Ten interesting things we read this week
Some of the most interesting topics covered in this week's iteration are related to 'Improving India's mobile service', 'Parallels between GM and Tesla', and 'Why are undertakers worried even in the burgeoning death industry'
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At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favorite reads with clients under our weekly ‘Ten Interesting Things’ product. Some of the most interesting topics covered in this week’s iteration are related to ‘Improving India’s mobile service’, ‘Parallels between GM and Tesla’, and ‘Why are undertakers worried even in the burgeoning death industry’.
Here are the ten most interesting pieces that we read this week, ended April 20, 2018.
1) Lazy fund managers lead to lousy returns [Source: Financial Times]
Much has been said and written about the poor returns achieved by many active fund managers for their clients. Some critics focus on high expense ratios, but the author, Tom Brown’s experiences over the past 30 years as a director of seven quoted British companies suggests there is a deeper problem. He says that most of the fund managers he has encountered lacked in-depth knowledge of his companies, which ranged from companies in the FTSE 250 to an AIM-quoted group, because they simply did not exert themselves. Rather than conduct rigorous due diligence before investing, they seldom left their offices. Instead they relied on weak and frequently partisan analysis provided by brokers’ analysts, or on a 45-minute sales pitch by the investee company’s chief executive and finance director.
Tom couldn’t recall even one fund manager asking to visit his operations or meet more executives before investing. They therefore became shareholders in companies that they barely understood. Once invested, few fund managers put in much effort to get to know the companies better. Although most companies welcome visits by fund managers, most of them are unwilling to leave London — unless it sounds like fun. He says that most investors limit their contact to the “horse-and-pony” shows that companies offer with their results, but some do not bother even with these. Such sessions are much more productive if the fund manager has a reasonable understanding of the business, but since most do not, it encourages management teams to put on a great show. Instead of challenging executives on the key issues, he found fund managers typically concentrated parrot-fashion on rubrics like “increase margins”, “cut costs”, or “improve cash flow”.
According to him, most are awful at appraising management’s quality — they tend to work backwards from short-term earnings per share, or even worse from the share price — and their interventions to demand or to block management change are often hopelessly misguided. He recalls an incident at one FTSE 250 business wherein a recession had increased cash inflow because it needed less working capital. Tom was asked to meet two fund managers who had a proposal. Instead of recognising that the situation was temporary, they wanted Tom to repackage the company’s debt and sell it to investors, backed by what they thought was healthy long-term cash flow. These were managers of two very well-known retail funds and each had invested several million pounds (of other people’s money) in the business.
In recessions, fund managers often demand “decisive action”, such as firing irreplaceable skilled people and selling underperforming subsidiaries. Removing a lossmaker immediately increases reported profit, but over time it can cause great reductions in value. When the 2008 financial crisis hit Spain particularly hard, a support services company of which Tom was a director was pressed to sell or even liquidate its market-leading business there — luckily the company resisted and it made an excellent recovery.
The root cause of actively managed funds’ underperformance according to Tom is the very short-term focus of most fund managers. Rather than getting to know the company, they push for rapid hikes in the share price. They tend not to support investment but instead want short-term profits that facilitate increased dividends and share buybacks. Why this approach falls flat is exemplified by S&P data which shows that 75 per cent of actively managed UK equity funds underperformed over the past 10 years.
2) The rise of informational economy threatens traditional companies [Source: Financial Times]
Jeff Bezos has become the world’s richest man, with a fortune of about $125bn, because the Amazon founder was among the first to understand the new rules of data capitalism. The reason why he grasped those rules quicker than most is because he wrote most of them himself. His letters to the company’s shareholders, published every year since Amazon went public in 1997, are the best explanation for how to thrive in the digital economy. A short summary of those letters - obsess about customers, invest for the long term, exploit your network of customers to grow further, and focus on delivering the best customer experience and the lowest price via an online platform.
At Amazon, Mr Bezos has made that vision work spectacularly well in practice. A new book from Viktor Mayer-Schönberger and Thomas Range suggests how it might work in theory, too. In Reinventing Capitalism in the Age of Big Data, the authors make two provocative, interrelated arguments. First, they contend that data have largely superseded price as the most effective signaling mechanism in the economy. Second, data-rich markets will increasingly render the traditional company obsolete, with massive consequences for our economies and workforces. For centuries, price has worked as a miraculous market mechanism, connecting buyers and sellers, consumers and producers. Some $100tn of transactions take place around the world each year guided by the “invisible hand” of the market. The intriguing possibility of today, though, is whether data-rich platforms have, in some areas, invented a better ordering mechanism that can structure information and reduce ignorance. They can now match buyers and sellers taking into account multiple preferences, such as personal taste, timing and convenience, rather than just price.
If data does indeed supersede price as more efficient economic information capsules, then that will threaten many traditional companies. In essence, companies exist because they can co-ordinate some human action more efficiently than decentralized markets. They act as legal entities, raise capital, bundle risks, and separate management of assets from ownership. But the authors argue that the rise of data-rich “superstar” firms, such as Google, Apple, Alibaba and Samsung, will suck the life out of many traditional companies. Those that know how to exploit the informational advantages of data will flourish; the rest will die.
This increasing concentration of market power will have social and economic impacts that will need to be carefully managed. It may also act as poison to innovation and competition. Innovation will increasingly result from feeding data into machine learning systems to understand consumers’ needs. That will make it all the more difficult for disruptive start-ups to succeed. “So long as innovation was based on human ingenuity, then a small start-up with a smart idea could dislodge a powerful incumbent,” they said. “But in the future those companies that have the data are going to be more and more innovative. A small start-up cannot hope to compete.”
The authors believe governments should levy data “taxes” on the superstar companies, allowing challengers to access some of their informational assets to stimulate competition. This is similar to German car insurance market, where the bigger players are forced to share data with smaller competitors.
3) Improving India’s mobile phone service [Source: Livemint]
Brooking India fellow Rahul Tongia in this piece talks about India’s notoriously bad cellular connectivity, especially in terms of quality—call drops, for instance. Sure, prices are about the lowest in the world, and the overall footprint is reasonable, but even urban areas, especially Delhi, have worse than average quality. According to him, a simple “solution” would be to build more cell towers. This is technologically easy, but (1) it’s expensive; and (2) zoning would remain a challenge—getting permissions to put up cell towers is a tricky affair. Instead, he asks why not offload much of the traffic to “femtocells”—tiny, licence-free (and sometimes individual-user) “cell towers” installed by end consumers?
According to him, contrary to popular belief, we suffer poor connectivity not because existing towers are too far away (their reach is many kilometres)—but usually because they are overloaded. In a (say) kilometre radius, one may have hundreds of people whose signal is strong enough to connect, but the spectrum cannot handle that many simultaneous users owing to congestion. The rising requirement for data (especially for video) needs far greater bandwidth than for voice calls. The only solution, short of enhancing our spectrum allocations or significant technology upgrades, is to make smaller but many more cells. But this would lead to economic and zoning problems. ‘Femtocells’ however provide a solution. Being ultra-low power, these can be owned and installed by the end consumer, like a home Wi-Fi router. The analogy to a home router goes beyond size or rough cost as femtocells use the end user’s broadband or internet connection to back-haul traffic to the rest of the system. If you have a broadband connection, you could plug the ethernet cable into the femtocell and automatically use this for your cellphone instead of the overloaded neighbourhood cell tower.
The telecom company could offload traffic to the femtocell and the consumer would get better connectivity, especially in overloaded or hard-to-reach areas: a win-win situation. Consumers might pay for the femtocell, but, in return, they could save minutes on their mobile plan, or get other rebates from the telecom carrier. The femtocell could be configured for one user as well as a restricted set of users. Similarly, telecom companies should explore Voice over Wi-fi (VoWifi). In the same way that data traffic can use broadband instead of 3G/4G cellular, voice calls could directly use any available Wi-Fi signal with similar back-haul over broadband. Many advanced phones have VoWiFi built in (or it’s a software update away), but the carriers need to enable such features—none in India do, while all four major US carriers do. He notes that this is superior to WhatsApp or Skype calls, which use third-party apps. VoWiFi is direct and seamless and uses regular phone numbers, just like iMessage in an iPhone uses data for messaging parallelly with carrier texts/SMSes, based on what is available.
As to why we don’t have femtocells, he says that buying the required hardware is only half the challenge. Both femtocells and VoWiFi need carrier coordination and configuration to work, else your phone won’t know which solution to use. Carriers must enable such change, and the good news is these need not reduce revenue since they can bundle this with their calling plans. Femtocells also require regulatory approval so that they are licence- and restriction-free (from an end user’s perspective). According to Mr. Tongia, the actual power level is so low that it’s comparable to home Wi-Fi routers, or even less, and shouldn’t need zoning and city/municipality permissions.
