EU divided over reforms to maligned fund performance rules
European Commission and MEPs warn regulator over watering down Priips performance scenarios decried as misleading
EU lawmakers and regulators are at loggerheads over how to reform wildly misleading fund performance disclosures, dealing a blow to fund managers and consumer groups hoping for a reprieve from the much-maligned rules.
The rift between the EU’s executive arm and its main financial supervisor has exploded as policymakers seek to rectify widespread problems with EU rules known as Priips, which were introduced in 2018 with the aim of making investment products easier to understand.
The rules require providers of investment products to publish projections of their future performance in different market conditions. Yet these forecasts have been decried as unreliable, with many funds generating wildly over optimistic figures, such as the 523,000,000,000 per cent annualised return forecast by one provider. Writing in FTfm, the economist John Kay described the regulations as “a triumph of pseudoscience over common sense”.
In a bid to find a workable solution, the European Securities and Markets Authority, the financial watchdog, recently proposed allowing funds to publish historical scenarios based on past performance data instead of forecasting future returns, according to an internal EU document seen by FTfm.
Esma’s proposal was snubbed by the commission on the grounds it went against the objective of the Priips rules to enable investors to directly compare financial products’ performance.
In a letter to Esma, seen by FTfm, the commission said it had “serious concerns” about the legality of the regulator’s proposals. Pointing out that forward-looking performance assessments are enshrined in the original Priips legislation, it warned against replacing them with historical scenarios “even if such scenarios could allegedly better apply to the reality in the market and avoid procyclical effects”.
Esma’s proposal also faces resistance from MEPs on the European Parliament’s economic and monetary affairs committee. Three MEPs, including Green MEP Sven Giegold — a longstanding adversary of fund managers — wrote a letter this month making it clear they would block any attempt to scrap future performance disclosures.
The MEPs poured cold water on the idea of fund managers being able to publish their past performance, arguing that this was more misleading because investors tended to base their future expectations on this information. “The current losses of many financial products in the corona[virus] crisis underlines this serious problem,” they added.
The political opposition to Esma’s efforts is a blow for asset managers and consumer groups, which have long advocated for historical return information to be used in investor documents.
Better Finance, an advocacy group representing European savers, warned last week that lawmakers’ moves to block the proposed reforms would have a “catastrophic impact” on investors.
It said that without changes to Priips, EU savers would be stuck with performance scenarios that were “almost certain to be wrong, highly misleading, not intelligible [and] not comparable”.
Esma has not yet published its final suggestions on reforms to the performance scenarios. According to two people familiar with the situation, the interventions from the commission and MEPs were a pre-emptive warning in response to Esma’s draft proposals.
The regulator, which declined to comment on earlier drafts, said it would submit its proposals to the commission following approval by its board of supervisors.
The commission, which has the power to amend or ultimately reject Esma’s proposals, said it was “working closely” with the regulator by “giving input and ensuring that the [reforms] are fully in line with primary legislation”.
Boeing walks away from $4bn Embraer jets deal
US group had hoped to broaden its aircraft portfolio to better compete with European rival Airbus
Boeing has walked away from its $4bn deal to acquire the regional jet business of Brazil’s Embraer as the US aircraft maker reels from the impact of a crisis in aviation.
The company said on Saturday that it had tried for two years to finalise the deal before the termination date which fell on Friday, but ultimately negotiations were unsuccessful.
“It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues,” said Marc Allen, president of Boeing’s Embraer Partnership & Group Operations.
The collapse of the deal will be a blow to Boeing which had moved to broaden its portfolio of aircraft to compete with European rival Airbus, which in 2017 had swooped on Bombardier’s C-Series, a 100-150 seater regional jet.
Embraer could also find it tougher to compete against the Airbus backed C-Series — now renamed the A220 — in a market which is expected to be substantially smaller in the coming years as a result of the global crackdown on air travel.
The Boeing-Embraer tie-up has faced several obstacles over the past year and a half, with substantial political opposition in Brazil while in Europe regulatory approval has taken longer than expected.
But the year long grounding of the 737 Max had already strained Boeing’s cash resources and now the coronavirus has significantly reduced expectations for aircraft demand in the coming years. Roughly two-thirds of the global fleet has been grounded, with airlines around the world seeking government bailouts to survive. Many expect to emerge from the crisis with significantly smaller fleets.
Boeing which has estimated the cost of the Max grounding at $19bn, is also under severe cash pressure as airlines cancel and defer large volumes of orders.
This had reduced the likelihood of any deal taking place, said one analyst.
“It’s a liquidity question,” said Bank of America analyst Ron Epstein. “Is Boeing in a position to spend $4bn on an acquisition given what’s going on in the broader commercial aviation market?”
Boeing is widely expected to receive financial support from the US government’s recent stimulus plan. The company’s chief executive Dave Calhoun has said Boeing and the wider aerospace supply chain would need $60bn to survive the current crisis.
The group is expected to slash production next week when it announces first-quarter results, and will have to revise cash flow expectations as a result.
Airbus earlier this month cut production rates by one-third, including its best-selling A320 single-aisle family. Further cuts are possible, depending on the extent of the aviation downturn.
The collapse of the Boeing-Embraer deal follows the decision by Hexcel and Woodward — two of the US company’s big suppliers — to pull the plug on their $6.4bn merger, the first big deal to collapse due to the coronavirus pandemic.
Boeing moved to acquire Embraer’s regional jet business in 2018, after European rival Airbus swooped on Bombardier’s C-Series, a 100-150 seater single aisle.
Under the agreement, Boeing would have taken an 80 per cent stake in Embraer’s jet business. Boeing on Saturday said it would continue a separate partnership agreement with Embraer to jointly market and support the C-390 military transport. Embraer will hold 51 per cent of this separate venture and Boeing 49 per cen
After some intense back-and-forth, the agreement granting Boeing 80 per cent control over Embraer’s commercial aircraft and services operations for $4.2bn was approved in January 2019 by Brazil’s president Jair Bolsonaro.
The tie-up would have enabled Embraer to boost sales by providing more heft in negotiations with the world’s biggest airlines, while helping Boeing gain a strategic foothold in the market for smaller regional jets. It would have also given Embraer the ability to move up into larger aircraft, while giving Boeing the ability to move down into smaller ones.
Embraer declined to comment on Saturday. But the cancellation is a blow for the Brazilian aircraft maker.
Nelson Salgado, Embraer’s chief financial officer, told the Financial Times last year that the deal would have allowed “revenue growth for Embraer which it otherwise would not be able to achieve on its own”.
Donna Hrinak, Boeing’s president for Latin America, said in 2019 that Boeing’s “original intent was to buy the whole company”.
Barron’s Weekend Summary: Washington’s coronavirus stimulus package has bought time, but markets will face growing pressure if the outlook doesn’t improve; Food delivery services aren’t getting the same boost as other “stay-at-home” stocks
* Cover story: Solving the problems created by the coronavirus pandemic is “a race against time—and no one knows who is winning”; Washington’s stimulus “has bought us time, but not much else. And the longer the virus prevents all of us from doing what we usually do, the greater the pressure on financial markets is going to grow.”
* Tech Trader: Cautious on GRUB, UBER, DoorDash, Postmates: As the pandemic continues, investors have jumped on “stay-at-home” stocks such as AMZN, NFLX, and ZM, but food delivery isn’t getting the same boost—partly because it’s a competitive and undifferentiated business, with a difficult path to sustainable profits—and while the top players are providing a crucial service for restaurants and diners across the country, their business prospects haven’t gotten much better.
* Trader: The coronavirus outbreak has put an end to a decade-long trend toward more companies buying back an increasing amount of their own shares and has exposed the boards that have been overzealous in buyback spending in recent years instead of paying down debt—now firms are seeking ways to hoard cash wherever they can. Profile: Ernesto Ramos, manager of the BMO Low Volatility Equity fund, is part of a 13-person disciplined equity team at BMO that manages $18B across more than a dozen strategies by melding the best of both worlds—the scale and discipline of quantitative investing and the depth and nuance of fundamental analysis (top holdings: KR, COST, PEP, WMT, LLY, NEM)
* Interview: Annie Duke, former winner of the World Series of Poker Tournament of Champions and the NBC National Heads-Up Poker Championship and currently a speaker who advises clients on how to make decisions, discusses removing emotions from decision-making, how global markets are really just one giant poker table, and her biggest bluff.
* Features: 1) Cautious on MCD, SBUX, CMG, YUM, DRI: Bulls believe leading restaurant chains will gain market share because financially strapped independents lack their delivery, drive-through, and digital capabilities, but investors may be too optimistic about the group’s prospects, since social distancing is likely to be in effect for some time, and when restaurants re-open they may have limited menu options and seating; 2) Positive on FLS, EMR, URI, FLR: Low oil prices have created some nice bargains among “oily industrials”—big manufacturing firms with hefty sales to the energy industry whose shares may be down now, but are likely to rise; 3) Positive on CVX, COP, SLB, PSX: The past two weeks, when oil futures plunged so violently that they briefly fell below zero for the first time in history, have shown the limits of the US boom, and the next few months portend a reckoning in the sector—but a handful of stocks have the potential to thrive, and could pay off for patient investors; 4) Barron’s latest Big Money Poll found that most managers are anxious about the near term, given rising unemployment, falling economic output, gyrating share prices, and the ongoing toll of a so far incurable disease, but they are largely upbeat about the outlook for 2021, when they expect people to go back to work and the economy to resume growing; 5) Positive on Albertson’s: The company has twice failed to go public, but its third time “might be the charm,” since supermarkets are a rare bright spot in the coronavirus economy, and Albertson’s—the country’s second largest grocer—has trimmed debt and has shown other signs of improvement, though it has a large debt burden; 6) “Delinquencies in the municipal market—already on the rise as counties and cities get squeezed by the coronavirus crisis—are likely to worsen amid soaring unemployment, rising alarm about stressed municipalities, and Federal conflict about aid,” creating a problem for investors who rely on munis for safety and income; 7) With people social-distancing and dining in, even hoarding groceries, the rally in packaged-foods stocks that began at the end of March might just be getting started—a contrast to just a few months ago, when the industry was plagued by stagnant sales growth, declining profit margins, and high debt levels; 8) Story reports on the crisis in American nursing homes, where the family members, volunteers, and other outside visitors who play a critical role in spotting problems and ensuring residents’ well-being are for the most part unable to enter homes because of the coronavirus; 9) Cautious on CCL, RCL, NCLH: Because of the coronavirus, cruise ships are likely to be docked until mid-July, leading to the loss of millions of dollars each day, but even when ships can sail again, the companies face a challenge winning back customers to their large vessels, which are at the center of their growth prospects.
* European Trader: Positive on Rentokil Initial: The pest control and disinfection company’s businesses has plummeted because the offices, hotels, and buildings it services have been mothballed due to coronavirus., but once restrictions are lifted on global lockdowns, there’s likely to be huge demand for the company’s disinfection services.
* Emerging Markets: Prospects for a sharp rebound in Mexican equities are dim, but Mexico has always played a bigger role as a fixed-income market, and “here its stolid DNA is a plus in tough times.”
* Commodities: The coronavirus pandemic slammed demand for rare metals palladium and rhodium, which are both used for car parts, though For now a supply shortage from the shutdown of production in some areas has offered some support for prices.
* Streetwise: For stock buyers who can’t resist reduced oil prices, Devin McDermott, commodities strategist at Morgan Stanley, recommends a defensive approach in North America, with a focus on companies that have asset quality, balance sheet strength, and scale, such as CVX, COP, NBL, and HES.
Goldman pay: out of step
Even among other top Wall Street banks, David Solomon’s 2019 pay rise stands out
It ranks as one of the clumsier moments in recent corporate history. Last month, Goldman Sachs disclosed it had awarded chief executive David Solomon a near 20 per cent pay rise. His $27.5m compensation package makes him Wall Street’s second-best paid bank boss after JPMorgan Chase’s Jamie Dimon.
Executive pay is a thorny subject in the best of times. But Goldman’s announcement, coming in the middle of a global pandemic, is particularly prickly. Millions of Americans are suddenly without a job. Businesses are going under. Bosses from companies hard hit by the public health crisis have been either taking pay cuts or forgoing salaries all together.
Proxy advisers such as Institutional Shareholder Services can be criticised for their cookie-cutter approach to corporate governance. But ISS is right to take Goldman to task. It is recommending investors cast advisory votes against the pay of top executives at the bank.
Even among other top Wall Street banks, Mr Solomon’s 2019 pay rise, which includes a $7.65m cash bonus, stands out. Neither Bank of America’s Brian Moynihan nor Citigroup’s Mike Corbat received a compensation bump. James Gorman at Morgan Stanley actually took a 7 per cent pay cut despite the bank posting record profits last year. At industry leader JPMorgan, Mr Dimon received a rise of just 1.6 per cent, even though he runs a vastly bigger outfit that made four times more in profit last year.
Goldman says compensation for 2019 reflects the “significant achievements” of its executives. The numbers tell a different story. Net earnings at Goldman declined 19 per cent in 2019 amid a surge in litigation charges related to the 1MDB scandal. Revenue fell. Both its investment banking and investment management units struggled. Another key metric — return on equity — came in at just 10 per cent for the year. That is well below the 15 per cent recorded by JPMorgan, which also posted record profits for 2019.
Since taking the helm, Mr Solomon has spearheaded efforts to rehabilitate a corporate reputation rightly or wrongly associated with a Machiavellian form of capitalism. Permitting executives to rake in hefty bonuses at a time of world economic stress undercuts that effort.
Smurfit Kappa insiders buy on weakness
Directors show faith in the paper group’s future
Prospects for the packaging and paper segment should benefit from an increase in online retail sales during the lockdown. That needs to be set against the virtual shutdown of the high street, both here and abroad, which will stall demand for disposable in-store packaging until normal commercial activity resumes.
For investors, it is reassuring that many products from the sector are routinely destined for less discretionary end markets, such as food and pharmaceuticals, and there has been a demonstrable shift in consumer habits towards delivery or food takeaway services. Meanwhile, supermarkets have struggled to restock produce as households tuck away storable foodstuffs, creating further demand for the packagers.
It remains to be seen whether the lockdown will accelerate the shift to online channels, although that seems highly likely. But even if it does not trigger a long-term change in consumer habits, conventional retailers may now look to reduce leasehold arrangements in favour of ecommerce.
Against this mixed backdrop, Smurfit Kappa delivered sales volume growth in Europe and the Americas during the first three months of the year, although cash profits at €380m (£334m) were down by 10 per cent year on year. The underlying margin pulled back by a full percentage point, but both these metrics were set against strong comparators in the first quarter of 2019.
The packager joined several other FTSE 100 constituents by pulling its full-year dividend. The emphasis is on capital preservation, so capital expenditure has been trimmed from previous guidance of €615m, to be in the range of €500m-€550m.
It remains a cash-generative operation, boasting liquidity of over €1.5bn, average debt maturities of over five years, and no bond maturity until 2024.
The group looks reasonably well set to see out current difficulties and there may even be M&A opportunities as its scale allows for optionality on that front. This might not have been lost on two directors in the group — Anne Anderson and Frits Beurskens — who picked up shares with an aggregate value just shy of £150,000 midway through the month.
Plumbing and heating products specialist Ferguson belongs to an elite club of UK companies that have cracked the formula to success in the US. Over four-fifths of the group’s continuing revenue and 95 per cent of underlying trading profit comes from across the Atlantic. Intuitively, spinning off its UK Wolseley business to focus on its more lucrative operations makes sense.
However, Ferguson has further ambitions to abandon the FTSE 100 altogether and shift its primary listing to the US, eyeing the “substantial incremental pool of capital” there. The group says discussions with a large chunk of its shareholders indicate a majority would support such a move. But if the vote were held now, it would likely fall short of the 75 per cent approval required. Some institutional investors oppose the strategy because they have mandates preventing them from holding shares outside of the UK.
For now, it is settling for a secondary US listing, guiding that it will revisit the issue in a year’s time. Chairman Geoff Drabble — former chief executive of Ashtead — believes this is “the most orderly and equitable path” to achieving its ultimate aim. Amid the current market turmoil, a vote on a dual listing won’t occur until the first half of 2021. Should conditions normalise, the Wolseley demerger is expected to complete this year as planned.
Uncertainty created by the Covid-19 pandemic has prompted the group to withdraw its full-year guidance and the 67.6c interim dividend. The $500m (£405m) share buyback programme has been suspended, although $100m-worth of shares have already been repurchased.
Mr Drabble remains bullish on his company’s prospects, having recently purchased 4,983 shares worth almost £250,000. He was joined by non-executive director Thomas Schmitt, who bought 13,500 shares for a little under £70,000.