The ground shifted last week when Big Oil suffered an unprecedented horrible, no good, very bad day.
And another quake may be coming this week from the world of central banking. Beginning today, central bankers from China to the US will join with Christine Lagarde and other notable economists for an unprecedented conference about “green swans” — the fear that climate change poses under-appreciated risks to economies.
The conference attendees will be discussing whether central bankers are barrelling into the climate fight to the detriment of their primary mandates.
In an exclusive interview, France’s central bank governor François Villeroy de Galhau told Moral Money progress had been much quicker than expected on new climate risk disclosure rules and an international framework could be agreed at November’s UN COP26 climate conference in Glasgow, and insisted he that climate risk and inflation concerns were intertwined. Read on. Gillian Tett
PS: last week we asked you whether this proxy season marks a turning point for executive pay. Fifty-three per cent of respondents said no.
Banque de France governor defends climate action
This interview transcript has been edited for length and clarity.
Moral Money: You say [addressing climate risk] is not mission creep but some still worry about interfering with your main mandate, which is price stability. Is it right for the ECB to do this? Is it legal?
François Villeroy: We cannot substitute the necessity of a carbon price, but let me stress why it is not mission creep. On the contrary, it is an imperative for us, consistent with our other mandate of financial stability and price stability.
The clearest message from the NGFS [Network for Greening the Financial System] is to say that climate-related risks are part of financial risks. And so for financial institutions and supervisors as well, it’s not a nice-to-have. It’s not part of [corporate social responsibility]. It is a must-have and it’s part of risk management.
If, as a financial institution, you don’t manage your climate-related risk and if as a supervisor, you don’t look at them [then] you miss your first duty — a duty to financial stability.
MM: Monetary policy is the more controversial area, but it’s probably an area where your impact isn’t going to be as significant as it is through your role as financial supervisor.
FV: There is, as you know, in Europe this question of the secondary mandate — which is about the environment. But let us focus on the primary mandate of price stability. If we had only this primary mandate we would [still] have to deal with climate change — and for obvious reasons because climate change affects economic growth and the level of prices in the long run. Nobody doubts that.
But I can also give you an example in the short run. Three years ago we had a slowdown in German activity with effects on the output gap and on prices and it was due to the low level of the Rhine.
Hence, one of the challenges we have is to better incorporate climate change’s effect on our economic modelling. This is not an easy task. But this is, for me, the first necessary step for greening our monetary policy.
MM: You talked in February about decarbonising the ECB balance sheet and tilting your asset purchases away from the most carbon intensive assets. Can you explain how that would work?
FV: No, this is not exactly what I said. I suggested three tools [for gradual decarbonisation]. The first one is modelling. We have to work on a better analysis of the economic effects of climate change. This raises several serious methodological challenges. We work with the best scientific institutes. We published our first scenarios in June 2020, and will update them each year starting next week.
The second tool I suggested is disclosure. We will have to disclose our climate-related risks, and to impose some disclosure to counterparties, which have a very powerful exemplarity effect.
And third, it is about our operations. For me, we will have to incorporate climate-related risk in the assessment of both our collateral and our asset purchases, but focused on corporations. We have data already on their climate alignment. We should use this data to build progressively to our asset purchases on corporates and our collateral policy.
This is my view, my conviction. We are discussing it in the [ECB] governing council and we will see when Christine Lagarde will publish its review next autumn. And I strongly hope we can go in this direction as quickly as possible.
MM: Will climate risk be incorporated into the capital requirements that are set for banks?
FV: We are not yet there, but the first very important step is to adequately measure climate-related risk in the long run.
What we have learned in our unprecedented [stress test] exercise is that the main risk for banks is transition risk, more than physical risk. Transition risks could increase in 30 years in the long-term view between one-quarter and one-third. We still have to work on the precise measure: I am confident NGFS will deliver on stress test methodology in the year to come.
Is it an orderly transition or a delayed one? We all know we will have to increase carbon prices, the more orderly it is the lower the risks are.
The second dimension is that there is a clear difference in financial institutions that have a static approach to their balance sheets and those that have a dynamic approach. Dynamic meaning I adapt my exposure to climate risk.
It is already a powerful tool for banks themselves to reflect on their strategy and adapt it.
MM: About the Banque de France’s climate stress test results, what surprised you?
FV: The positive surprise was strong voluntary involvement from banks and insurance companies. All big financial institutions took part.
The second surprise perhaps was that we expected insurance companies to have a strong technical advantage over banks because it is long term and they are more used to thinking about climate. It was true for physical risks — without any doubt. But as a general rule, physical risk is limited.
For transition risks, banks were ahead and insurance a bit behind.
Coke’s river clean-up looks beyond the bottle line
Three years ago, Coca-Cola set out to cut its contribution to the world’s glut of plastic waste, saying it would make its packaging fully recyclable by 2025 and recycle one bottle or can for every one it sells by 2030.
Some greeted the pledge sceptically: as the Changing Markets Foundation reported last September, Coke has missed previous recycling targets. But the group behind Sprite and Dasani will take another step towards its “World Without Waste” goals today by unveiling a partnership with The Ocean Cleanup.
Moral Money readers will have seen the TED-talking Boyan Slat explain how he started the project when he was 18 after seeing more plastic bags than fish on a diving trip. He focused first on ocean garbage patches, but started thinking about the arteries that pump plastic into the sea, launching a solar-powered “interceptor” in 2019 to collect flotsam from the world’s 1,000 worst offending rivers.
Slat has rolled out just three of his €550,000 Interceptors but Coke will help take that to 15 over 18 months, with the hope of extending the partnership further.
Slat and Brian Smith, Coca-Cola’s chief operating officer, aren’t saying how much money the company has committed, but they told Moral Money that its connections would be as important as its cash. Coke will mobilise bottlers, the recycling companies it already uses and its government connections to speed deployment.
Whatever the cost, Coke does not regard this as philanthropy. “We see it as a licence to continue operating,” Smith said.
That captures a shift since The Ocean Cleanup began in 2013, Slat says: “Companies recognise more and more that they have an important role to play in society beyond just the bottom line.”
Coke also plans to put its marketing muscle behind an initiative that should provide some good PR. As Smith put it: “We just need to . . . hit people in the heart to say this is something that needs doing.” (Andrew Edgecliffe-Johnson)
Tips from Tamami
Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.
It’s been an exciting time for ESG investors to participate in China’s green transformation, as the world’s largest emitter has become the biggest green bond market in the world, surpassing the US.
But the concern of greenwashing is also rising, despite Beijing’s commitment to achieving net zero by 2060.
China’s carbon neutral bonds fail to restrict the use of funds to green projects, the Institute for Energy Economics and Financial Analysis said, in a warning to ESG investors.
IEEFA’s research found that 30 per cent of proceeds from Yuan-denominated carbon neutral bonds issued by the top state-owned power companies were to be allocated to the working capital of the issuers, whose core businesses were still coal power.
“Chinese financial market regulators need to take a serious look at how the country’s state-owned enterprises are using the proceeds of their green bonds,” said Christina Ng, research and stakeholder engagement leader at IEEFA.
Yi Gang, governor of People’s Bank of China, who has been keen to improve the country’s green finance standards as part of an effort to attract foreign investors, is also participating in the Green Swan conference. We will keep you updated on his remarks on the matter.
Grit in the oyster
Many companies and investors (and governments) say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.
Despite government pledges to “build back greener” and cut carbon emissions, more than half of $372bn in Covid recovery funds given by G7 countries to energy-producing and consuming activities was for coal, oil and gas.
And most of the money was handed over “no strings attached” without any demands on the companies receiving help to reduce their carbon footprint.
‘Womenomics’ advocate Kathy Matsui debuts venture capital fund (Nikkei)
How to Tell if a Company’s Claim of Ethical Practices Is True (NYTimes)
MBA graduates take on a green hue as fewer choose fossil fuel careers (FT)
Record metals boom may threaten transition to green energy (Guardian)
Supervisors step up pressure on banks to tackle climate risk (FT)
Volvo Cars posts record results as sector bounces back from Covid slump
Volvo Car AB updates
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Volvo Cars posted its best-ever first-half results despite the shortage in semiconductors, as the automotive industry rebounded from last year’s pandemic slump.
A quarter of the vehicles sold by the Geely-owned group were chargeable in the first six months of this year, putting it on track to become a fully electric car company by 2030. This was the highest proportion of total sales among traditional carmakers, the company said.
The group made operating income of SKr13bn ($3.6bn) in the six months to June, reversing last year’s first-half loss, on revenues that rose 26 per cent year on year to SKr141bn due to strong demand.
Compared with the first six months of 2019, the number of cars sold rose 12 per cent to a record 380,757, taking its rolling 12-month total close to 800,000.
Hakan Samuelsson, chief executive of Volvo Cars, predicted that the semiconductor shortage would hold back growth in the remainder of the year and spill over into 2022.
“Unless supply of semiconductors improves, we expect flat sales and revenue growth for the second half year compared with the same period last year, despite strong customer demand,” he said.
The company said it was still evaluating the possibility of an initial public offering in Stockholm this year, which was first announced in May.
Two days earlier, it agreed with Geely that it would buy its parent’s stake in the companies’ joint ventures in China, allowing it to take full ownership of factories and sales operations in the country and potentially boosting the price if the company floats.
Ex-chair of world’s biggest pension fund sounds caution on ESG
Government Pension Investment Fund Japan updates
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The ex-chair of the board of the world’s largest pension fund, who oversaw its $1.7tn portfolio as it became a pioneer of responsible investment, has warned the institution to remember its core duty to Japanese pensioners: returns.
“The GPIF [Government Pension Investment Fund] must always go back to its investment purpose,” says Eiji Hirano, who stood down from the job three months ago. His comments reflect concerns that too great a focus on environmental, social and governance (ESG) standards can add risk, including a possible collision between the law and the investment philosophy under the GPIF’s previous regime.
According to the law under which the GPIF operates, it must invest with the sole purpose of benefiting Japanese citizens through the returns generated. And Hirano says GPIF is well aware of that obligation — emphasising that he does not think it has strayed from that principle since he left.
But he adds: “There is always a potential danger that GPIF money is misused,” stressing that the fund’s board should now be especially determined to act as a guardian against that.
Though carefully framed, Hirano’s comments highlight increasingly urgent questions over the future direction of the GPIF since the departure in March 2020 of its charismatic chief investment officer Hiromichi Mizuno. He was replaced by the more reclusive and media-shy Eiji Ueda, a former Goldman Sachs bond trader.
The Mizuno revolution
During Mizuno’s five-year tenure, he sought to turn the once sleepy-looking GPIF into a global symbol of more modern Japanese thinking. His time there roughly coincided with the arrival of Japan’s stewardship and governance codes. These new guidelines were designed not only to precipitate practical changes in corporate Japan, but also to reinforce the idea that the country’s equity market was tackling some of the problems that had tarnished its reputation among both foreign and domestic investors.
Despite strict constraints on how the fund can operate — for example, it is unable to hold individual stocks and therefore cannot directly vote on companies’ policies — Mizuno was able to use the GPIF’s choice of external fund managers to project a tough stance on governance shortcomings at Japanese companies.
While this was happening, the GPIF pressed ahead with a historic — and still internally controversial — rebalancing away from government debt and towards stocks. It now splits its investment roughly equally between domestic and foreign bonds and domestic and foreign equities. These weightings will be revised again in 2025, and there is already speculation that the fund’s exposure to domestic Japanese equities may be reduced then.
But arguably Mizuno’s boldest achievement, which he proselytised about at Davos and other global financial forums, was yoking the GPIF name to the then fledgling theme of ESG investing. The campaign included what Mizuno himself described as the “epochal” decision to mandate index-compilers FTSE and MSCI to create ESG indices for the GPIF. It sent the message that the GPIF under his stewardship would regard ESG factors as financially relevant.
That, says Hirano, is one key area where debate is now focused. While there is increasing evidence that some aspects of ESG-themed strategies boost returns in the long term, he thinks many ESG proponents, including Mizuno, rely on the argument that it is “common sense” that this will be the case across the board.
But not all agree that the non-financial outcomes being pushed via ESG investment translate directly into the financial outcomes the GPIF is legally obliged to prioritise.
Shorters v stewards
A significant clash came in late 2019 when Mizuno announced that the GPIF would stop lending its global equity stocks to short sellers — who bet on share price falls. Although the move was controversial, prompting fierce debate within the fund because of the forgone revenues, Mizuno — who last year joined the board of Tesla, the carmaker led by outspoken anti-shorter Elon Musk — argued that the practice was antithetical to ESG principles.
“I never met a short seller who has a long-term perspective,” Mizuno told the Financial Times then, adding that he felt comfortable with the decision because it represented a choice between making cash immediately or being “better stewards for our constituency”.
Mizuno is also proud of adding two new concepts to the lexicon of ESG fund management: universal ownership and the cross-generational investor.
He explained to reporters earlier this year that the GPIF is so big that it essentially owns the whole investable “universe”, which means its focus should be “making the whole market better” rather than attempting the mathematically difficult feat of beating the market.
More stories from this report
As for the cross-generational investor, Mizuno said the idea is necessary to emphasise the long-term nature of ESG strategies.
Hirano, however, sounds a cautious note in his conversation with the FT. While agreeing that it is important to correct the market bias towards short-termism, he points to several outstanding concerns about the ESG narrative. These include the lack of a common evaluation system and a tendency to stress the environmental over the governance part of ESG.
He also admits to feeling uneasy about the large number of chief executives who emphasise the importance of ESG principles or the UN’s sustainable development goals.
The focus may be right, he says, but delivery depends on the still unproven determination and perseverance of all those leaders.
Corporate Japan gets serious about ESG
For Hitachi, the appointment of its first chief environment officer in April meant closing a critical gap in its sustainability efforts.
In recent years, the Japanese industrial group has undergone a radical makeover. It withdrew from its thermal power business, spent $6.4bn to buy Swiss-Swedish engineering group ABB’s electricity grid assets, and strengthened its global presence in railways.
Hitachi’s business mix has also left it better placed to seize new opportunities arising from climate change disruptions — more so than at any point in the group’s 111-year history.
Yet Alistair Dormer — whose April appointment means he now leads Hitachi’s environmental initiatives as well as its mobility business — says a tangible commitment by senior management to meet sustainability targets had still been missing.
“We were working on this for five years or so but it was almost being done in a corner of Tokyo,” Dormer explains. “We had senior-level sponsorship for sure, but who was worrying about it on a day-to-day basis and making it happen? That’s my job.”
Road maps required
Accountability is a common challenge for Japanese companies. With prime minister Yoshihide Suga pledging to achieve carbon neutrality by 2050, many companies have followed suit by setting long-term targets in addition to any existing sustainability goals. Honda, for example, wants to end the sale of petrol and diesel cars by 2040.
But few companies provide a detailed road map showing how they will go about achieving these ambitions.
“As a first step, it’s extremely important to present a target,” says Norichika Kanie, an expert on sustainable development at Keio University. “The next phase is making sure that real action is being taken. It is true, though, that more companies are now aware that efforts in sustainability lead to actual business success.”
At Hitachi, Dormer has led efforts to introduce a remuneration scheme for heads of business units that will tie annual bonus payments to hitting carbon emission targets. He also persuaded chief executive Toshiaki Higashihara to sponsor the COP26 climate change summit in the UK later this year.
“We need to be creative in how seriously executives engage with targets that are far into the future,” says Keiji Kojima, Hitachi’s newly appointed president. “It’s hard to take it forward when you’re thinking that you can leave it to the next generation. That’s why we made sure that everyone does their job thinking about the environment on a day-to-day basis.”
While measures to incorporate environmental, social and governance (ESG) metrics in annual executive pay are widespread in the US and Europe, Japanese companies are only now starting to introduce them. Entertainment group Sony and cosmetics business Shiseido are among those taking a lead.
A survey conducted by consultancy Willis Towers Watson last year suggested that 15 per cent of Japan’s top 100 companies by market capitalisation had such schemes in place. However, analysts estimate that the proportion is less than 5 per cent for the 2,000 or so companies listed within the Tokyo Stock Exchange’s first section.
That compares with 52 per cent of S&P 500 companies and 63 per cent of companies listed on the main European indices, according to the Willis Towers Watson research. Meanwhile, initiatives to link ESG to long-term incentives are far less common, both in Japan and elsewhere.
Takaaki Kushige, a senior director at Willis Towers Watson, says one reason for Japan’s tardiness in linking ESG to executive pay is that many businesses have governance structures that are not sophisticated enough. This, in turn, means they lack the kind of independent remuneration committees that can fairly assess ESG metrics, which are more complex than stock price and other financial indicators.
Cleaner and greener
Still, companies are increasingly keen to ensure that senior managers hit sustainability targets, as investments to cut carbon emissions become critically important in sectors that were built around fossil fuels.
Mitsubishi Heavy Industries, for example, is seeking to reinvent itself in clean energy as it tries to shift away from businesses such as coal power stations and shipbuilding. One key technology it is investing in is carbon capture, which was recently chosen by Drax, the FTSE 250 power company, for use at its main site in northern England to achieve “negative emissions”.
“The market [for carbon capture] does not exist yet, but if we wait for the market to be built, we won’t be able to achieve carbon neutrality by 2050,” says Makoto Susaki, head of MHI’s carbon capture, utilisation and storage business task force. “It’s very tough for us [financially] in the near term but we have to continue these efforts towards 2050.”
Even as companies scramble to raise their environmental game, pressure is growing to address other ESG concerns.
Executives say the challenge is even greater with social issues such as labour practices. Already, the supply chains of businesses ranging from Fast Retailing, owner of Uniqlo, to electronics group Panasonic have come under scrutiny.
Joji Tagawa, Nissan’s chief sustainability officer, says that, since his appointment in 2019, the carmaker’s management has strengthened its focus on human rights, alongside efforts to reduce carbon emissions and maximise recycling.
Last month, Nissan released global guidelines on human rights, which emphasised its opposition to forced and child labour and promised protection to whistleblowers. In recent years, campaigners have highlighted the dependence of electric vehicle makers such as Nissan on cobalt, some of which is mined in exploitative conditions in the Democratic Republic of Congo.
“The focus on human rights and sustainability has been increasing more than regular companies had anticipated,” Tagawa says.
“We are not perfect but we are working on it extensively.”
The game is still wide open
This year in markets cannot so far match the drama of 2020 — even in the wake of this week’s gyrations. As a test case of how fast risky asset prices can collapse and of the awe-inspiring power of central banks to drag them back up, last year was hard to beat.
But 2021 has provided its fair share of challenges both to professional fund managers and to the somewhat less serious pursuit that is the annual Financial Times stockpicking competition. Six months into this battle of cunning, wit and good old-fashioned luck, it is time to see how FT hacks and 700 or so of our considerably wiser readers are shaping up.
Now in its fifth year, the stockpicking contest is a simple fantasy exercise of selecting five stocks from the UK or US markets, and opting to go long (buy) or short (sell). Our data team — the real brains behind the entire FT operation — track how those shares perform over the course of the year, average them out, and use that to produce rankings of the make-believe portfolio managers.
For the sake of simplicity, the process ignores the effect of currency movements and dividend payments. Rather it is a blunt exercise: who picked stocks that went up, and who picked duds?
FT journalists were also invited — harassed even — to take part. Hacks operated under slightly different rules for internal reasons. But before you cry foul, do not assume the sages of Bracken House have outperformed external contestants.
At the end of the year, external winners are due, pandemic willing, to be rewarded with a tour of the FT offices near St Paul’s Cathedral in London. The true prize, however, is bragging rights, particularly in the (likely) event that the winner triumphs over the puny guesses of the FT insiders.
What market environment have contestants been dealing with?
Despite a generally more sedate start to this year than last, the dangers of running a concentrated portfolio — as this fictional exercise with just five stocks demands — have already been illustrated in style.
In March, Bill Hwang discovered the hard way that a tight focus on a small group of shares — in his case wrapped up in high-voltage derivatives — can leave you wiped out. The implosion of Archegos, his private investment group, was spectacular enough to bite multibillion dollar chunks out of his banks. Any contestant who avoids that fate will effectively beat an alumnus of Tiger Management, one of the best-respected hedge fund groups in history.
Stock pickers have also pitted their wits against a new and powerful force in US markets: retail traders. At the start of this year, have-a-go amateur traders jumped into previously unloved US stocks such as consoles retailer GameStop and cinema chain AMC Entertainment, with dramatic results.
So-called meme stocks, popularised online with coarse but often irresistibly funny jokes, ripped higher in late January, delivering a victory to the amateurs over a number of hedge funds that had been betting the other way. One hedge fund, Melvin Capital, was famously pushed into a bailout.
The starting gun for this stockpicking contest was February 1. Since then, meme stocks have experienced wildly different fortunes. By extension, contestants jumping into the craze have too.
The bond market has provided the bulk of the market drama, with government debt sliding in price in the first quarter of the year on nerves about sweeping inflation, pulling so-called value stocks higher, before steadying.
But broadly, this has been a supportive environment for our plucky punters. The global vaccine rollout and chipping away of lockdowns generated an 11 per cent rally in the MSCI Global index of stocks from the start of February to the end of June, the period captured by the performance figures here. US indices crept slowly but determinedly to record high after record high, with only this week’s wobble later breaking the rhythm.
What were the popular stock picks among readers?
By a long distance, the most popular bet was Tesla, the electric vehicle maker run by the mercurial Elon Musk. Over one-third of contestants picked it for their portfolio; 28 per cent were short.
Betting against Tesla stocks has been a fool’s errand for several years. Many investors, professional and otherwise, are uneasy about Musk’s unpredictable nature and awkward relationship with securities regulators. Many doubt that Tesla can keep up with demand and believe that other carmakers will catch up. All of that may be fair, but the more than 1,000 per cent ascent in Tesla’s share price since 2019 is hard to dispute.
Nonetheless, the hive mind of stockpicking contestants has wagered that this time is different. The rationale: after a more than 600 per cent rally since early 2020, shares appear ripe for a drop, especially as Musk devotes more energy to what he describes as the “hustle” of dogecoin, the cryptocurrency designed as a joke.
“The price has simply gone too high,” reader Stephen Pavey told us in explaining his decision to bet against the company. “The valuation of Tesla is bonkers,” said StJohn Brown in East Grinstead. “Way overvalued, not much else to say,” agreed Will Francis in Birmingham.
The strategy has shown promise in the opening months of the contest. From February 1, when we started the clock, to the end of June, Tesla shorts delivered a return of 19 per cent.
Large numbers of contestants have also bravely taken on the new armies of US retail traders.
After Tesla shorts, bets against GameStop — the original meme stock that found itself at the centre of a firestorm of retail buying in late January — are the second most popular pick of the competition. Nearly 18 per cent of contestants placed bets against the company, while just 1 per cent were long.
Among the shorts was Anthony Stamp from Bethnal Green in east London, who wagered that the retail trading frenzy at the start of this year would “burn itself out”.
“The possibility that GameStop is worth a fraction of its currently pumped-up valuation seems a lot higher than my chances of predicting the next tech unicorn or vaccine manufacturer,” he noted. Wise words.
The shorts have won the day so far, with a return of nearly 5 per cent. Before declaring victory over the real-life GameStop true believers, it is worth noting that shares are still a whacking 850 per cent above where they started the calendar year.
But the real kingmaker or widow-maker trade so far this year is fellow meme stock AMC. Nearly 4 per cent of all bets among readers were shorts on the company. In fact, the shares have gained around 300 per cent as the company succeeded in pulling itself back from the brink of bankruptcy. Four of the five contestants leading at this point were brave, lucky or skillful enough to back the stock.
Ayodeji Awolaja from Guildford is one of them, ranking a spectacular third in the competition so far, thanks in no small part to a positive bet on AMC stemming from the poetic and shrewd observation that “cinema will not die”.
The 25 worst performers in the competition so far, however, were all short.
One of them, Brian Mullens in Chicago, called GameStop right, but said AMC was “fundamentally and dramatically overvalued” and heading for a “precipitous decline”. Not yet, Brian, sorry.
Popular longs are largely clustered on the so-called reopening trade — stocks likely to do well as the world emerged from enforced hibernation. Airline EasyJet, travel accommodation group Airbnb and cruise operator Carnival all ranked among the most frequent picks. Performance has been mixed; EasyJet longs were up 19 per cent, and Carnival was up by a tasty 42 per cent at competition half-way cut-off time (it is now, dramatically, almost flat on the calendar year — you need good sea legs to stomach the waves of cruise stocks, it seems), while Airbnb was down 15 per cent.
Our contestants have not given up on the lockdown heroes — stocks that rocketed higher during global lockdowns while we were all stuck at home. Apple, one of the most popular longs, has gained 2 per cent since the close of February 1, while Amazon has gained 3 per cent.
Who is top of the pops among readers at the halfway point?
Take a bow Jonathan Northfield from London, whose average return of — wait for it — 213 per cent is many multiples beyond what the finest hedge funds have achieved this year. The average equity hedge fund placing positive and negative bets on stocks is up by around 13 per cent so far in 2021.
How has he done it? The Tesla short was deliberate. But dedicated investment professionals who spend hours poring over earnings reports and scouring smart data for tips will be excited to hear the rest of the portfolio selection was, he says, “random”.
Most of the gains came from a long bet on Moxian, a Nasdaq-listed Chinese technology company involved in online gaming and retail that has never even been mentioned in the FT before, judging from an online search. That stock is up by 1,159 per cent. Even a disastrous bet against MV Oil Trust, whose stock has more than doubled, has not been enough to blow him off course.
Second-placed Zhiwei Xiao, from Chongqing in China, is thus far sitting on an average return of over 100 per cent, flying high on gains by AMC and Tetra Technologies, an oil and gas services company that joined the Russell 3000 index this year after what the chief executive described as a “significant increase in our market capitalisation”.
Tesla shorts have helped to support the performance of a number of contestants with portfolio returns clustered around 20 per cent — a highly respectable job.
How are the FT journalists doing?
For practical reasons, the FT hacks’ entries were compiled using a different system that permitted them to choose any stock in the world, not just those in the US and UK. But, as in previous contests, they continue to trail behind the readers when it comes to market predictions.
The truly terrible performances are, once again, dominated by bets against AMC.
Dan McCrum, the prize-winning FT journalist whose forensic and thrilling reporting on the Wirecard fraud has rightly earned him the respect of peers and readers alike, was just one of the hacks to bomb with this bet. Despite decent performances in his shorts on Tesla and Nikola, other shorts on Warren Buffett’s Berkshire Hathaway and on AMC proved disastrous.
His average return of minus 60 per cent places him at the bottom of the pile, and also makes him one of the worst contestants in the whole competition, inside or outside the FT. I guess you can’t win them all, although McCrum, who is so far laughing off this humbling performance, does have time to turn it around.
Our leisure industries reporter Alice Hancock is also nursing a 58 per cent loss, again thanks largely to AMC, as is Miles Johnson, our man in Rome, who won the contest among FT journalists in the previous two years. The second half of 2021 will have to deliver something stunning to get him back on track to reclaim his crown.
Johnson cited a well-known financial adage to describe his position: “Markets can remain irrational longer than you can remain solvent.”
Laying early claims to the FT in-house bragging rights are Simeon Kerr in Dubai, with an average return of 33 per cent, Anna Gross in Paris on 29 per cent, Leo Lewis in Tokyo on 22 per cent and London-based Arash Massoudi, whose short-only portfolio has returned 21 per cent. None of them went near dreaded AMC shorts.
I confess I did not enter the competition this year. This is partly a matter of timing. Like every upstanding journalist, I file on deadline (that is, I leave everything to the last minute). This year that meant coming up with chosen stocks at the end of January — precisely the time when the GameStop story was blowing up and the workload was, let’s say, intense. This was the task that got away.
On some level, though, my pride is still bruised from the 2018 competition, when I figured the situation for construction company Carillion surely could not get much worse, and slapped it in my list of longs. It declared bankruptcy two weeks later. I won’t lie: that hurt my overall performance, and spoiled the fun of this challenge somewhat, though if I recall, a short on Carpetright, whose shares collapsed also that January and which later ended up being taken private, softened the blow to my portfolio.
Friends, relatives and newfound acquaintances frequently ask financial journalists for investment tips, and write off our shrugging insistence that we have no idea as false modesty. My unprofessional advice to you all is: we genuinely have no idea. Even the best competitors among us struggle to repeat a winning result.
Of course, I may turn out to be wrong about that too — but you will have to join us again early next year to find out. Good luck!
High costs dog Tokyo’s hydrogen buses
Tokyo 2020 is meant to be the “hydrogen Olympics” — a showcase for Japan’s aspiration to make the lightest element in the periodic table the fuel of the 21st century, and a central technology in the drive to net-zero carbon emissions.
After a team of Japanese engineers spent months developing a suitably colourful additive, the Olympic flame will burn hydrogen. The athletes’ village has been designed as a hydrogen society in miniature. What the world will take away, Japan hopes, is the image of a hyper-modern nation that has found the energy of the future.
“During the Olympics and Paralympics, cars and buses will run through the city powered by hydrogen, and the athletes’ village will run on electricity made from hydrogen,” said former prime minister Shinzo Abe in March 2020, as he geared up for a Games he later had to postpone for a year because of Covid-19.
Behind the hydrogen razzmatazz, however, the reality is considerably more prosaic — and nothing illustrates that better than the humble Tokyo bus. A central part of one of the world’s best public transport systems, the Tokyo network has introduced 100 fuel cell buses, made by Olympic sponsor Toyota.
Along with a fleet of hundreds of Toyota’s Mirai fuel cell cars, it is one of the most ambitious hydrogen experiments in the world. In a fuel cell, hydrogen reacts with oxygen to produce a flow of electricity, with water as the waste product. Hydrogen has a higher energy density than lithium batteries, making it particularly suitable for heavy vehicles such as buses.
The buses Tokyo has bought are a hit, according to Osamu Maekawa of the metropolitan government’s transportation bureau. “The feedback from the drivers is extremely good. The buses are quiet and have lots of power,” he says.
Nonetheless, having bought dozens in time for the Olympics, the city will not buy any more this year. The problem is cost. A fuel cell bus from Toyota costs ¥100m ($900,000) for a six-year lease. A diesel bus costs ¥24m ($220,000) and has a useful life of 15 years.
To get the initial 100 buses into service, the local and national authorities have paid subsidies covering 80 per cent of the lease cost. Even that is not enough to make them competitive.
“The fuel costs are also higher,” says Daisuke Harayama, who is in charge of operations at Tokyu Bus, a private company that has introduced two of the fuel-cell vehicles (FCVs). “The fuel cost is 2.6 times higher for FCVs over diesel.”
This reflects fundamental constraints: the high capital cost of the vehicle, with its complicated drive system and fuel cell full of exotic materials; the short lifespan, which is limited by the performance of the fuel cell; and the relatively high cost of hydrogen fuel.
There are also additional costs in time and money associated with early adoption. Operators have diesel fuel stands in their depots to refill buses in the evening, but the fuel cell buses must travel daily to one of a few hydrogen filling stations big enough for a bus.
The operators could bring costs down a little if they switched to hydrogen for all their buses, by installing fuel pumps in their depots, and sharing parts across the fleet. Yet they would still be far more expensive than diesel — and bus passengers will not tolerate higher fares.
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To make hydrogen feasible, manufacturers will have to cut prices hard. “If we can’t get the costs down close to diesel, then it’s going to be hard to continue this in the future,” says Maekawa.
Harayama has a similar view about the short term. “I think it’ll be hard to go to fuel cells for now,” he says. “We don’t look at it as whether fuel cells are good or bad. There’ll come a time when we can no longer use diesel so we need to think about the options.”
Where the bus experiment does make a difference is by increasing the demand for hydrogen and supporting the refuelling infrastructure that will be essential if it is ever to become mainstream.
“Running the buses creates a big increase in H₂ demand,” says Maekawa. The buses run all day, unlike cars that mostly stay parked. “To have an H₂ bus in operation is equivalent to having 50 fuel cell vehicles on the road.”
The most fundamental issue for all Japan’s hydrogen aspirations is where that fuel comes from. At present, it is mainly made from natural gas at existing chemical plants, in a process that emits plenty of carbon dioxide.
In the future, Japan hopes to import large amounts of hydrogen from countries such as Australia, where it will be made from coal, with the carbon captured and stored, or produced using green electricity such as solar.
For now, however, the environmental benefit of the buses that will ship Olympic athletes and officials around the city is hypothetical. The Olympic flame will burn prettily, but to make a true transition to a hydrogen society will require years of patient effort — and some big breakthroughs on cost.
US regulator fines UBS $8m over volatility ETP
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UBS Financial Services will pay $8.1m to settle allegations that it had faulty policies and procedures that led to clients holding a short-term, volatility-linked exchange traded product for longer than they should have, the Securities and Exchange Commission announced earlier this week.
Between at least January 2016 and January 2018, financial advisers in UBS’s discretionary Portfolio Management Program purchased and held the iPath S&P 500 VIX Short-Term Futures ETN, or VXX, for clients for a longer period of time than it was intended to be held, the SEC’s order said. The ETN is designed to be held for a few days, but the New Jersey-based subsidiary of the Swiss multinational investment bank had hundreds of accounts that held the product for more than a year.
Accounts that held VXX for more than a year lost more than 75 per cent of the value of their VXX holdings, the SEC found.
UBS neither admitted nor denied the findings, the SEC’s order stated.
The VXX, which is listed on NYSE Arca, is a volatility-linked exchange-traded note that tracks the S&P 500 VIX Short-Term Futures Index Total Return, the order said. The benchmark offers exposure to futures contracts of specified maturities on the VIX, a volatility index.
When VXX was initially pitched to UBS’s ETP review committee in 2009, issuer representatives noted that it was “inappropriate to hold the VXX for extended periods”, according to the SEC’s order. UBS’s review committee initially allowed the ETP to be sold on UBS’s brokerage platform. However, the committee soon restricted the sales of the VXX to brokerage clients, and in 2011, it banned UBS brokerage representatives from soliciting the product altogether.
By 2016, the committee only allowed the product to be sold unsolicited to customers with more than $1m in net worth and an aggressive risk profile. In 2017, the net worth threshold increased to $10m.
On several occasions in 2015 and 2016, UBS management committees warned internal financial advisers about the product’s long-term risks, the order found.
However, the equivalent restrictions were not in place for the fund advisers in its discretionary account advisory programme, the SEC said.
Such advisers with more than five years of experience could invest client assets in VXX. In addition, UBS did not restrict their use of the product to certain strategies or by client risk profile, net worth or income.
“Although UBS implemented holding period monitoring and restrictions with respect to another category of complex ETPs, inverse ETFs, UBS did not do so with respect to volatility-linked ETPs such as VXX,” the order stated.
Several fund advisers stated that they viewed VXX as a hedging instrument and did not account for its investment time horizon. “As a result, these [advisers] could not make a reasonable determination as to whether VXX was a suitable investment for their clients,” the order found.
The SEC’s order was likely motivated by investor protection concerns, said James Tierney, a law professor at the Nebraska College of Law and a former senior counsel in the SEC’s Office of the General Counsel.
“Some of UBS’s advisers really didn’t understand the risks involved with these volatility-linked products,” Tierney added.
UBS advisers were forbidden from investing more than 3 per cent of an account’s assets in the products, the order noted. However, UBS failed to monitor and enforce this rule, the order stated. Between January 2016 and August 2017, 38 advisers held excess concentrations of VXX in 637 accounts.
“The way this happened was pretty egregious,” said Amy Lynch, founder and president of FrontLine Compliance. “They weren’t even following their own policy and procedure, which is to monitor the concentration risk.”
In October 2017, UBS’s management committees recognised that UBS advisers were misusing the VXX. They banned further purchases and told current holders to exit their position by January 2018.
UBS’s decision to take remedial actions prior to being contacted by the SEC helped their settlement negotiation position, Tierney said. “Firms don’t get the same kind of credit for remedial efforts taken only after someone noticed,” he added.
The SEC ordered UBS to pay $96,344 in disgorgement, $15,930 in prejudgment interest and an $8m civil penalty.
“Advisory firms must protect clients from inappropriate investments in complex financial products,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “We will continue to scrutinise firms’ policies and procedures related to these risky products, and we will take action when they are inadequate.”
“UBS is pleased to have resolved this matter related to the firm’s policies and procedures for one product in one of its discretionary trading programmes between 2016 and 2018,” UBS said. “As the SEC acknowledged, UBS proactively reviewed and removed the product from its programme before being contacted by the SEC.”
This settlement is the sixth arising from the SEC’s ETP Initiative. Last November, the SEC settled with five groups over holding on to volatility-linked ETPs for longer than they were designed.
In May, the SEC settled with S&P Dow Jones Indices over disseminating stale data about the S&P 500 VIX Short Term Futures Index ER during a period of market volatility.
*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignites.com.
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