaccine, and the work-from-home trend.
The performance of broad-based versus specialized ETFs was very different, the researchers found.
Broad-based ETFs had earnings over the study period that were relatively flat, the analysis showed. But specialized ETFs lost about 4 percent of value per year, with underperformance persisting at least five years after launch.
“Specialized ETFs, on average, have generated disappointing performance for their investors,” said co-author Rabih Moussawi, assistant professor of finance at Villanova University.
“Specialized ETFs are launched near the peak of the value of their underlying stocks and start underperforming right after launch.”
The study found that the types of investors who bought into specialized ETFs were different from those who invested in the broad-based products.
For example, large institutional investors who have professional managers, such as mutual funds, pension funds, banks and endowments, generally avoid specialized ETFs.
The study found that institutional investors own about 43 percent of the market capitalization of broad-based ETFs in their first year, but less than 1 percent of the capitalization of specialized ETFs.
In contrast, data from one online discount brokerage that caters to individual investors showed that its customers are much more likely to invest in specialized than broad-based ETFs.
Other research has suggested that investors using that discount brokerage exhibit “sensation-seeking behavior” and their holdings can be described as “experience and curiosity holdings,” Ben-David said.
The results suggest that most people should be wary of investing in specialized ETFs, Ben-David said.
“If you purchase a specialized ETF, you are likely to lose money because their underlying stocks are overvalued,” he said.
Meeting: American Economic Association 2021 annual meeting
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