Tag Archives: Portfolio management

proxy advisers (ii)

June 3, 2015 By in Portfolio management, proxy advisers Tags: , , , 1 Comment

Yesterday I wrote about the genesis of third-party proxy advisory firms as a result of SEC insistence that investment management firms fulfill their fiduciary duty to vote in the best interest of their shareholders at the annual meetings of portfolio holdings.

The media don’t really understand the function proxy advisory firms serve:  they’re low-cost insurance/evidence that the manager takes his proxy voting duties seriously.  As the de facto authority in this arena, the proxy advisor is the first line of defense if the SEC, the portfolio holding in question or clients have any questions.  Hiring the adviser also eliminates proxy voting as an administrative task for the investment manager, as well as as a source of internal friction among portfolio managers.

Jamie Dimon of JP Morgan should understand this as wel–but apparently doesn’tl.  Calling investment management firms lazy and irresponsible does him no good.   It seems to me his outburst will only serve to heighten the proxy advisers’ sense of mission in speaking out against high executive pay.

I do have one quarrel with the proxy advisers, though.  In an effort to grow, they’ve branched out into selling services to the corporations whose proxies they analyze.  To my mind, this is analogous to the pension consultants who also manage money or the accountants who have–to their regret–provided consulting services to audit clients.  In other words, it’s a conflict of interest.  They shouldn’t be doing this.

To see why, we only have to look at the sorry case of the accountants, whose consulting arms pressured their auditing colleagues to overlook problems with client firm’s accounts for fear of–or after threats of–losing lucrative consulting business if the auditors were too strict.

Even the possibility that this could take place with proxy advisers undermines their authority as pure ly objective sources.

 

proxy advisory firms–what they are and how they became powerful

June 2, 2015 By in proxy advisers Tags: , , , , Leave a comment

Dimon’s outburst

Jamie Dimon, the CEO of JP Morgan, went on a rant last week about proxy advisers, saying that US institutional investors have been “lazy” and “irresponsible” in using third-party advice to cast votes at the annual meetings of publicly traded companies.

What’s this about?

Mutual funds and ETFs are specialized investment corporations that sell shares to the investing public.  When you or I buy shares of a mutual fund , we have a claim on a certain portion of the fund’s investment portfolio of stocks or bonds.  But we don’t hold the stocks or bonds directly.  That’s the beauty of the mutual fund/ETF structure–that we can easily and cheaply buy into a diversified portfolio of, say 100, 500, or more names with a single transaction.

But it creates complications when shareholders, as owners, are asked to vote on corporate matters.

For stocks, every year each company holds an annual meeting of shareholders.  It sends a package of materials to each holder in advance.  The package includes general information, details of top management compensation, and a list of proposals that will be voted on by shareholders at the meeting.  There’s also a form for shareholders to cast their vote if they’re not going to attend the meeting in person and want to vote by proxy.

 Who votes the shares that are held in mutual funds and ETFs?

In the old days, when I entered the industry, basically no one did.  Voting the shares held by institutions was haphazard at best.

By the early 1990s, however, the SEC had made it clear to professional investment managers of mutual funds that this was unacceptable.  Managers have a fiduciary obligation to vote the shares in their funds for the benefit of their shareholders.

This presented a set of practical problems:

–in a group of strong-willed, egotistic, opinionated portfolio managers (the norm), it was hard to obtain a consensus on how to vote

–if managers were split, say, 3/2 on a particular voting item, should all the firm’s shares be voted the way the majority thought, or just the shares in the portfolios managed by the 3?

–how would the firm protect itself against shareholder lawsuits if an apparently sensible, well thought out voting decision turned out to have severe negative consequences?

–should the firm use in-house lawyers for legal counsel on decision-making or use outside counsel?

What a hassle!  …an obligation, yes, but also a hassle.

proxy advisers to the “rescue”

Much in the way that person consultants serve institutional investors, proxy advisory firms arose to act as a form of insurance against lawsuits for investment managers.

Hiring one with experience, a large staff–including a bunch of in-house lawyers–also showed the SEC that you were taking your fiduciary duty on voting seriously.

It eliminated a lot of internal conflicts, as well.

Best of all, the proxy adviser could be paid in soft dollars.

More tomorrow.

Avago (AVGO) and Broadcom (BRCM) …and Intel/Altera

May 29, 2015 By in activist investing, mergers and acquisitions, semiconductor manufacturing, software, stock market, Technology Tags: , , , , , , , , , , , , Leave a comment

Two days ago the rumor hit Wall Street that chipmaker and serial acquirer AVGO had found its newest target, BRCM.  Yesterday the offer was announced:  cash and AVGO stock, in approximately 45/55 proportions, totaling $37 billion.

my thoughts

When customers in a given industry group become bigger and more powerful, the natural response among suppliers is to do the same.  This is part of what is going on here.  More than that, AVGO appears to seek out companies whose technological virtuosity far outstrips their management skills.  So it gains not only the marketing benefit of size but also the rewards of improving the profitability of firms whose main virtue has been their intellectual property.

What’s striking about this deal is that in revenue terms AVGO is more than doubling its size.  Although I have no intention of selling the AVGO shares I own, experience says that acquirers often bite off more than they can chew when they make the jump from small acquisitions to super-size ones like this.

One of AVGO’s rumored other targets had been Xilinx (XLNX), the junior partner with Altera (ALTR) in the field programmable gate array duopoly.  I had thought that ALTR would feel more favorably disposed to overtures being made by Intel (INTC), given the possibility that AVGO would buy XLNX and turn the firm into a much more aggressive competitor.  That threat is now gone.  INTC must now rely on pressure on ALTR management from its major shareholders (shareholders are, after all, legally the owners of ALTR and the employers of management) to return to the negotiating table.

As a practical matter, managements have a lot of autonomy, despite the fact that we the shareholders are, technically speaking, the bosses.  Wall Street seems to believe that ALTR is holding out for a higher price from INTC.  While that may be the rhetoric being used, I think the real issue is more basic.  Who would want to go from being the master of all he surveys as the top dog (and treated as a demigod) at a major publicly traded company to being a near-invisible division head in a conglomerate?

return potential for US stocks–suppose Goldman is right?

May 28, 2015 By in bond market, Investment firms, stock market, Strategy Tags: , , , 1 Comment

Yesterday I wrote about the view of Goldman equity strategist David Kostin that, on a capital changes basis (i.e. , not counting dividends), the US stock market will be flat over the coming 12 months and will edge higher at only about a 2% annual rate for at least several years after.  Collecting dividends will be a major source of total returns.  In fact, if the reason for this sub-par showing (by historical standards) is that earnings will grow but price earnings multiples will contract as interest rates rise (I’ve only read a bare-bones summary of Mr. Kostin’s view), then dividends may be the major source of returns.

Let’s suppose Mr. Kostin is right.  What does this mean for investors?

my thoughts

1.  Losing stocks will be devastating.  Large losses always hurt more than large gains.  But a strongly rising market tends to act somewhat like a safety net to cushion the fall, as well as offering a chance to catch the next shooting star to make up for the mistake.  A flat market is less forgiving, and will presumably offer fewer chances to recoup from losses.

2.  One or two winners will probably be enough to make a portfolio manager’s year.  Careful securities analysis will be rewarded with outperformance, provided a manager can avoid having big losers.  Again, this is nothing new–although the idea that having a ton of stocks you spend only a little about is not as good a strategy as having a few you know inside out has eluded academics until recently.

3.  Trading stocks, aka market timing–a tactic reviled in investment folklore–probably becomes more important as a source of performance (maybe this is why GS is content to let Mr. Kostin publish).  This will be doubly so for non-taxable accounts.

If we truly believe the major trend is sideways, buying and selling portions of positions based on valuation–especially in the case of stable, mature companies–becomes a more attractive strategy.  This is sort of like bunting for a base hit–you need a lot of successes to score a run.  But it may be the only way to get on the board if the market is throwing blanks.

4.  For institutions, trading through derivatives–maybe in the same fashion big bond funds operate–would provide liquidity and speed that gigantic portfolios can’t get otherwise.  Custom-tailored OTC derivatives may be the most preferred.  Not for you and me, but probably for the largest money management houses.  Great for brokers’ profits, too.