Monday, June 24, 2013

Ozymandias and the banks

I read a broker note today which described China's Ozymandian (and bank funded) urbanization program. But then the banks have always lent towards Ozymandias.

Here - framed for irony - is UBS paying Ben Kingsley to read the classic Shelley poem.


Friday, June 21, 2013

The conflict between managing funds and selling funds

BT Australia - before it was purchased by Principal Financial Group for AUD2.1 billion - was the dominant independent fund manager in Australia. Its position seemingly secured by a very good (albeit aging) record of funds management and an unbeatable sales force. That $2.1 billion was paid in the third quarter of 1999.

And then it all went wrong.

The bellwether for a spectacular decline was the launch of the TIME fund. TIME stood for Technology, Internet, Media and Entertainment. The launch date I believe was 14 March 2000, the exact date the NASDAQ peaked. Here is an article from May 2000 expecting 15-20 percent annual returns.

It did not work out quite that well.

As the 2003 Form 10K for Principal says:

On October 31, 2002, we sold substantially all of BT Financial Group to Westpac Banking Corporation ("Westpac") for proceeds of A$900.0 million Australian dollars ("A$") (U.S. $499.4 million), and future contingent proceeds in 2004 of up to A$150.0 million (approximately U.S. $80.0 million). The contingent proceeds will be based on Westpac's future success in growing retail funds under management. 
The decision to sell BT Financial Group was made with a view toward focusing our resources, executing on core strategic priorities and meeting shareholder expectations. Changing market dynamics since our acquisition of BT Financial Group, including industry consolidation, led us to conclude that the interests of The Principal shareholders, BT Financial Group clients and staff would be best served under Westpac's ownership.

Westpac later largely closed the funds management part of the business.

In three years the business was largely destroyed along with the career and reputation of the then Principal CEO.

The "retrospectoscope"* is a fine instrument - but it is still obvious what happened. BT launched a tech fund at the height of the dot-com boom because it was easy to sell. They put "sexy" dot-com stocks in their portfolio because they made the product easier to sell. And they burnt their clients beyond a cinder of recognition.

Pretty it was not.

They did it because they got led by their sales force. If you do what the sales force wants and you have a competent sales force you will sell lots of funds. As a funds management business you will be big and profitable.

But the target for BT Funds Management's sales force was a financial planner in Doncaster (10 miles from Melbourne) with gold-rim spectacles (or the same in Parramatta or any other middle suburban Australian center). These guys are the modern bell-boys. Whey they are putting their clients into tech stocks there is nobody left to sell to.

And so it is - the most extreme example I have ever seen of the conflict between managing money and selling funds management products.

Imagine the patter

I wish I had a recording of a BT "sales call" from say April 2000. The market was off pretty hard - but all was OK in the financial planner in Doncaster. Economic growth looked great. The record for the NASDAQ measured in Australian dollars was astounding - not only because the NASDAQ was astounding but the AUD had collapsed to below 50c in the dollar.

The image projected would have been competence, technical sophistication and certainty.

About this time I ran into David Drury, then CEO of Principal at a CSFB insurance conference in New York. He found out I was Australian and regaled a circled crowd with his version of the BT mid-2000 spin. BT Funds Management was a very fine asset. Later I told two of the people in the circle that I thought the acquisition would cost him his career - but I did not have the courage to tell Mr Drury himself. In my memory I like to kid myself I did have that courage - but whilst I had that view I was racked with doubt about it. Mr Drury was an important man with an illustrious career, BT had a great reputation and I was just a junior analyst.

Mr Drury was a better salesman than I will ever be. He projected the illusion of certainty. [See here and here for a discussion about that illusion...]

Good spin versus good funds management

What makes for good funds management is -

(a) contentious, but well thought through opinions,

and in direct contrast,

(b) doubt sufficient to make sure the downside is always well covered

This is a schizoid requirement. People who have both these features are strange - flat out weird.  People with only (a) are engaging but dangerous.

At Bronte we have both - but only because there are two of us. I am the contentious one. My business partner - his job is to extinguish any passions that I might have. [He is a real spoilsport - ed.]

How to manage financial product salesmen

A good financial product salesman knows things that a fund manager can't know. He knows for instance what is going through the mind of that financial planner with gold-rimmed spectacles in Doncaster. He knows what will sell.

At best he knows how to craft the message so that it will sell, so that it will not trigger any red-flags, so that it will make the recipient comfortable.

And that is good, you can say things in a glass half-empty way or glass half full way without bending the truth. Trivial example: risks are a bad thing, so focusing on the the risks does not sell your product whereas risk management is a good thing so focusing on that might help you sell. You can't actually do good risk management unless you focus on risks - but the angst that gives a good fund manager need not be seen by clients. A good salesman will hide that angst because - well - what sells is the illusion of certainty.

But a salesman who drives changes in the product because, so changed, the product will sell better is on the path that eventually destroyed both BT and Mr Drury's career. And good sales people are empathetic to the needs and desires of their targets so that is the path they tread...

But it is a dangerous path. Really dangerous.

I know (and respect) a fund manager with a very harsh solution to this. When the salesman tells him how to design his product he gives him a warning. The second time he fires him.

He has gone through a few sales people. And eventually he sold lots of product because the performance was too good to ignore.

But it is harsh, unpleasant and not very effective as a sales strategy.

Anyone got a better idea?


*Retrospectoscope is - to my knowledge - a Trade Mark of Platinum Asset Management - a very fine firm who took over BT's dominant Australian position.

Monday, June 17, 2013

Self assessment Monday: an old letter to a client...

About two years ago I wrote a letter to our foundation client about how we viewed the equity markets. Mike* had sent Bronte a profoundly bearish broker note.

I posted the letter on the blog. The original (reproduced below) can be found at this link.

Dear Mike 
The bear case always sounds intellectually more convincing than the bull case. And it is in this broker note too. Intellectual sounding and convincing. 
But America is still an amazingly innovative country, humans are ingenious and most of the imbalances will sort themselves out. Big cap equities are cheap relative to almost all other assets (especially relative to small cap equities, cash and bonds and to many assets such as commercial property that require leverage). Cash yields almost minus 3 percent after inflation and less post tax. Bonds are scary as hell and yield minus 1% after tax and inflation. 
Big though difficult-to-run companies are at low teens multiples.  Great franchises are at mid-teens multiples.  Tesco (UK) which is a truly great franchise - is at a 14 PE ratio. And the Pound is historically cheap. WalMart and Target - both slightly less good franchises - are at 12 times. The difficult parts of Silicon Valley (eg HP) are well under 10 times PE ratios (and we feel no need to own that one). The less difficult parts of Silicon Valley (Google for instance) are at a high teens PE ratio once you take out the excess cash. We own that. 
Own equities.  Don't kid yourself.  Mega-cap equities are generationally cheap compared to other assets - and certainly compared to the cash/bond/levered asset complex. 
Just don't be blind about it. The places that there have been high returns (Asia, small caps, smaller resource companies) are riddled with fraud. Twenty five years of deregulation and the high levels of innovation mean we have high and rising levels of stock fraud. Fortunately there is much less fraud risk in mega-caps. 
Don't own Australia or the iron-ore-coal-steel complex. It has run too far and has been too easy to make money. Too many stupid/aggressive/greedy people are doing too much expansion. Some of these people are stupid - but they have made much more money than you or me so they must be right!
I can find dozens of reasons to be bearish - but I look at it dispassionately and I am bullish on big caps, and bullish on America. The problems will sort themselves out and the American exceptionalism (decent institutions, free enough markets and a willingness to take risks) will work their magic again. 
Anything that takes you out of real assets (businesses and property that generate real cash flow) and puts you into nominal assets is - with a ten year time-frame - a bad idea. (And why is your personal account any shorter dated than that?) 
Just don't get greedy by buying things you do not understand: you will be ripped off. The underlying fraud level is as high as I have ever seen it.
Oh, and we are also bullish on France and Germany. Old Europe has manufacturing and production power of enormous levels. (Remember what they produced to fight wars? Their productive capacity is very high and Americans have forgotten that. They do engineering as well as anybody. And Germany no longer has a restrictive monetary policy to crush its consumer market.) 
Also the French are in that lovely position of having convinced newly rich Asians that they are the arbiters of good taste. There are few higher ROE businesses. France has played Asia better than America.
We can see plenty of reasons to be bearish - but just the frauds makes our portfolio short enough. Indeed we are plenty short and likely to remain so until I can't find frauds with ease.
Beyond that, there is a lot of pessimism around. It has got to be time to be bullish. We certainly do not desire being 125 percent net long or hyper-aggressive like that - but we will take steps to become incrementally longer. We are if anything too short.


At Bronte we have done pretty well in the past two years - and a good part of the reason can be seen in this letter. Still it is worth assessing how we went on a line by line basis.

The starting call - Tesco which we still own has not been great and the turnaround is appearing more difficult. That was a dud.

The Great British Pound is slightly cheaper compared to the USD so that was also a dud. It was a dud we doubled down on by buying a large stake in Vodafone.

Walmart and Target have both been fine investments; up about 40 percent plus dividends. We only owned Target. It is pretty hard to pick the charts apart but we suspect that operationally we might be in the wrong stock. We did not think that income disparity in the US would continue to widen. However it has and a widening income disparity favors Walmart over Target. [Target is just too up-market.] Also we think the very-cheap-very-diversified retailers are the last ones displaced by the web. Walmart is about the safest name in retail.

Hewlett Packard, which we explicitly stated we did not own, was an okay short over that time. We were short but we did not do as well as the chart suggests as we were too aggressive with put options on the premise of an underfunded pension fund – which proved unfounded.

Google which we owned has been a fine stock. However after the appreciation we own much less of it. We were about 7 percent in the stock at $550 and are just above 4 percent in the stock at $870.

Explicitly not owning the Australian iron-ore-coal-steel complex has been a good call. We were short a few iron-ore names. Those mostly worked for us.

Our French and German industrial names have had more than adequate returns. Our French liquor companies have continued to sell a lot of highly priced Cognac in Asia.

The place we have been mostly wrong is on shorting some frauds. We have had irregular wins in this [alas we will not name names]. We have also had a few losses. This is a bull market and bull markets tend not to be the time-or-place for exposing frauds. Still our short book is not an abject failure.  It contains a few wins and very few disasters. The most prominent loss was that we bet hard that the Focus Media acquisition would not close. Focus Media has very funky accounts - but that did not stop a multi-billion dollar acquisition.

The general call to be long big-cap stocks and avoiding Asia/China/Resources was not a bad call. This continues to be our call but we are far less convinced about it now than we were two years ago simply because the price has changed.

Where to now?

I have another person - a close friend - who has just lost her job and wants some financial advice. I would love to give it to her - but I am finding it extremely difficult to write anything as clear and well supported as the advice above.


*Mike is not his real name.

Wednesday, June 12, 2013

Vodafone - Kabel Deutschland: Meet Vittorio Colao - the new Sir Fred Goodwin

Vodafone it seems has made an "informal bid" for Kabel Deutschland.

We have a largish position in Vodafone - some of which we feel compelled to sell. I want to put on the record that I believe this is a nasty diminution of shareholder value and continues the management-board record of incompetence at Vodafone.

I live in Australia - and I have other commitments - so I do not want to run a spill of Vodafone's board myself - but I am happy - indeed eager - to encourage other people to do so.

If any large shareholders in Vodafone wish to organize a spill of the board please contact me. We will be more than willing to participate and will use this blog as a platform to publicize the cause. [We cannot do it ourselves - Bronte is a small operation without sufficient resources to take on a large company.]

For the record though - this blog has only ever taken on one major British CEO. I did it early when I did a series of posts labelled "Sir Fred Goodwin Death Watch". Here is the original one. Royal Bank of Scotland was then still above GBP5 per share. I was also - well before I started this blog - one of the sources for this story in Fortune about RBS.

Vittorio Colao the urbane but seemingly incompetent CEO of Vodafone is the new Sir Fred Goodwin.


Tuesday, June 11, 2013

Self assessment Tuesday: Alan Jones and Facebook... #fail

A while ago I wrote about Alan Jones - a right-wing radio shock-jock in Australia with a well organized Facebook campaign against him.

I did not think Jones could survive the onslaught - new media I thought won.

I bet my business partner $50 that Jones would be chased off air.

I lost - and $50 duly traded hands although I took until today to pay him.

My faith in the power of Facebook to change the world is reduced. Not so keen on FB stock either any more - I find myself using FB less and less...

Worse: my thirteen year old son is not nagging me to allow him a Facebook page.


PS. We made a small profit on Facebook stock mostly via selling put options which eventually delivered to us at an average cost in the low 20s. We sold a few calls (and much was called away from us) in the mid to high 20s. I consider this luck. I used to think that FB was a "no brainer" in the low 20s. Not so sure any more.

Thursday, June 6, 2013

Please please China - make my day

China is threatening to impose punitive tariffs on European wine exports in a tit-for-tat retaliation for tariffs on solar panels.

Peter Thal Larsen (Reuters - Breaking Views) tweeted that some Europeans would like that.

I would love it.

The Australian wine industry would recover - and get a stronger entry to China than ever before.

And the reduced demand for good French plonk would lower its price - making it cheaper to develop a very refined palate.

Trade wars: bring 'em on.


Wednesday, June 5, 2013

Short selling and misrepresenting the truth - Infitialis edition

I am a short-seller by inclination. Moreover I short mostly frauds and stock promotes.

If you are going to call these publicly you need to be purer than Snow White. Alas I am finding some shorts I respect to be drifting.

I am going to pick on one - Infitialis - an anonymous group. This group (I am assuming there is more than one of them) have been pretty good getting more than a few things right. I read them because some of the analysis is good.

But they are also into the misrepresentation game. This table from a recent report is just slimey:

It purports to show a track record - but it measures everything against the "subsequent low".

Hey - wouldn't you love it if you could be paid performance fees on your long versus their "subsequent high" and performance fees on your shorts versus their "subsequent low"?

This is misleading accounting. Infitialis knows better and should behave better.


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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.