financial advisers and investment results

I got an interesting email yesterday morning from Factset (FDS), a publicly traded firm that provides information and analysis to the financial community.  It’s titled “What Ultra High Net Worth Clients Want From Wealth Managers.”

FDS defines “ultra high” as having $10 million or more in investable assets.  These clients are (as economic theory would predict) more risk averse than the less wealthy.  According to FDS, the primary service requirements from this group–an emphasis sharpened since the financial crisis–are to have investments that fit their risk profile and to receive timely and accurate analysis of performance from the financial adviser who is the primary point of contact with the wealth management firm.

This contrasts with the attitude of the less wealthy, who FDS says are more concerned with having a cordial relationship with the financial adviser than in having suitable investments, good performance and timely reporting.

Three things about this email strike me:

–that the people with the most money are interested in investment performance for the first time

–wealth managers are struggling to provide the data

–less wealthy, but still affluent, clients are relatively indifferent to how their portfolios are performing, provided they get a minimum of attention from the marketing guy assigned to them.

 

I think this is one of the two central problems with active investment management services provided to individual clients.  Even though performance analysis is the lifeblood of the portfolio management business, and for decades attribution software has been able to generate extremely detailed results daily, clients have generally been uninterested in finding out.

Wealth management firms haven’t been in a rush to educate them, either.  On the one hand, “like me, trust me” marketing is easier to manufacture than market-beating performance.  So one (not me) might argue it’s in the firm’s best interest not to shed light on performance with warts.  On the other, there’s a reasonable argument (here, I agree) that a firm shouldn’t create an attitude of chasing the latest “hot” thing among clients.

The second problem is deeper.  As I see it, traditional brokers have placed most of their effort on marketing, with considerably less focus on creating outperforming products for their clients.  As FDS underlines, until very recently almost no clients have made performance a crucial variable.  Why then, the argument must have gone, deliver something customers don’t consider key?  Send them fifty pages of raw data at the end of the quarter rather than one page of analysis.  Why pay top dollar for a strong manager when a lesser light will satisfy the minimum regulators require, and clients are indifferent?

Two issues, then:  inability to deliver timely, pertinent performance information; and, in the case of (a majority, I think, of) traditional firms, portfolio managers unable to deliver satisfactory results.

No wonder even active managers with respectable records are losing assets.

 

 

 

 

 

 

 

the future of oil mega-projects

My friend Bruce pointed out in a comment last Friday that the shale oil explosion in the US has come very quickly, and as a surprise to most.  Could there be a similar resurgence of the mega-projects that the big international oil companies have typically launched–and are the cause of the huge cost writeoffs they are now making?

My thoughts:

oil

–I assume the current administration in Washington will encourage domestic pipeline construction and reduce/eliminate support for renewables.  This would push further into the future the time when renewables will be price competitive with, and begin to replace, fossil fuels in a widespread way.  At the same time, increased availability of fossil fuels would tend to keep a cap on their price–which pushes the changeover to renewables even further into the future.

–if the chief oil exporting nations think this way (and I believe they do), there won’t be the panicky sense of urgency to produce oil as fast as possible that would prevail if they thought renewables would begin to substitute for fossil fuels in, say, ten years.

–I have friends in the Endless Mountains of Pennsylvania (the Marcellus Shale) who sold the mineral rights to their land to an oil company several years ago.  They tell me there are seven or eight oil- or gas-bearing strata below the one being tapped now.  If this is any indication, profitable shale drilling can go on for much longer than the consensus expects.

–the onshore shale oil/gas wells that smaller independent firms drill tend to use simple equipment, take a short time to get up and running and play out in, say, two years.  If I had to make up an oil price breakeven point for the typical fracked well, I’d say $30 a barrel.

–the offshore megaprojects that the big integrateds specialize in tend to involve very deep wells that take a long time to drill, use quarter-billion dollar+ floating drilling rigs to do so, and which tend to be located in remote, inhospitable, infrastructure-poor areas controlled by potentially unstable governments.  On the other hand, they tend to produce oil/gas for twenty years or more.  Breakeven?  …a gross generalization would be $60 a barrel.

–onshore shale wells in the US tend to cost around $12 million and to produce $35 million in output before they play out.   Fields, say, in deep water offshore Africa or in the Arctic, can require billions of dollars in upfront investment.  In addition, it’s possible that terms will be renegotiated in its favor by the owning government if the wells turn out to be more prolific than expected.  So the risk profile for this type of project is far higher, and the payback period far longer, than from the type of domestic onshore drilling done by independents.  It’s also at best marginally profitable at today’s oil price.  This suggests to me that the big oils will continue to prioritize their lowest risk, but also lowest potential, projects.

–can costs for big integrateds fall from here?  Maybe.  But those for frackers would likely fall in line, too.  And the political risks + the substantial upfront costs caused by challenging physical environments will likely remain for Big Oil projects in spite of future breakthroughs in technology.  So my guess is that the barriers to greenfield mega-projects will remain high.

Of course, neither frackers nor the large integrateds can match the lifting costs for established wells in Saudi Arabia of around $2 a barrel.

Middle East

–Many Middle Eastern oil-producing countries have young, growing populations and economies that are fundamentally dependent on sales of oil.  The government is typically the main employer.  Over the past decade, government spending will typically have expanded in line with oil revenues, to the point where now, with the oil price more than 50% off its highs, substantial government budget deficits are common.  Reorientation of these economies is urgently needed, but is also, like anywhere else, typically opposed by beneficiaries of the status quo.  This is a recipe for political instability.

–the US is likely going to be energy self-sufficient within a few years.   This will lessen the economic motivation for the country to intrude into, ore even maintain an interest in, Middle Eastern politics.  Other motives for doing so will remain, but my guess is that political willingness will wane, as well.

 

 

 

 

 

 

BP Energy Outlook 2016

BP just released its annual Energy Outlook.  

The company is projecting faster development of shale oil, coming mostly over the next few years from the US, than it previously thought.  Renewable energy supply will rise more quickly; (heavily polluting) coal usage will fall faster.  Most of the action will be in developing nations like China and India.  The US will attain energy self-sufficiency in a handful of years, oil self-sufficiency shortly after that.

 

To me, the most interesting topic the release brings up is not actually contained in the report.  It comes from comments by Spencer Dale, BP’s chief economist, during a press conference promoting the new Outlook.

According to the Financial Times, Mr. Dale said that there’s twice as much technically recoverable oil available as the world is expected to need between now and 2050.”

First, “technically recoverable” means only that all of this oil can be extracted from the ground using current oilfield methods.  It does not mean it can be done profitably.  In fact, the choice of the word “technically” suggests BP believes that a significant portion is uneconomical at today’s prices.

Second, according to BP, much of this oil is unlikely to see the light of day…ever.    That’s because global demand for energy is likely to grow by less than 2% yearly.  Most of that will be supplied by renewables and natural gas; oil demand increases by less than 1% annually.

At some point, as the price of renewable energy continues to fall, and absent a decline in the oil price, demand for oil begins to shrink.   Since one might imagine that this drop might not take place thirty years, it may be of little practical concern to you and me.  However, for OPEC countries like Saudi Arabia, which holds perhaps 100 years worth of economically viable oil, and whose economy is radically dependent on petroleum, this is a significant worry.

Investment implications (assuming BP is correct):

–the oil price is unlikely to go up

–OPEC + shale oil will squeeze out higher cost oil production from the rest of the world

–future shale oil company profits will come as much from lowering production costs as from new finds

–big oil firms probably still have plenty of stranded assets (meaning oilfield investments that have become uneconomical and where recovery of the money already spent is unlikely) on their balance sheets.

 

 

 

 

D0w 20,000

The question is whether having a badly constructed, information-poor stock market index achieve a round-number milestone has any significance.

It’s no secret that I’m not a fan of the Dow.  But I am of two minds:

–On the one hand, the Dow Jones Industrial Average, which is what we’re talking about, has been around for a very long time.  It has somehow deflected all attempts over my investing career to replace it in the media with an index that’s more useful, like the S&P 500.  So there’s at least a vague association in the public’s mind between Dow achievements and general economic prosperity.

–On the other, the minute you hear a media pundit use the Dow to interpret the ebb and flow of stocks in general, you know he’s clueless.

The best I can say is that if the Dow can remain higher than 20,000, doing so will have some small positive psychological value.  So I’ll take it.

 

 

Masayoshi Son and Donald Trump

Masayoshi Son is the visionary entrepreneur who controls Softbank, an innovative Japanese communications and internet giant.  Several years ago, Softbank gained control of the US wireless company Sprint.  Mr. Son’s intention was to buy T-Mobile and merge the two, creating a third large national wireless company able to compete with ATT and Verizon.

The Obama administration vetoed the combination on antitrust grounds.  On the surface, this made sense, since the number of competitors in the US market would be reduced from four to three.  On the other hand, the relative market shares of #3 and #4 ares small enough that they have not made much difference in how the two giants operate.  Also, Mr. Son entered the Japanese wireless market in the same fashion, piecing together a national network out of smaller firms. Then he disrupted the existing oligopoly through very aggressive, consumer-friendly, price competition.  He created competition–and much lower wireless bills–where there had been none before.

His intention is to do the same in the US market.  From where I sit, government disapproval of the proposed merger of Sprint and T-Mobile stifled competition rather than promoting it.

My guess is that Mr. Son will have better success explaining his motives to the Trump administration.  A Sprint/T-Mobile combination would likely be good for us as consumers of wireless services, but bad for the incumbents, ATT and Verizon.