The Royal Commission and your portfolio
Developments at the Financial Services Royal Commission, even though we are merely one week into the second round of public hearings, point to significant damage and fallout for the ‘Big-4’ banks and AMP. My colleague, W&D, has written more acutely about some of the evident behaviours.
But there is merit in considering the investments implications for your portfolio.
We have not been investors in the large financial services companies, especially the big 4 banks, for many years (big-4 banks last owned in Jan-08, and AMP Dec-12). There are a number of reasons for this. For the banks, this has included concern about their exposure to residential property, consumer debt levels / credit growth outlook, increases in capital requirements post the GFC, and more recently potential implications from the Royal Commission. And the Big-4 banks are big, complicated, highly-leveraged businesses with meaningful operational risk.
Reflecting on where things are currently with the Royal Commission, an indirect but significant reminder to us is the role that culture and incentives play in any business. And it is not just at the banks and AMP that we currently see these issues. We believe the recent developments at Blue Sky Alternative Investments Limited, a fund manager in the areas of private equity, real estate, water rights and hedge funds, are at the heart driven by culture and behaviour. The Royal Commission is a reminder to us to be attuned to investments where we assess the incentives and behaviour to be positive – because in the long term that will add to shareholder value instead of destroying it (as well as being a better way to live in the world).
Another point of note regards these developments – what you don’t own is often as important as what you do. Passive funds, or portfolios with a large-cap orientation, are likely to have at least some exposure to the banks and AMP, given their weightings in the market indices. Often they don’t have a choice but to own such investments. We are seeing that this is now detrimental to the end investor.
Our investment team, instead, assesses each investment individually; making conscious decisions on businesses to invest in, and not to invest in where we have doubts or concerns about the future (i.e. we see downside risk) – with culture, incentives and corporate behaviour being part of our consideration.
We don’t always get the risk assessment right. It is hard to predict the future, and, as with other investors, we don’t know things that aren’t public. But if we get it right more often than not, over time your portfolio will benefit and grow.
One day the banks may again be a good investment. But not just yet.