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Top Links: How bankers ‘put the clients last’

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

In a remarkable feat of probability-defying industry incompetence, not a single large cap U.S. equity fund available in Canada beat the index over the past five years. I understand that the environment has been difficult for portfolio managers – the usual forms of risk management limited returns – but there's hundreds of funds and someone should have beat the benchmark, even if by accident.

The revelation will no doubt speed the investor shift to passive investing, but there's a catch there too.

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A recent report from the Financial Times showed that index investing makes large cap stocks more expensive, and thus riskier, than they would normally be,

"Between the second quarters of 2013 and 2016, Exxon had a revenue decline of 46 per cent, an earnings per share decline of 74 per cent and a debt increase of 129 per cent, which led to a share price increase of 4 per cent … [Steve Bregman, president of Horizon Kinetics] says, 'The normal valuation for a lapsed growth company might be 12 to 15 times earnings. But all of the companies at the top of the S&P 500 have a valuation of 22 to 25 times earnings. If the indexation money comes out of them, they would be driven 25 to 50 per cent lower, relative to the market.'"

"Fund management performance in Canada has just hit a new low" – Shufelt, Report on Business
"On the perverse economic effects created by ETFs" – Financial Times
Related: "The odds of day trading yourself to a profit are lower than you expect" – Marketwatch


The conspiracy-minded tin foil hat crowd is going to be all over this Bloomberg report about secret meetings of lawyer's from the world's largest banks,

"Attendees arrived at the marble and gilded hotel primed to focus on a common scourge: class-action lawyers who seek billions of dollars from top banks for alleged market manipulations and related bad behavior. Eric Grossman, chief legal officer at Morgan Stanley, implored his confederates to hang together and resist the temptation to settle quickly. Months before, Citigroup Inc.'s general counsel, Rohan Weerasinghe, had made a decision that essentially forced several of the world's biggest banks to pay a total of $1.9 billion to settle a class action over credit-default swaps. "

"What Top Bank Lawyers Were Doing at Secret Versailles Summit" – Bloomberg

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It has long been my contention that when any outsider doesn't understand why the industry works as it does, the first question to ask is "how does this affect the investment banking department?" How can analysts stay employed when their target prices are always wrong? Because the reports still function as the marketing department for Investment Banking. That's where the big cheques come from.

Pro Market, the blog for the University of Chicago's prominent business school, recently interviewed (anonymously) investment bankers who related how client-unfriendly the industry can be,

"During an annual internal keynote in 2007, the global head of corporate finance said bluntly to our division that 'it is when our clients are the most fragile that we make the most money.' It worked like this: if a client desperately needed something from us — say, some funding — you would provide it only if the client agreed to an additional transaction that he did not necessarily have an appetite for but that was much more profitable."

"Putting the Client Last: A Former Investment Banker Explains How Clients are Being Systemically Sucker-Punched" – Pro-Market


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Tweet of the Day: "@StockBoardAsset Copper has crashed in recent sessions -414bps. Prints on low threatens new lows here " – Twitter

Diversion: I'm not the only one affected by the vile horror show the U.S. election has become, apparently, "It's Official: This Election Is Driving Americans Nuts" – Bloomberg

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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