TheChek News Flow

Silver, platinum, and other industrial metals, laggards among commodities in 2019, could take the spotlight in the years ahead.

The S&P GSCI Industrial Metals Total Return Index has seen a modest rise of about 2% this year as of mid-December, compared with a gain of nearly 17% for the S&P GSCI Total Return Index, which tracks 24 commodities. Zinc, typically used as a coating for iron and steel and as an alloying metal for bronze and brass, actually fell.

Industrial metals were left out of the commodities rally, “as investors continued to worry about global growth,” says Chris Gaffney, president of World Markets at TIAA Bank. However, growth expectations are on the rise, and most major central banks are taking cues from the U.S. in looking to hold rates steady through 2020.

“The lower rates, along with supportive central bank policies should support global growth and with it manufacturing, which will be positive for the price of industrial metals,” says Gaffney.

Among industrial metals, silver and platinum have “some catching up to do,” as these metals typically have better performance when global growth prospects heat up, he says. Year to date, silver futures are up about 10%, underperforming the gain of more than 15% for gold.

One standout in industrial metals this year is palladium, up a sharp 62% so far this year on tight supply. Palladium is used in gasoline-powered vehicles’ emission-controlling catalytic converters. Platinum, needed for the same gear in diesel-powered vehicles, is also up but by much less—about 16%.

Longer term, the outlook for palladium remains upbeat. Steven Dunn, head of ETFs at Aberdeen Standard Investments, says the metal’s supply deficit is expected to persist for the next several years. Still, “palladium is considered precious as it has characteristics that are hard to replicate,” Dunn says.

Technology and innovation “should be major headwinds for most commodities” over the long term, says Gregory Leo, chief investment officer at IDB Bank of New York. “Electric vehicles are still expensive, but improvements in battery technology and charging infrastructure have spurred demand.” That could lead to more demand for commodities such as copper and nickel, which are key components in electric vehicles, he says.

Improvements in alternative energy sources should also “limit our dependency on oil,” says Leo. He expects energy prices to face headwinds in 2020, with slowing demand and alternative sources among the factors keeping a ceiling on oil prices.

In the years ahead, global economic growth may dictate the outlook for commodities. “While we may see a rebound in 2020, the challenge is the moderation in global economic growth over the next few years,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “Aging populations are dampening global growth prospects. While inflation prospects may tick slightly higher this year, and perhaps even over the next few years, this is not enough to rekindle fundamental demand growth that could lift prices.”

And “despite commodity prices being very inexpensive relative to financial assets, without a rekindling of end-user demand growth through rising real economic growth, we anticipate commodity prices, on average, [to] still underperform stocks over the next business cycle,” says Haworth.

Barring a common vision, or unity of purpose on how to get their economies out of the slump, all that European policy makers have for 2020 is hope. Hope that stronger growth will materialize as global headwinds recede.

But a look at what awaits the four largest European economies next year shows that governments everywhere are hanging at the mercy of a continuous slowdown, as the persistent recession of the manufacturing sector begins to spill over into the rest of the economy. Many countries also suffer from self-inflicted harm that they haven’t done much to tackle during the recovery.

The United Kingdom will leave the European Union legally at the end of January but enter a renewed period of uncertainty after Prime Minister Boris Johnson’s decision to clinch a deal with the EU before the end of 2020. It’s an impossible achievement that means a possible trade treaty would only cover the exchange of goods and leave aside the services sector, notably finance services, which is crucial for the U.K. economy.

Uncertainty means that gross domestic product would grow only 1% next year, according to Bank of America analysts. The only relative upside is that inflation would then be constrained, allowing the Bank of England to lower rates if the economy takes a turn for the worse.

The U.K. at least has a stable government supported by a strong majority in Parliament, after the conservative landslide in the Dec. 12 elections. The same cannot be said of Germany under Chancellor Angela Merkel. Her ruling coalition is split after her Social Democrat partners from the SPD party chose a hard left duo to lead them. It still hangs on to power, but that will most likely lead to political paralysis.

The once-powerful German economy avoided recession last year but it hasn’t seen the end of its problems. Slowing global trade hit the export-led economy in 2019. But the lack of confidence, dearth of investment, and the ingrained problem of the country’s automobile industry will spill over into 2020.

The government seems unable to decide whether or not to do more to support the economy through much-needed public investment. But with unemployment at barely more than 3%, less than half the EU average, there are little incentives for Berlin to decide major fiscal expansion.

France surprised in 2019 with one of the euro zone’s strongest growth rate but the country’s main economic problem looks similar to Germany’s: political paralysis. The major strikes and demonstrations against Emmanuel Macron’s pension reform over the holiday period could signal the end of the French president’s reform drive.

Nationwide elections to town and city councils are due in March, and Macron is already thinking about his 2022 reelection campaign. Meanwhile little has been done to reform the state apparatus and find the billions needed to invest in the dilapidated French suburbs.

Italy will continue to underperform, even though its small and midsize businesses do wonders on world markets, as witnessed by a robust trade surplus. But the self-inflicted harm of a government that played a little too close to bond markets’ fears last year will continue to exact a price on an economy that has long been Europe’s growth laggard.

Staggering under a debt load topping 130% of GDP, it is doubtful that the fragile coalition government could muster the courage to launch the structural reforms the country has been needing for much too long.

Visit Intercept Pharmaceuticals’ website on the liver disease known as NASH and you might come away thinking that your liver is about to kill you.

“HOW CLOSE ARE YOUR PATIENTS TO THE TIPPING POINT?” the website asks in all caps, with an illustration featuring boulders that spell the word “cirrhosis” bouncing off a cliff.

Getting doctors and patients to worry about NASH—nonalcoholic Steatohepatitis—is important for the pharmaceutical industry. Drug developers are all-in on the little-known, newly defined disease, which afflicts a large swath of the adult population in Western countries, but which few sufferers will notice over the course of their lifetimes.

Big and small drug companies are piling on. About 72 different drugs are in the pipeline to treat the disease, says Pasha Sarraf, an analyst with SVB Leerink, and many more are in the early stage. Companies like Novartis (NVS), Intercept Pharmaceuticals (ICPT), Gilead Sciences (GILD), Novo Nordisk (NVO), Eli Lilly (LLY), and Alnylam Pharmaceuticals (ALNY) are all contenders.

Investors, however, should view that pipeline with skepticism. Though analysts agree that Intercept will have significant sales if its drug hits the market first, as expected sometime next year, there is growing uncertainty around the long-term hopes for the field.

“NASH involves huge patient numbers and real unmet need, but until the diagnostic pathway improves and higher impact therapies enter the pipeline, I think it’s going to be a tough business for pharma to build,” says Marc Elia, the founder of M28 Capital Management, an investment firm focusing on biotechnology that is launching early next year.

In lay terms, NASH describes a very, very fatty liver. In more advanced stages, patients experience scarring on their liver, known as fibrosis, which can lead to deadly conditions like liver cancer or decompensated cirrhosis.

That sounds bad, and it can be. But even if you have a serious case of it, NASH likely won’t be the thing that kills you. NASH does not seem to cause symptoms before its terminal phases, and in most patients, it can take years, and even decades, to pass through all the phases of the disease.

By that point, people suffering from NASH are more likely to die of a heart ailment. NASH patients often suffer from obesity and Type 2 diabetes. According to a simulation tool developed by researchers at Massachusetts General Hospital and Harvard Medical School, a 60-year-old male patient with the most significantly progressed form of NASH has only a 16% chance of dying from liver-related diseases within 10 years, and a 40% chance of dying from a heart condition.

And treatment poses challenges. Among other things, the only way to diagnose NASH currently is through a liver biopsy, an expensive and potentially dangerous procedure.

Still, physicians are eager for tools to treat the disease, particularly in its advanced stages, and companies are eager to fill the need.

“There is nothing available to treat the liver” in NASH patients, says Intercept CEO Mark Pruzanski. “We believe that there’s an unequivocal unmet need for antifibrotic therapy in patients with advanced fibrosis.”

Intercept’s senior vice president for medical affairs, Gail Cawkwell, stands by the imagery on the company’s “tipping point” website for health-care professionals. “Patients may be going along, walking on that edge of the cliff, but not know that they’re there,” she says. “Once you develop cirrhosis, there’s a point where that cirrhosis is so advanced that there’s little functional liver left, and...there’s few options for the patient.”

The rush for NASH treatments followed Gilead’s success with Harvoni, a treatment for another liver ailment, hepatitis C. In 2015, Gilead sold $13.9 billion worth of Harvoni. As patients were cured, sales dropped, and Gilead is expected to sell $674 million worth of Harvoni this year.

Some of the push for NASH drugs comes from hepatologists worried about the growing impact of obesity, Sarraf of SVB Leerink says. But, he adds, there is also “an opportunistic force that’s riding this.”

At a time when much of drug development is focused on extraordinarily expensive drugs for extraordinarily rare diseases, NASH offers the benefit of affecting up to 6.5% of adults worldwide, according to one 2016 study that looked back at previous research.

And since NASH isn’t caused by a virus like hepatitis C, it would likely need to be treated chronically over a lifetime.

Investor enthusiasm over NASH has cooled a bit, particularly after Gilead’s lead entry in the NASH race, selonsertib, failed in two Phase 3 trials earlier this year. In December, Gilead announced that a Phase 2 study of combination therapies targeting NASH had also failed to reach its primary endpoint.

Still, big players remain in the game.

“People want to be there on the hope that this will be a very big market,” says Ronny Gal, an analyst with Bernstein.

Some scientists, however, worry that the commercial windfall of the hepatitis C drugs has led to an approach to NASH that underestimates the disease’s complexity. “They were sort of bewitched by the success, the enormous commercial success, for the companies,” says Ian Rowe, a hepatologist and a university academic fellow at the University of Leeds. NASH is “much, much more complicated.”

The NASH treatment scheduled to reach the market first is Intercept’s obeticholic acid. The company submitted the drug for Food and Drug Administration approval in September, and the agency has granted the application priority review status. The FDA is expected to make a decision by March, and analysts expect sales of obeticholic acid in NASH to hit $770 million by 2023.

But data from a Phase 3 study suggests that the impact of obeticholic acid on the disease may be incremental. Intercept based its FDA application on interim data from a study that found that liver scarring, or fibrosis, improved, and other NASH parameters did not worsen, in just 23.1% of patients who took the higher dose of the drug, compared with 11.9% of patients who took a placebo.

Intercept says that figure understates the drug’s efficacy. Pruzanski, the CEO, says that the most important metric was stabilization of fibrosis, and that four in 10 of the patients on the high dose improved by a full stage of fibrosis, the unit by which the scarring is measured, while just one in 10 worsened by a stage.

Obeticholic acid also raises levels of so-called “bad cholesterol,” a potential concern for the likely patient population, which is prone to heart disease. Intercept’s Cawkwell says the risk could be managed with other cholesterol-lowering medication.

Shares of Intercept are up 95% since Sept. 27, when the company announced it was filing its application for approval of obeticholic acid with the FDA. The S&P 500 is up 8.3% over the same period.

Analysts say that there is a significant group of patients already diagnosed and waiting for a NASH drug, and that insurance companies will have a hard time denying coverage.

“People think it’s the front-runner,” SVB Leerink’s Sarraf says of Intercept’s drug. “If they price it appropriately, if they can execute commercially, they have no competition.”

Yet beyond that first group of patients, the future begins to get hazy. In a note in April, Bernstein’s Gal estimated that the entire market for NASH drugs will be just $5 billion by 2030, and that Intercept’s obeticholic acid will quickly lose market share. By 2025, he projects it to hold just 9% of the market.

Other drugs in the pipeline include Elafibranor from Genfit, which would be the second drug to hit the market. Novo Nordisk and Eli Lilly each have similar drugs in Phase 2 NASH trials, called semaglutide and tirzepatide, respectively. The GLP-1 class of drugs were originally developed for diabetes.

Even as the companies prepare to release these drugs on the market, the science on the disease remains a moving target.

“It’s definitely causing cases of end-stage liver disease and liver cancer,” says Rowe of the University of Leeds. “But the optimal approach of treating it is much more difficult to know, and ultimately the vast majority of people who’ve got [fatty liver and NASH] will not die of liver disease.”

Rowe published a study this fall arguing that the benefits of treating NASH in patients who have yet to develop cirrhosis is “predicted to be limited.”

If Rowe is right, that could mean that the GLP-1 drugs may be more useful in the long-term than the drugs arriving on the market sooner.

None of this has discouraged the drugmakers. Nor has the difficulty of identifying patients, or diagnosing the disease, or keeping the patients on the drug long-term.

The drugmakers say that they expect more diagnostics to hit the market, and that the insurance companies won’t require biopsies to pay for the drugs.

Given the challenges in identifying NASH patients, some of the success of the NASH compounds will rely on marketing campaigns. Some of that work, including Intercept’s, has already begun.

“I’m a commercial guy,” says Pascal Prigent, CEO of Genfit, which has a NASH drug in Phase 3 trials. “Most of those consumers... they don’t even know they’re sick. So how you drive them to seek treatment and all of that? It’s a cool marketing challenge.”

Vanguard’s brokerage customers may be getting a New Year’s gift. The company is expected to announce soon that it is eliminating commissions to trade equities and options.

Free trades would be an abrupt shift by Vanguard Group. Only a few weeks ago, CEO Tim Buckley had waved off the idea of cutting commissions, a move every other discount broker made in October. “We go for a different investor,” he told Barron’s in mid-November. “We’ve made the choice not to provide all the services for people who want to churn and burn their account.”

It’s a measure of how rapidly the industry is changing that its leader is playing catch-up on pricing.

Vanguard built itself into one of the world’s largest fund companies on the back of low-cost investing. It has become a feared competitor, taking 70% of the fund industry’s net sales since 2014 and racking up more than $5.7 trillion in assets under management. In 2018, Vanguard took a stunning 97% of the entire fund industry’s net sales. No one comes close to Vanguard’s scale. It can drive down the economics of everything it touches.

Yet its castle is now under siege. Its low-cost advantage is being eroded by advances in technology, industry consolidation, and heightened competition. Index funds are so inexpensive across the industry that Vanguard’s prices are no longer the lowest. Vanguard’s brokerage platform lacks innovative tools and features, and the firm has suffered a series of embarrassing technology glitches.

Competitors are circling. Among the major brokers, Charles Schwab (ticker: SCHW) led the way in eliminating equity commissions in October. Schwab, State Street (STT), and BlackRock’s (BLK) iShares exchange-traded funds match or beat Vanguard’s pricing. Schwab’s “robo” exchange-traded fund service costs nothing in annual fees while Vanguard charges 0.3% for a similar service, although it comes with a financial advisor. (Schwab offers planning for a $30 monthly advisory fee.)

Critics say Vanguard needs an adrenaline shot of innovation. “They suffer from a bit of hubris,” says Steve Lockshin, an investment advisor who worked on a Vanguard advisory council to explore new technologies. “When you have the success they’ve had, it reinforces the notion that you’re smarter than the other guys, and hubris can kick in.”

Some hubris is warranted: Vanguard has done more to change the fund industry for the better than any other firm. Company founder Jack Bogle set out to make investing accessible to everyone, eliminate friction from high fees, and develop products that captured the market’s returns—a model that proved wildly successful and forced other companies to follow.

Buckley disputes the notion that Vanguard is no longer a price leader and lacks innovation. “When you come to Vanguard, you don’t have to worry about low cost,” he says. With fees averaging 0.1% on an asset-weighted basis, Vanguard charges far less than the industry average of 0.58%.

And the company is investing more than $1 billion a year in technology, Buckley says. It has launched several mutual funds and ETFs in recent years. Its managed-portfolio business has racked up $148 billion in assets since 2015. The company plans to roll out a lower-cost robo called Vanguard Digital Advisor in 2020. Vanguard is also expanding internationally, aiming to bring its brand of low-cost indexing to Europe, Asia, and other regions where fees remain high.

Nonetheless, Vanguard is facing stiffer competition and tough questions about its future. Index funds were always a commodity. But with U.S. fund fees heading to zero (already the case at Fidelity), it is getting tougher to distinguish a Vanguard product from the competition. Vanguard can count on an enormous asset base for growth, but it has fallen behind in areas like brokerage and advisory services. The planned merger of Schwab and TD Ameritrade Holding (AMTD) will create a megarival that will likely challenge Vanguard’s pricing and customer base even more.

How will Vanguard contend against these forces and fare if the indexing wave that fueled its rise starts to taper off? The company has answers, of course. But Vanguard clams up when it comes to another question: How much does it actually make and give back to investors—which, because of its structure as a mutual company, are the fundholders themselves? Buckley and other executives declined to disclose any details about Vanguard’s revenue, profit, or taxation. Vanguard’s finances are a black box.

Is Vanguard really wobbling?

It seems crazy to even ask. This is a company, after all, that went from an industry gadfly—given patronizing, then grudging, respect—to one that strikes fear with its capacity to drive down prices and scoop up assets.

Since 2008, Vanguard has doubled its share of the fund industry’s net sales, going from 15% to an average of 30%, according to John Rekenthaler, vice president of research at Morningstar. Vanguard took in $1.2 trillion in net new money in the past five calendar years, compared with $500 billion for all other fund companies combined, Rekenthaler says. Much of its growth has come from index funds, but Vanguard is also the third-largest manager of actively managed mutual funds, with $1.1 trillion in assets at the end of November, behind American Funds and Fidelity.

In the retirement market, Vanguard has become an immovable force. The firm administers more than 1,900 retirement plans with $1.4 trillion in assets, and employers have seeded many of them with Vanguard target-date funds, the default investment in most plans. Vanguard’s $500 billion in target-date funds accounts for 39% of the market, nearly double the assets its next-closest competitor, Fidelity, at 20%, according to Morningstar Direct.

All of this makes for quite the success story. When Bogle founded Vanguard in 1975, active managers were paid handsome sums to outperform. Index investing was viewed as a quirky academic idea, bordering on socialism; the notion that investors could do better in the long run by matching the market, rather than trying to beat it, seemed almost un-American.

Bogle convinced investors they had the best chance of success by keeping costs down, holding for the long term, and avoiding complex products. He wasn’t opposed to active management—Vanguard began as an all-active shop with 11 funds, including Wellington (VWELX)—but it had to be low-cost to be competitive.

Vanguard became synonymous with homespun investing—a safe place you would recommend for a college savings account or your grandmother’s retirement. Bogle’s wisdom inspired millions to send in checks, including superfans known as Bogleheads, who make a pilgrimage to Vanguard’s campus every year. The 300-acre headquarters in Malvern, Pa., a Philadelphia suburb, is a testament to Bogle, who died in January and was known as Saint Jack, albeit sardonically to some. There’s a statue of him in a grassy area and nautical themes everywhere, like the ShipShape gym and Morgan Galley cafeteria, reflecting his love of naval history.

Bogle wasn’t just beloved because he preached the gospel of index funds. His other legacy was setting up Vanguard to put clients first and money back in their pockets. He scrapped the industry practice of charging sales commissions on funds. And he structured Vanguard as a mutual company, owned by its fund shareholders, similar to a mutual insurance firm. The bigger Vanguard got, the more cost savings it would pass along to fund shareholders—a stark contrast to a traditional fund company or a bank. Vanguard transformed the index fund from a Wall Street laughingstock to a mainstream product—and one that now accounts for half the assets in U.S. equity funds, including more than $3 trillion at Vanguard alone.

Vanguard “was founded on the idea of insurgency, of disruption,” says Buckley, 50, who took over as chief executive in 2018, after starting as Bogle’s assistant in 1991 (and earning a couple of Harvard degrees along the way). “We’ve defined the way the industry is today.”

It is only a slight exaggeration. Fund fees in the industry have fallen for years, thanks in good measure to Vanguard’s price pressure and growth. Vanguard charged an asset-weighted average 0.68% in 1975, now down to 0.1%. The company led the way in eliminating commissions on non-Vanguard ETFs in 2018 (it never charged for its own), triggering a cascade of price cuts elsewhere. Vanguard’s influence is all the more impressive because the company doesn’t pay a cent for distribution. While the firm does plenty of sales and marketing, investors come to Vanguard, not the other way around.

Indexing didn’t take off just because of Vanguard, of course. Active managers did their part by putting up weak numbers. In the 1970s and 1980s, Buckley says, active-fund returns were more widely dispersed, partly because regulators hadn’t yet instituted rules for equal access to company information. Today, active returns hug the indexes, partly because everyone can see the same earnings reports and public meeting transcripts, whittling away the edge of active managers. Money has flooded out of active U.S. stock funds since 2008.

A phenomenal bull market has also helped: Tracking the S&P 500 would have netted you 13.4% a year, on average, over the past decade. Why bother with active, when you could probably do better with an index fund?

People who admire Vanguard are nonetheless frustrated by it, especially members of the growing independent financial advisor industry. The firm doesn’t custody assets for advisors—it quit custody service in 2003, saying it wanted to stay focused on investment management—and advisors view the firm as a technological laggard.

“They’re a trusted brand and incredible product producer, but if you ask advisors, ‘Do you consider Vanguard to be a technology leader or partner?’ the answer is no,” Lockshin says. “Vanguard doesn’t really know how to work with advisors other than helping distribute its products.”

The company has long battled perceptions that its technology is subpar. Over the past few years, Vanguard customers have experienced website outages, money-transfer glitches, and incorrect fund pricing, including an episode last August, when some Vanguard funds appeared to lose half their value overnight.

Buckley acknowledges that Vanguard has slipped up. “Our cash flow is greater than the next nine companies combined,” he says. “With that success comes high expectations, and you can’t sit and whine about it.”

He adds that Vanguard’s massive size makes it an easy target. “If we have a two-minute outage, that’s a headline, whereas other companies have a two-hour outage and it doesn’t make the news.”

Still, the frustration is palpable. Bob Bellagamba, a Vanguard customer, woke up one October morning to an alert from his bank that his checking account was overdrawn by $75,000. Vanguard had duplicated a transfer he had made to the firm a few weeks earlier. It took many phone calls and emails to resolve. “They seem to always have problems with technology,” says Bellagamba, 61, who gave up on consolidating his external account information at Vanguard because it wouldn’t update properly.

Allan Roth, an advisor and volunteer board member of the John C. Bogle Center for Financial Literacy, recommends Vanguard funds to his clients. But he says: “You can get better service and lower fees at Schwab or Fidelity. Vanguard’s web interface is clunky and hard to understand. It’s not seamless and has fallen further behind.”

Schwab, Ameritrade, and Fidelity offer more trading services and cash-management and investing tools. Schwab and others are introducing fractional-share stock investing to lure millennials, more mobile features, and, at Fidelity, even cryptocurrency custody.

Vanguard, meanwhile, has scaled back in some areas. The firm eliminated bill payment last summer; Vanguard says less than 2% of eligible clients used it. “We’re not a bank and online bill pay isn’t core to what we offer,” says Karin Risi, head of retail investing. New customers with $1 million to $5 million at the firm aren’t assigned an advisor anymore; they get sent to a call center. Vanguard says it has moved half its “flagship” clientele to this service model.

The changes annoyed customers like William Beck, who had to switch bill payments to a bank. He wasn’t pleased that his Vanguard representative left without notice. “I’ve thought about switching out of Vanguard if I can find better service elsewhere,” says Beck, 64, a retiree in Fairhope, Ala.

Investors gripe that Vanguard is prioritizing growth over service. “I see Vanguard burn through a lot of money on Google and Facebook ads,” wrote a client on the Bogleheads forum in August, after the fund-pricing glitch. “They should use some of that money to fix their issues first and then aim to increase their AUM [assets under management].”

The latest push is managed accounts. Vanguard’s advisory business could get a lift with the launch of Digital Advisor, which it plans to sell across its brokerage, retirement, and 401(k) plans. At an all-in cost of 0.2% in annual fees (including underlying funds), it will be priced below most rivals. Vanguard plans to distinguish it from competitors by keeping clients fully invested. Schwab and others require clients to hold cash in bank deposits, dragging down returns if the cash sits for long periods.

Digital Advisor won’t be as cheap on fees, but its performance could be superior without the cash drag. “Digital Advisor will be at a markedly lower price point for comprehensive services, all in a digital format,” Risi says. “The intention is to be disruptive.”

Yet Digital isn’t likely to disrupt the incumbent robos on price alone. “People go where they already custody money,” Lockshin says. “It’s like buying a car; you research it online but then go to a dealer and pay the price they set.”

If price were the main driver, he adds, Schwab’s free robo would have already put Betterment and Wealthfront out of business. Both those robos may be most vulnerable to Vanguard’s competition, since they are independent, use primarily Vanguard funds, and cost a bit more. Betterment is now working with Dimensional Fund Advisors as an alternative to Vanguard products.

Vanguard has a huge head start with its 30 million customers—eight million people who invest directly with the firm, plus another 22 million via advisors and institutions. It can count on the forces of customer inertia to build assets. Vanguard also plans to market its robo to intermediaries like broker-dealers, registered investment advisors, banks, and 401(k) plans.

More than $2 trillion of Vanguard’s funds are held through intermediaries, and it is the fastest-growing part of Vanguard’s business, says Tom Rampulla, head of financial advisor services. Vanguard’s other products for intermediaries include model portfolios, analytics software, and “behavioral coaching” techniques for advisors to use with clients.

Vanguard is no slouch in active management, either. While much of its growth has come from index funds, it has racked up assets in active fixed-income (managed in-house) and equity funds (run mainly by subadvisors). Wellington, started in 1929, has beaten 95% of peers over the past 15 years. Vanguard Health Care (VGHCX) and Vanguard Dividend Growth (VDIGX), which recently reopened, are considered to be two of the finest funds in their categories. Vanguard PrimeCap Core (VPCCX), despite stumbling lately, has long been a growth-fund leader. The company has also launched several active funds in the past year, including Vanguard Commodity Strategy (VCMDX), Vanguard Global ESG Select Stock (VEIGX), and Vanguard International Core Stock (VWICX). “We’re firm believers in active,” Buckley says.

If indexing wanes, however, Vanguard may not be able to count on active to pick up the slack. Like much of the industry, it has had outflows from active equity funds, including $18.5 billion in 2019 coming out of such funds as Health Care, Wellington, Windsor II, and PrimeCap. (Active fixed income, however, has taken in $30 billion.)

Low-cost funds have an edge in retaining assets over high-fee funds, but Vanguard appears to be slipping: It had $1.3 trillion in active assets at the end of 2018, $200 billion more than its recent total despite a strong bull market this year.

Vanguard’s competition, meanwhile, is getting stronger. A combined Schwab and Ameritrade will be a brokerage and fund behemoth. The merged firm is likely to price funds and advisory services more aggressively and expand banking services, says Shirl Penney, CEO of Dynasty Financial Partners, a technology firm for advisors: “They’ll be a much stronger scaled competitor to Vanguard.”

At the same time, index-fund fees have come down so much that it is getting harder to compete on price alone. Fidelity took a shot at Vanguard in 2018 with the introduction of zero-fee index mutual funds. Schwab, State Street, and iShares sponsor ETFs with expense ratios similar to Vanguard’s products. The differences in fees are negligible; they won’t add up to a material difference for most investors—especially given any tax bill that could come due from selling funds in a nonretirement account. Fidelity’s zero-fee funds have been a success, but they haven’t opened the floodgates from Vanguard. “I don’t think people are that price-sensitive,” Lockshin says.

Even if they’re not big traders, Vanguard’s brokerage clients are soldiering on with a bare-bones site. The company no longer offers debit or credit cards that reward investors with rebates or perks available at other banks and brokerage firms. Its margin rates are about average.

“They’ve proven time and again that their technology isn’t sufficient,” says Dan Wiener, co-editor of The Independent Adviser for Vanguard Investors newsletter. Vanguard’s site for advisors used to include more data, he says, but that has disappeared. Vanguard says, “We provide robust set of tools and data to advisors via Vanguard.com.”

Brokerage customers do get one treat: Cash in their accounts automatically sweeps to a money-market fund, where it is available for trading. Fidelity does the same, but most others—including Schwab, Ameritrade, and E*Trade Financial (ETFC)—sweep cash into bank deposits that yield less.

Buckley says Vanguard is investing heavily in technology and service, hiring more certified financial planners and working to avoid site outages and other glitches. “We have a higher bar, but we should have a higher bar, so we have to continually invest,” he says.

The big mystery at Vanguard is its own finances. The company doesn’t issue an annual report (unlike Fidelity, also privately held). Its revenues, profit, taxation, and compensation practices aren’t disclosed.

Buckely says that “a large amount” of its revenue comes from its funds and that it has issued financial reports to creditors. “To the extent that we retain earnings, we pay tax like any other company,” he says. Vanguard must operate “at cost,” charging the funds “only enough to cover its cost of operations.”

How much does Vanguard make? And what’s left to be doled out as investor savings? It’s possible to do some back-of-the-envelope calculations.

Assume Vanguard has at least $5.7 billion a year in revenue, based solely on its asset-weighted average expense ratio of 0.1% of AUM. Vanguard also charges 0.3% for its $148 billion in advisory accounts, and it has other revenue streams like 401(k) record-keeping, transaction fees, commissions, and variable annuities. Vanguard participates in the industry practice of revenue-sharing, charging other fund companies an asset-based fee of up 0.4% annually for distribution on its brokerage platform. These fees are a “significant source of revenue,” according to its disclosures.

If Vanguard took in $10 billion annually, it would be more than T. Rowe Price Group’s (TROW) revenue, at $5.6 billion, but less than BlackRock (at $14.4 billion), Schwab ($10.7 billion), and Fidelity ($20.4 billion). Asset managers and brokerages generate net margins of 25% to 30%. By that math, Vanguard’s operating income would be $2.5 billion to $3 billion—money it could theoretically pass along to investors as savings. Free trading may cut into Vanguard’s revenue a bit. But without knowing Vanguard’s sales or operating costs, it is impossible to say what it makes and doles out.

“We can’t pay a special dividend, but we can give it back by lowering expenses,” Buckley says. “That’s a sign that Vanguard is a profitable company and that we’re returning capital or earnings to our clients.”

Vanguard’s growth should help investors. The bigger it gets, the more it can share as costs come down. But it’s unclear how that’s playing out. Bogle was at odds with Vanguard’s leadership before he died because he thought the company could lower prices further. As Vanguard expands, the firm could share more of its bounty. But just how much will likely be a mystery.

Tesla Model 3 cars are overflowing in Gigafactory 3 parking lot

Tesla is about to deliver the first Model 3 cars made in China and when the floodgates open, there could be a lot of Model 3 vehicles coming out based on how the Gigafactory 3 parking lot is overflowing right now.

When $TSLA goes all time high! 😆I still believe it will achieve $4200 per share in 10 years.

Please enjoy latest drone footage of massive amount of MIC #TeslaModel3 cars parking outside of #GF3. 🔥🧜‍♂️

pic.twitter.com/kGk8rBovcm

— Chao Zhou 👽 (@realChaoZhou) December 27, 2019

Eric Garcetti says cities must take decisive action on climate change

Los Angeles is considering forcing rideshare services such as Uber and Lyft to use electric vehicles in what would be a first for any city as LA seeks to cut emissions and get more electric vehicles on the streets. 

Eric Garcetti, mayor of Los Angeles, told the Financial Times that the electric-vehicle requirement was one step being contemplated to cut the city’s greenhouse gas emissions and become carbon neutral by 2050. 

“We have the power to regulate car share,” he said in a phone interview. “We can mandate, and are looking closely at mandating, that any of those vehicles in the future be electric.”

Mr Garcetti, mayor since 2013, has made environmental issues a central part of his platform. Earlier this month, he became head of C40, a network of the world’s biggest cities that are trying to fight climate change. 

Calling the next 10 years “the climate decade”, he said: “It has to be the decade of action. It is the decade that makes us or breaks us.”

As part of Los Angeles’ “Green New Deal”, published in April, the city aims to draw 80 per cent of its electricity from renewable sources by 2036, and recycle 100 per cent of its wastewater by 2035. 

The plan also includes purchasing more electric buses, and electric vehicles for the city’s municipal fleet, including America’s first electric fire engine. 

Los Angeles has not yet begun formal public consultation about whether to require rideshare services to use electric vehicles, but Mr Garcetti said the city was considering the step. 

The Los Angeles City Council Transportation Committee has been seeking greater powers to monitor and track rideshare services, including through a possible driver registration program. 

Any policy to require electric vehicles would radically alter the economics of the rideshare business, in which the drivers own or rent their own vehicles, because electric vehicles are significantly more expensive than their petrol-burning counterparts. 

At present, rideshare services in California are regulated by the state’s Public Utilities Commission, and face additional rules in certain cities. Uber declined to comment.

Mr Garcetti said that, as the US prepares to withdraw from the 2015 Paris climate accord, it is up to cities and states to take action against climate change. 

“Local actors, no matter who is in power, are the most critical elements of whether or not we win the fight against climate change,” he said. “It is local governments and regional governments that regulate or directly control building codes, transportation networks, and electricity generation, which together are 80 per cent of our emissions.” 

Mr Garcetti who took over the chair of the C40 group from Anne Hidalgo, mayor of Paris, is supporting a “Global Green New Deal” intended to help mayors cut emissions in their cities. He also founded the “Climate Mayors” group in the US, which includes 438 mayors dedicated to addressing climate change. 

“Cities have never been more powerful in the modern era,” Mr Garcetti said. “We make laws, we make business deals, we create jobs, we have to clean air and water, we run ports and airports, we attract investment and we often finance infrastructure.”

He added: “Cities will either succeed in saving this planet, or cities will fail, and I intend that it be the former.”