Happy Friday!

📝 Focus

• Active Fundpocalypse?

📊 In the Markets

• Tesla and Netflix beat, then get beaten

• Core (UK inflation) Blimey

📖 MoneyFitt Explains

🎓️ FUNDS that are TRADED on an EXCHANGE

📝 Focus

Active Fundpocalypse?

Recently, PwC released research claiming that one in six asset management groups will likely disappear from the market by 2027. The active asset management industry faces massive consolidation as many struggle to justify their existence and stem the gushing bleed of their assets into passive investment vehicles such as index-tracking ETFs🎓. Many are resorting to mergers with other floundering players or succumbing to acquisition by industry giants with greater scale. Many have also attributed recent poor performance to market volatility around interest rate hikes and the pandemic, but poor fund performance has been a significant feature of the industry for longer than that. Much much longer!

..... ▷ The well-followed SPIVA (S&P Indices Versus Active) scorecard tracks the performance of actively managed funds against their respective benchmarks. Numbers are ugly: After just 5 years (to the end of 2022) 88% of all US domestic funds underperformed their benchmarks (83% of international funds), meaning that over 4 in 5 actively managed funds fail to achieve what they are paid (extremely well) to do. 20 years of such SPIVA scorecards have shown that actively managed funds have underperformed over short- and long-term periods and that “a minuscule percentage” of market outperformers in one period repeat the feat in subsequent periods.

..... ▷ In 2022, shares of MegaCap companies like Apple, Meta and Amazon crashed. Given that MegaCap companies make up a significant portion of the standard, market cap-weighted benchmark S&P500 index, the equal-weighted S&P500 outperformed it by 7 percentage points. In other words, the average stock in the index would have beaten the benchmark. This was a great opportunity for active fund stock pickers to finally outperform! And yet a slim majority of managers still managed to underperform. 51% of large-cap managers underperformed compared to 85% in the previous year... so an improvement, but only taking it to an almost random 50-50 chance of outperformance. With the surge in MegaCap performance in 2023 to date, it will be interesting to see how the stats will look for the full year.

..... ▷ Investment Company Institute data shows that in 2022, investors pulled $1.1tn from mutual funds and invested $609bn in US-listed ETFs. Fund managers such as JPMorgan, Pimco, Franklin Templeton, BlackRock and T Rowe Price have been launching actively managed ETFs🎓 run by their "star managers" to catch the trend. To be clear, these are the exact same managers with the same salaries and overheads who appeared in the pool of actively managed funds mentioned above, but now in the popular and easily accessible ETF format. Management fees of the ETF versions of their funds tend to be lower than at mutual funds but still much higher than low-cost passive index fund ETFs tracking their benchmarks. The aim is, exactly as before, to outperform those benchmarks. (SPIVA says "fees alone cannot explain the fact of majority underperformance in most equity categories.") With the allure of "star managers," 17% of net US ETF inflows so far this year have been into actively managed ETFs despite the industry's dire track record of underperformance.

Writer: Alexis Kong, NUS Business School, 2024

📊 In the Markets

Tesla and Netflix beat, then get beaten: After a healthy start to the earnings season from the big banks last week, Thursday saw weak results showing up in places as diverse as Tesla, Netflix, TSMC and ABB, with the former two leading the tech-heavy Nasdaq down 2%, its largest single-day percentage fall since March 9th, though both companies, perversely, reported profits much higher than the forecasts of Wall Street's Finest. Tesla dropped 9.7% (losing $89bn in market value in a day, about one entire Mercedes-Benz company), and Netflix gave up 8.4%. Both suffered from what appeared to be quite well-telegraphed business decisions translating into drops in certain key metrics which traders took for weakness.

..... ▷ In Tesla's case, it was weaker margins... in fact, Tesla's higher margins, thanks to its industry-leading scale, were what gave Elon Musk the firepower to launch the price war in the first place, rather than having weaker margins as a result of the price war. Higher sales did come through as a result, and higher sales usually mean less inventory and potentially greater economies of scale. And net profits were better than expected: adjusted earnings per share, or "EPS", was 91 cents vs 82 cents forecast. (Musk warned of more price cuts to come.)

..... ▷ In Netflix's case, it was weaker-than-expected revenues and 3% lower average revenues per subscriber as a result of the introduction of the ad-supported subscription tier and the crackdown on password sharing... in fact, the moves were made to reignite stagnant new subscriber growth, which it did, adding almost 6 million new subscribers... triple what Wall Street was confidently forecasting. And net profits were better than expected: diluted EPS was $3.29 vs $2.86 forecast. (Netflix may kill off the cheapest ad-free plan to move more subscribers to its nascent ad-supported tier.)

Core (UK inflation) Blimey: The UK benchmark index, the FTSE-100, continued its rally for a 2-day gain of 2.6% after June inflation (see below) fell by more than expected to 7.9%, the lowest since March 2022 and largely from a sharp fall in petrol prices, though food inflation remained crazily high at 17.3% from an even crazier 18.7% in May. The previous month saw inflation at 8.7%, while The City's Finest had been expecting a milder drop to 8.2%. Cue euphoria in equity and bond markets as hopes rose that the Bank of England may not raise interest rates quite as high as feared in the months ahead, which in turn led to weakness in the Pound Sterling, now able to buy 1.2% fewer USD than two days ago.

..... ▷ Strip out volatile food and fuel prices from the "headline" inflation, and you get "the core" inflation rate, which for the UK was 6.9% in June 2023, only a little lower than May's 30-year high 7.1% and still very much higher than the Bank of England's target rate of 2%. (Just because it strips out food and fuel doesn't mean there is no impact, as those real-world costs feed through indirectly into the other components.) UK inflation remains significantly and stubbornly higher than in the US and Europe, so interest rates are still expected to rise and continue rising in the UK... though possibly at a slower pace and peaking at a lower level. Given the relative weakness of the UK economy, hobbled by the cost-of-living crisis and rolling industrial strike action, this would be a relief but possibly not enough to keep the economy out of a recession.

Inflation - a mini-explainer

- Inflation is basically a general increase in prices in an economy over a period of time. In most cases, it is compared with prices a year ago, so that 5% inflation means that what cost $100 a year ago would now cost $105.

- When this happens, the value, or purchasing power, of money goes down. Inflation is usually caused by too much demand for something relative to how much is available or by the cost of producing (or importing) something going up. Both can lead to a vicious cycle of rising prices, usually when higher prices become expected.

- The Consumer Price Index is a way of measuring inflation in an economy based on the increase in the overall price of a "basket" of items that an average individual would spend on.