The Power behind the Throne

Friday, 10 January 2020
Melbourne, Australia
By Matt Hibbard

  • Markets
  • When passive becomes active

Royal watchers and monarchists have been in a flap this week, with news of Harry and Meghan’s escape. And that’s to put it mildly.

That Buckingham Palace was reportedly only given 10 minutes warning of the Duke and Duchess’ (for now) announcement, only added to the mayhem.

One royal correspondent went as far to say that it was all rather…well, unbecoming. Such understatement! I guess you couldn’t accuse them of talking it up.

Of course, after the initial shock, a sea of monarchical ‘experts’ have come to life. Dusting off crusty sports jackets and pantaloons, they have been speculating about all kinds of things.

Will they get to keep the titles? (Harry yes, Meghan no, apparently.)

And where and how will they live and support themselves? (They have registered a brand name — oddly including the word ‘royal’ — and will charge for speaking engagements and other appearances.)

In any other world, moving out is to be celebrated. A sort of coming of age type of thing. A chance to show you can make it all on your own, and pay an endless ream of bills for the rest of your life without so much as a simple pat on the back.

Yep, adulthood…vastly overrated.

The only problem with Harry and Meghan is that they’re moving out…sort of.

They still want their titles, security and a lovely place to call home whilst in England. Their residence has already had a two million pound touch up — courtesy of the now not-so-happy tax-payer.

For the rest of us, it’s a bit like moving out, but keeping a room at your parents’ home. And…mooching off their credit cards.

Who knew what, and when in the royal household, and all the shenanigans of the royal family’s 1,500 staff (yes, 1,500), we commoners will never know.

But I guess it’s a bit like the markets. You never quite know who is running the show.

First, though, a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 211.81 points, or 0.74%.

The S&P 500 closed up 21.65 points, or 0.67%.

In Europe the Euro Stoxx 50 index closed up 23.32 points, or 0.62%. Meanwhile, the FTSE 100 gained 0.31%, and Germany’s DAX closed up 174.88 points, or 1.31%.

In Asian markets Japan’s Nikkei 225 is up 36.22 points or 0.15%. China’s CSI 300 is down 0.17%.

The S&P/ASX 200 is up 52.90 points, or 0.77%.

West Texas Intermediate crude oil is US$59.44 per barrel. Brent crude is US$65.23 per barrel.

Turning to gold, the yellow metal is trading for US$1,547.60 (AU$2,253.28) per troy ounce. Silver is US$17.86 (AU$26.01) per troy ounce.

One bitcoin is worth US$7,800.01.

The Aussie dollar is worth 68.64 US cents.

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Look at the share register of any public company and you might not be overly surprised at what you see.

The top 10 shareholders will likely be a gaggle of huge superannuation funds and names including ETF providers like Vanguard.

The latter’s so large that their index funds puts them among the other biggest shareholders in the market.

There might also be one or two nominee groups who hold shares on behalf of international investors.

At first glance, you might be tempted to think there is nothing to see here. Just the usual funds going about their business.

But whether we like it or not, agree with it or disagree, those funds are having a bigger say in how we go about our life. What services companies can and cannot provide, and the composition of their boards.

Because they own such a huge block of shares — both individually and collectively — this group has the power to influence directly how a company is run.

Whether an ASX-listed stock wants to embark on a takeover. Or spin off a subsidiary into a separate entity or sell it off completely via a trade sale. It is unlikely a deal will take place unless these mega-shareholders give the all clear.

To be fair, that might not always be a bad thing. Some companies have better governance than others.

And somewhere along the line, boards and their CEOs decided to start paying themselves American-sized salaries.

We can thank these large institutions for halting that. They now regularly use their huge shareholdings to veto excessive remuneration reports.

Apart from the CEO and senior executives, you’re unlikely to hear anyone complain about that.

However, what we don’t know is how much influence these institutions put on management and boards behind closed doors.

And just as importantly, who puts pressure on the influencers.

When passive becomes active

As reported by CNBC in October last year, from a report conducted by the Harvard Law School:

Blackrock and Vanguard control the largest block of shares in nearly every publicly-traded firm   in the US…’

That’s a bucket load of clout shared between two companies. Combined, Vanguard and BlackRock control around $12 trillion in assets.

As the CNBC report goes on to say, both companies pressured ExxonMobil to produce a report on climate change in 2017, with observers describing it as a ‘watershed moment’ — something that would likely be replicated at every other listed energy intensive company in the US.

However, less than two years later, climate activists are pouring scorn on Vanguard and BlackRock for not doing enough. Vanguard and BlackRock stand accused of going soft on social issues. In particular, the climate.

Their defence — that they had thus far voted against 4,800 directors at 2,700 companies — was not enough to quiet the activists. Nor that they had engaged with over 200 companies in the past year about climate risk.

Don’t think for a moment that this influence is not coming here. In fact, it has already arrived.

In May last year, both APRA and ASIC put climate change front and centre of the agenda. The Australian Financial Review quoted APRA’s head of insurance, Geoff Summerhayes:

The financial risk of climate change (was) were no longer a niche concern, and would soon be fundamental to every financial decision an APRA-regulated firm makes.

Furthermore:

In the future there will not be sustainable finance and other finance, all finance will need to be sustainable. Ultimately there will only be one form of finance, and that will be green finance…’

And from ASIC commissioner, John Price:

Investors need to be able to price climate risk into their investment positions…’

Make no mistake about it, climate change is now considered real by those who regulate our institutions. Those institutions now have no other choice than to tag along.

It’s not about whether climate change is real or not. That argument has already been done to death. I’m sure Harry and Meghan will pop up at all sorts of climate related events to help us out on that score.

But what investors need to know — have a right to know — is what these mega institutions do to influence companies and their boards behind the scenes.

What they have to say about climate, wages, full-time versus casual work, holidays and other general working conditions. Or even further afield, how they might wish to engage with Australia’s trading partners.

How do we know if issues they are activating for might not put them at odds with those on whose behalf they invest…or the rest of us?

The Australian Financial Review reported almost 12 months ago that since the Hayne Royal Commission:

Almost $11 billion (had) flowed out of scandal-plagued retail superannuation funds into industry funds in 2018, with AustralianSuper the biggest winner and AMP the biggest loser.’

It’s unlikely this flow will reverse anytime soon. It seems as though every other month yet another actively managed retail fund has to shutter its doors.

While money will always goes to where it gets the best return — as it should — we need to know if and how these mega industry funds wield their influence in the markets. And furthermore, they have everyone’s best interests at heart.

All the best,

Matt Hibbard,
Editor, Options Trader