Tag Archives: etfs

Maximising Shareholder Value Has Nothing To Do With Maximising The Share Price

The idea that directors should seek to maximise shareholder value has come in for a lot of flak in recent years. James Montier of GMO even wrote a piece on it called ‘ The World’s Dumbest Idea ‘. One of the most prominent criticisms of maximising shareholder value is that it causes directors to focus too much on their company’s share price, which leads them to underinvest in the company’s long-term future in order to boost short-term profits (and therefore, the share price). This is not so much a failing of the concept of shareholder value maximisation as it is a failure to understand what shareholder value is and what directors can do in their attempts to maximise it. True shareholder value is a measure of long-term value The value of a company is essentially the value of all the cash it will return to shareholders over its remaining lifetime. Let’s assume that Sainsbury ( OTCQX:JSAIY ) ( OTCQX:JSNSF ) will survive another 100 years before closing its doors for the last time. In that case, the value of the company today is the value of all dividends paid out over the next 100 years plus any cash returned to shareholders, when the company is wound up (which we can ignore because it is usually zero). A dividend today is preferable to a dividend in 50 years’ time, so future dividends are usually “discounted” by an annual discount rate. If you want a 10% annual return on your Sainsbury investment, then you would discount the value of future dividends by 10% each year, in which case a 100p dividend 10 years from now would have a “present value” of about 42p. Add up those discounted future dividends and hey presto, you have the present “shareholder value” of Sainsbury, at least according to an investor who wants a 10% rate of return. A different discount rate would provide a different shareholder value. Because the company’s shareholder value is the discounted sum of 100 years of dividends, only a fraction of Sainsbury’s value today comes from dividends paid in the next 10 years. Most of its shareholder value comes from dividends that are expected to be paid more than 10 years in the future, as is the case for most mature companies. This is the true meaning of shareholder value; a multi-decade stream of dividends, which directors should be attempting to maximise, without taking unnecessary risk. True shareholder value maximisation should be much more about working to improve and expand the business for the next 10 years and the 10 years after that, rather than hitting short-term profit expectations. Share prices have almost nothing to do with shareholder value Those who believe in the wisdom of crowds might say that yes, the true shareholder value of a company is indeed the discounted value of its future cash returns to shareholders, but we can never know those cash flows and therefore can never calculate an accurate figure for shareholder value. They might go on to say that our best estimate of shareholder value is the market value or share price of a company, and so it is entirely sensible for directors to pay attention to share price and to be paid according to its performance. Utter drivel, is what I would say to that. The share price or market value of a company is, at most, a combined “best guess” by investors as to what a company’s shareholder value really is. However, calling it a “best guess” is wildly optimistic as a large portion of equity trades are carried out by traders who don’t even know the names of the companies whose shares they are buying and selling (especially the computer-driven High Frequency Traders who own shares for thousandths of a second). Even if all market participants were long-term dividend-focused investors, they still wouldn’t have the faintest idea what dividend Sainsbury will be paying 10, 20 or 30 years from now, and therefore no idea what its shareholder value is (and the same would be true for pretty much all companies). Rather than an estimate of shareholder value, share prices are more closely connected to factors like current dividends, current earnings and any and all combinations of news, noise, expectations and emotions; none of which have anything to do with true shareholder value. So the idea that maximising shareholder value means maximising the share price is a joke, which means that compensating executives with one-way bets on the share price (otherwise known as stock options) is equally daft. If executive directors are to be compensated by share price movements at all, it should be by insisting that they invest a significant amount of their own money into the company and to keep it invested for as long as they are on the board. In addition, they should be encouraged to focus on maximising true shareholder value rather than the company’s market value. As Lawrence Cunningham describes in the introduction to his book, The Essays of Warren Buffett : “The CEO’s at Berkshire’s various operating companies enjoy a unique position in corporate America. They are given a simple set of commands: to run their businesses as if (1) they are its sole owner, (2) it is the only asset they hold, and (3) they can never sell or merge it for a hundred years. This enables Berkshire CEOs to manage with a long-term horizon ahead of them, something alien to the CEOs of public companies.”

Growth Beating The Pants Off Of Value In 2015

2015 has been the year of the “FANGs.” Investors have fixated on just a handful of glamorous tech stocks – Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google ( GOOG , GOOGL ) (now Alphabet) – that have held the broader market afloat even while earnings this year for American stocks have been mostly disappointing and the “average” stock has actually been falling. For lack of anywhere else to go, the investing public is crowding into a very small handful of recognizable names and hoping for the best. Consider the relative performance of the growth and value segments of the S&P 500. (Standard & Poor’s breaks the S&P 500 into two roughly equal halves, based on valuation, momentum and other factors.) Year to date through November 12, the S&P 500 Growth index – which includes the FANG stocks – was up 3.9%. Its sister, the S&P 500 Value index, was actually down by 5.5%. This is a peculiar market in which cheap stocks are getting cheaper and a handful of extremely expensive names keep getting more expensive. As a case in point, look at the advance-decline line, a simple measure of market breadth. Starting in April, the advance-decline line started to trend downwards and, apart from a brief rally in October, really hasn’t stopped sagging since. This means that fewer and fewer individual stocks are still rising, even while the market grinds slowly higher. In a “healthy” bull market, the advance-decline like rises along with the major stock indexes. So when you see an “unhealthy” market like this, one of two things has to happen. Either investors start to spread their bets across a wider swath of the market and market breadth improves… or they finally throw in the towel and sell the few remaining leaders. So, how on earth are we supposed to invest in a market like this? You really have two options. The first is simply to ride the momentum of some of these glamor names while it lasts. Sure, the FANGs are expensive. But that doesn’t mean they can’t get a lot more expensive in the short term. So, riding the momentum is a perfectly viable strategy so long as you’re ready and willing to sell at the first sign of weakness. The second option – and the one I am following in my Dividend Growth model – is to look for deep values amidst the carnage, or stocks that are already so cheap, you don’t mind if they get cheaper. While the S&P 500 Value index is down only 5.5% this year, there are plenty of stocks that are down 30% or more. Several midstream oil and gas pipeline stocks are currently sitting at multi-year lows and are sporting cash distribution yields I never expected to see again. And of course, there is always the third option: Keep a larger percentage than usual of your nest egg out of the stock market altogether, and simply wait for better prices across the board. My recommendation? Try some combination of the three. Keep your long-term portfolio heavy in cash and deep-value opportunities, but set a portion of your portfolio aside for more aggressive short-term trading. This article first appeared on Sizemore Insights as Growth Beating the Pants off of Value in 2015 . Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Are EM Stocks Finally Emerging?

It seems as if in every client meeting lately, I’m getting questions about emerging market (EM) stocks. Many investors are looking for that magic bottom and are wondering if it’s time to step back in, while others are wondering if we’ll see further declines due to commodity weakness and eventual Federal Reserve (Fed) tightening. These questions come as EM stocks have had a rollercoaster year , with valuations beaten up by concerns about China’s economy , slowing global growth and lower commodity prices , just to name a few of the headwinds facing developing markets. According to Bloomberg data, by the end of the third quarter, the MSCI Emerging Markets Index was down 15 percent year to date. However, since then, emerging markets have reversed course , with the index gaining roughly 5 percent since the last day of the third quarter, according to Bloomberg data as of November 9. Of course, this ride has been rocky as well, with the index rallying following news implying a Fed delay, like the weak September jobs report, and then losing steam in early November after upbeat October jobs data increased expectations of a December hike. So, is this the beginning of an EM rally? Or are the gains since the third quarter just a temporary bounce? I believe it’s too early to call a recovery. A look at what has caused the volatile advance helps to explain why. First, a little primer on what typically happens to EM investments when a Fed rate rise is imminent. When markets believe the Fed will raise rates in the short term, investors generally add exposure to U.S. assets as they search for higher returns and potentially stronger currencies, rather than explore EM investments and their generally higher risk. In contrast, when Fed action is delayed, as has been the case this fall, flows have generally gone in the opposite direction, based on Bloomberg data. Investors increase risk exposure for potential return, adding exposure to EM equities and other risky assets. This is what seems to be the catalyst for the fourth-quarter EM rally. Unfortunately, as EM data accessible via Bloomberg testify, it hasn’t been driven by signs of economic improvement, firming inflation or rising earnings. Rather, it’s been primarily a reaction to the Fed’s delay in September, and the belief that the Fed would not raise rates until 2016. But when investors believe the Fed will, in fact, raise rates sooner than that, they may very well reduce their EM exposure. We saw this in early November, when a positive labor market report caused investors’ expectations of the probability of a Fed hike in December to rise from 56 percent on November 5 to roughly 70 percent the following day as measured by the pricing of federal funds futures, according to Bloomberg. EM stocks sold off on the news, with the index down roughly 4 percent since November 5, based on Bloomberg data as of November 9. Whether a Fed rate rise comes before December 31 or not, it’s likely to come eventually. In addition, many EMs are forecasted to continue to experience weak economic growth and geopolitical issues. So while EM valuations are relatively cheap, they may remain cheap for some time, and could even get cheaper from here. So what does this mean for portfolios? With valuations cheaper than they have been in over a decade, patient long-term investors may want to consider slowly building back benchmark buy-and-hold positions . But while broad exposure to the asset class can help diversify risk, it’s also important to remember that EM stocks aren’t a homogenous asset class. In our latest Investment Directions monthly market commentary , my investment strategist colleagues and I highlight select EM countries where we see potential opportunities right now, including South Korea. Exchange traded funds such as the iShares core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) and the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) can provide exposure to broad emerging markets, while exchange traded funds such as the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) can provide access to South Korea. This post originally appeared on the BlackRock Blog.