Investment
We could all learn some investment lessons from Taylor Swift
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John Ray, the man who sorted out Enron, and who has now been drafted in to try and clear up the mess left behind by Bankman-Fried and his small gang of millennial crypto idealists, commented acidly that there was “a complete failure of corporate control”.
Whether it was fraudulent or not will be up to the courts to decide, but there can be no question it was a hopelessly badly run business.
Who knew? Well, as it turns out: Taylor. The company made a huge effort to try and secure her endorsement, and also to sponsor her massive Eras tour. The singer, however, we learned this week, had a few questions. “Just tell me that these are not unregistered securities, right?” she asked before committing to anything.
We already knew that Swift was a savvy businesswoman as well as a fine singer and songwriter. We can see that in the way she has expertly managed her career, taking back control of her catalogue and re-recording her old albums to ensure she earned the money from them. Now she appears able to spot a financial fraud that had eluded almost everyone else.
The technique, however, was a very easy one. Unlike many other celebrities who got caught up in the bandwagon, she just checked it was a real business doing properly regulated stuff. In fact, asking very simple questions is one of the best ways to avoid making very basic mistakes. There are lots more straightforward questions that should be asked of fast-expanding companies a lot more often. Here are a few we could be starting with.
Does the company actually make any money? There are a surprisingly large number of seemingly very successful businesses that don’t actually make any money. Instead they are kept afloat on wave after wave of fresh capital. Very occasionally, after lots of investment they become very profitable (like Amazon, for example).
More often, once the funding dries up, they collapse like a house of cards. If a business isn’t profitable after a couple of years, it probably won’t ever be. Even if the answer is yes, it is worth also asking whether it is cash-flow positive, or whether it consumes more cash than it manages to generate. If that box is not ticked as well, there is probably trouble ahead.
Next, has the product been launched yet and if so is anyone buying it? It would be a lot easier to run a company if you never actually had to go to the trouble of actually selling anything. Plans and projections are lots of fun, and might convince investors for a while. But it is only when there are actual people buying the product every day that you know whether the company is real or not.
Thirdly, how long has the chief executive been in the job, and what kind of team do they have around them?
In fairness, it is sometimes possible for a brilliantly talented entrepreneur to emerge straight from college, with no real experience especially in new technology. Bill Gates or Mark Zuckerberg are both obvious examples, even if both of them were quickly surrounded by more knowledgeable executives. But it is very rare. Typically, people need a few years at least working for an established organisation before launching something of their own.
Finally, is there lots of hype? If the founder spends most of his or her time on building their personal image, on magazine covers and winning awards, hobnobbing with former presidents and prime ministers, they are probably not putting enough time into the hard work of building the business. Bankman-Fried spent far too much time on his personal profile, and far too little checking the paperwork was all in order.
Investing doesn’t need to be very complicated. A company makes stuff, or provides a service, charges money for it, and makes a profit. And, well, that is basically about it. When it gets any harder than that to understand it is usually a swindle.
Taylor Swift could see that, and saved herself a lot of embarrassment by refusing to have anything to do with FTX. If a few more investment professionals could do that well the financial world would be a safer place.
Investment
GM, POSCO Future M to boost investment at battery materials plant in Canada – The Globe and Mail
General Motors Co GM-N and South Korea’s POSCO Future M said on Friday they will invest more to boost production at their chemical battery materials facility in Canada, taking their estimated total investment in the plant to over $1-billion.
The companies said the new investment includes an additional CAM and a precursor facility for local on-site processing of critical minerals.
The development comes a few days after the Canada’s federal government and the Quebec province each provided about C$150-million ($112-million) for the facility.
The companies last year established Ultium CAM joint venture, which is majority owned by POSCO Future M, and had initially invested about $327-million, according to media reports.
Their battery facility in Becancour, Quebec, will produce cathode active material (CAM) for electric vehicle (EV) batteries.
Investment
Canadian pension fund CDPQ puts brakes on China investment, Financial Times reports – Reuters
June 1 (Reuters) – Canada’s second-largest pension fund Caisse de dépôt et placement du Québec (CDPQ) has stopped making private deals in China and will close its Shanghai office this year, the Financial Times reported on Thursday, citing people familiar with the matter.
The news follows a May 8 parliamentary hearing in which several Canadian pensions, including CDPQ, were asked about their relationship with China as bilateral political tensions have intensified.
CDPQ is leading its regional investment efforts from Singapore, the report said, noting that it still has business interests in China.
“We paused private investments for some time already — and have focused on liquid markets, which is the majority of our two per cent total portfolio exposure to China. We expect this trend to continue,” the newspaper quoted CDPQ as saying in a statement.
CDPQ confirmed the Shanghai office closure later this year, but declined to comment further.
The Financial Times in February reported that Singapore’s sovereign wealth fund GIC has reduced private investments in China.
During the May hearing, Michel Leduc, a senior manager at the Canada Pension Plan Investment Board (CPPIB), said China was an “important source” for its portfolio.
“We recognize that any investment in China needs to be handled with care, sophistication, and an acute understanding of the current political and geopolitical environment,” Leduc said.
A CPPIB spokesperson declined to comment further on Thursday.
In May, Canada’s C$211.1 billion ($157.87 billion) British Columbia Investment Management Corporation (BCI) said it had reduced exposure in China and Hong Kong by about 15% over two years and paused direct investments in China.
“Our current exposure in China is less than 5% of the overall BCI portfolio, the majority of which is through public markets and via indexed funds,” the asset manager said.
In April Canada’s third largest pension fund, Ontario Teachers’ Pension Plan (OTPP), also closed its China public equity investment team based in Hong Kong.
At the start of the year, OTPP said it was pausing future direct investments in private assets in China, citing geopolitical risk as a factor.
OTPP expects to name a new head of Asia-Pacific Private Capital Direct in the coming months to replace Raju Ruparelia who has left to pursue other opportunities, a spokesperson said by email.
($1 = 1.3372 Canadian dollars)
Our Standards: The Thomson Reuters Trust Principles.
Traditionally reserved for institutions and ultra-high net worth individuals, direct indexing is a hot topic for investors as technology advances and downward pressure on retail trading commissions have done much to democratize its access. In the United States, direct indexing strategies are expected to outpace the growth of both ETFs and mutual funds. In response, U.S.-based providers are scrambling to build, buy or partner to acquire the required capabilities to get in on the action, driving down the costs and required account minimums for investors. For Canadians, it’s worth getting a better understanding on what Direct Indexing is, and what we can expect for the future of these strategies north of the border.
As a brief overview, direct indexing amounts to personalization at scale. Similar to a traditional investment fund, direct indexing gives individual investors a way to get exposure to a broad segment of the investment market, such as an equity index. Unlike traditional funds, however, direct indexing involves individuals investing directly in the underlying securities (stocks or bonds that make up a larger index), instead of simply buying units of a fund. Investing in this way offers multiple benefits. First, there are a variety of tax strategies (most notably tax loss harvesting) made available by directly holding the individual securities, which can add a potential 1-3% after-tax return on an annual basis. Second, the investor would have near-full autonomy to incorporate their personal preferences for the purpose of excluding securities that do not align with their values or investment objectives. Consider an index that is made up of the 500 largest companies listed in the United States, when investing in this product the investor does not have the choice of what companies make up this portfolio, meaning they may be required to invest in companies that do not align with their values or investment objectives. However, by holding the underlying securities, these non-aligned stocks can be excluded from the investor’s portfolio. While traditional thematic ETFs and mutual funds provide generic options for investor choice, the opportunities for hyper-personalization inherent in direct indexing strategies are almost endless.
As a concept, direct indexing is not new. Sophisticated investors, such as institutions and wealthy investors, have long held the requisite buying power and influence to overlay all manners of unique constraints on their investment portfolios. However, technology advances that could handle significant scale coupled with reduced trading costs brought this concept into the hands of individual investors – the former made it possible for investment managers to offer direct indexing while the latter made it affordable for the retail market.
The seismic nature of this shift cannot be undersold. Consider an investment advisor seeking to satisfy the individual needs of their clients across 10,000 individual investment portfolios. They’d need to manually ingest a mountain of client-level information, go about buying into hundreds of thousands of individual securities and monitor all accounts to identify portfolios that require rebalancing when they drift out of alignment. Prior to the advances described above, this would be cost- and time-prohibitive. Direct indexing offers this high degree of personalization in an automated fashion that is feasible for the investment manager, while better serving individual client needs.
When compared to the U.S., Canada has been slower to internalize the required pre-conditions to support direct indexing, but the outlook is increasingly positive. Leading direct indexing technology-solution providers in the U.S. are expressing interest in Canada as an expansion target. Additionally, Canadian broker-dealers are exploring ways to enable zero commission trading at scale. Fractional shares, at one time considered more of a marketing gimmick, is also slowly finding its footing as firms are tapping into lower account balance investors that are seeking alternatives to traditional funds.
Beyond these structural considerations, it’s worth examining whether demand among Canadian investors will be sufficient to justify bringing direct indexing to the Canadian market. For instance, the main driver for adoption of direct indexing in the U.S. is the opportunity to capture additional after-tax returns through direct indexing’s optimization capabilities. However, given tax code differences in Canada related to the treatment of capital gains, the benefit provided from tax optimization strategies deployed on Canadian portfolios will likely be less than those experienced by our counterparts south of the border. That said, believers in the concept remain steadfast that the increase in personalization for Canadian investors will be enough to drive demand for direct indexing.
Direct indexing likely still has a place in the Canadian investment landscape, despite the differences between Canada and the U.S.. The first ‘Canadianized’ direct indexing solution made available to the mass-market will have to navigate Canada’s structural nuances; if done successfully, investors aim to significantly benefit by accessing institutional investment capabilities at a cost likely competitive with most Canadian mutual funds.
Michael Thomson is director, and Jeffrey Joynt a consultant, with Alpha Financial Markets Consulting
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Don’t let the haters get to you. Never ever get back together. Oh, and never leave your red scarf behind if you break up with someone. There are no doubt lots of lessons in life and how to manage its ups and downs that we could all learn from listening to Taylor Swift. And now it turns out that we can learn something else as well: how to manage our investments.
The American singer spotted that the crypto currency trading platform FTX was a flimsy, over-hyped ego-trip by just asking a simple question about what it was up to. If we all did that a little more often, the financial markets would be a far safer place.
Just a few months earlier, major celebrities – not to mention some of the world’s most prestigious investment houses, and a few major league politicians – were queuing up to do business with Sam Bankman-Fried’s fast-growing FTX crypto empire.
The American football star Tom Brady and the supermodel Gisele Bündchen were among its celebrity endorsers. Bill Clinton and Tony Blair showed up at conferences it sponsored, effectively lending it some of their gravitas. It was the second biggest sponsor of Democratic candidates at elections, and sprayed money around on what it called “effective altruism”, as well as making donations and investments in Left-leaning news organisations.
Its advisers included Wall Street royalty such as JP Morgan and Goldman Sachs. Heck, why would anyone not want to get involved? At its peak last autumn, Bankman-Fried was worth an estimated $26bn (£21bn) and was ranked as the 60th richest person in the world, and the exchange was dominating the expanding market for digital money. Yet it turns out that FTX was a chaotic mess.