Apollo Shareholders Rule

One trend in corporate finance is that many companies have moved to unequal voting rights. For example, Comcast, Alphabet, Facebook, Lyft, Pinterest, and many others have some type of dual class share structure, with different voting rights for each share class. Investment management company Apollo Global Management is feeling different. Recently, former CEO Leon Black proposed that the company move to one share, one vote. As Mr. Black stated:

Moving to a “one share, one vote” structure to ensure that the voting rights of our shareholders align with their economic interests by eliminating the Class C voting stock, as well as examining a move to a single class of common stock.

Apparently, Mr. Black feels that shareholders should be counted by the number of shares owned.

 

Organizational Charts

Organizational charts can have very different structures when comparing companies and an individual with the same duties in one company could have a different title in another company. Elon Musk certainly does. In a recent SEC filing, Musk has added a new job title of "Technoking of Tesla." And in a nod to Game of Thrones, CFO Zack Kirkhorn is now the "Master of Coin." Tyrion would be proud!   

Cash Versus Earnings

A recent article in the Wall Street Journal notes that banks sharply increased their loan loss reserves in 2020 in response to the pandemic. Increasing such reserves reduces a bank’s reported profit, and decreasing them improves the profit picture. By 2021, the loan losses had not emerged at the level the banks anticipated, so their profits will be rising as the loan reserves are decreased. According to the WSJ, “U.S. banks are sitting on a pile of cash that could turn into billions of dollars of profits.” There’s only one problem. Loan loss reserves are just accounting entries. Increasing and decreasing them impacts reported profits, but has no cash flow implications. As JPMorgan CEO Jamie Dimon said "It's ink on paper . . .we don't consider that earnings." We recommend a review of Chapter 2 for the WSJ reporter.

Supply Chain Issues

Increasing demand for products in the U.S. has resulted in supply chain problems for many companies. For example, shipping from one Chinese manufacturer, which was 30 days a year and a half ago, is now three months and shipping costs have increased 50 percent. U.S. ports are a major bottleneck and ships can sit offshore for weeks at a time. Overall, global delivery times are the second longest on record. Shortages are the most severe for semiconductors, as demand increased when workers bought electronics to create home offices. In fact, the German Association of the Automotive Industry announced that only 240,000 passenger cars were made in February, about half of the November output. The reason given was the shortage of semiconductors.

Mutual Funds Underpform...Again

In our discussion of market efficiency, one trait of an efficient market is that it is difficult for investors to outperform the market. The results for mutual funds for 2020 are in and it appears that the market won again. For large-cap equity funds, 57.1 percent underperformed the S&P 500, the 11th straight year less than half of large-cap funds outperformed the S&P 500. Over a 20-year horizon, only 4 percent of large-cap funds outperformed the index, while 10 percent of mid-cap funds and 6 percent of small-cap funds could make that claim. It appears that the market is tough to beat.

Women Outperform Men

Who are better investors, women or men? A recent interview with proprietary trader Kathy Donnelly discusses reasons why the evidence suggests that women tend to outperform men as investors.

LIBOR Termination Extended

The administrator of the London Interbank Offer Rate (LIBOR) has extended the termination of some tenors until mid-2023 to allow users more time to change to another reference rate. However, the 1-week and 2-month U.S. dollar LIBOR rates will end on December 31, 2021. In the U.S., SOFR appears to be the new standard, but SOFR is not without it's own issues. SOFR does not allow treasurers to estimate forward interest rates, a major drawback. Even with this shortcoming, companies need to transition from LIBOR before it runs out.