Big Bang Goes Off Smoothly

It appears that the "big bang" over the past weekend went relatively smoothly. The big bang was the transition from LIBOR to the Secured Overnight Funding Rate (SOFR) for exchange-traded swaps at the Chicago Mercantile Exchange. The LIBOR scandal in 2012 caused regulators and market participants alike to search for another reference interest rate that was less susceptible to manipulation. In the U.S., SOFR has become that reference interest rate.

Universities And Pensions Underperform

We recently discussed the underperformance of Harvard's endowment fund, but it appears that Harvard is not alone. A recent article shows that the endowment funds of major universities have underperformed the market by abut 1.6 percent per year. What is so interesting about that 1.6 percent? That is the average management fee paid by the endowment funds! In other words, the overall investment performance is the same as the market, but once fees are accounted for, performance lags the market. Of course, public pension funds have performed slightly better, only underperforming the market by about 1 percent.

SRI Hits Oil Companies

It appears that socially responsible investing (SRI) is affecting at least some oil companies. Five of the largest six banks have decided that they will no longer finance drilling projects in the Artic. As renewable energy becomes more widely used, oil and gas reserves may become less valuable. At the same time, since bank financing appears to be drying up, financing for the industry becomes more difficult to obtain.

Market Trounces Harvard

So how hard is it to beat the market? From 1993 to 2008, the portfolio managers of Harvard’s endowment fund beat the S&P 500 by almost five percent per year. A major contributor to that performance was a hugely successful investment in timber. Since then, things have not been so rosy (or even Crimson). Using the analysis in the article, the Harvard endowment fund has underperformed a blended portfolio of stocks and bonds by one percent per year over the past 20 years. Based on the current endowment value of $42 billion, this means the endowment potentially lost out on $420 million in growth per year, or roughly $8.4 billion dollars of growth over this period. It is tough for the best and brightest to beat the market.

Austria's 100-Year Bonds

In 2017, Austria issued 100-year bonds with a paltry yield of 2.112 percent. But recently, the country issued more 100-year bonds with the unbelievably low yield of .88 percent! And the issue was four times oversubscribed, meaning investors were willing to buy four times the amount of bonds than were being offered. Given the ultra-low interest rate environment, investors appear to be taking risks too attain any positive yield. For example, half of the German government debt has a negative yield, and the yields on Austrian government debt with less than 20 years to maturity are negative as well. 

Thiel In Control

Palantir Industries, the data-mining company owned by billionaire Peter Thiel, went public this week. But take note, if you buy stock in the company you will have virtually no say in the company's operations. Thanks to super-voting shares, Thiel and two other co-founders will retain voting control in perpetuity. Other Silicon Valley companies like Alphabet, Facebook, and Snap have similar voting structures. As Ohio State professor Michael Weisbach notes, "They  set it up so Peter Thiel can still sort of run it like a private company and still have the advantage of being public." The three co-founders will retain 49.99 percent of the voting power in the company regardless of the number of shares owned.    

Harley-Davidson Abondons India

Harley-Davidson announced that it was discontinuing manufacturing and sales in India, effectively abandoning the world's largest motorcycle market. Harley-Davidson joins the list of foreign manufacturers that have not been able to enter the Indian market, including General Motors, which stopped sales in India in 2017, and Ford, which entered a joint venture to scale back its Indian operations. These companies all exercised the option to abandon.