GPIF Stops Lending Stocks, and New IR Career Paths
Week Ending 6 December

Figured we’d jump out of our usual introduction to highlight what we think is the headline IR story of the week. Over the years, the IR chair has served as a stepping stone to career paths across the capital markets universe, all the way up the corporate management chain to CFO, CEO, and board-level positions…but this week, for what we believe is the first time, we saw a former IRO prepare to take a seat in the United States Senate. Kelly Loeffler, former IRO for Intercontinental Exchange and current CEO of Bakkt, was appointed by the Governor of Georgia to serve out the remaining term of departing Sen. Johnny Isakson. If you want to read political opinions about the appointment, go somewhere else; we’re just looking forward to seeing someone with IR experience delivering “advice and consent” (and maybe helping confirm future SEC Commissioners?). And, for any of you thinking about your career paths, feel free to adjust those expectations…upwards.

Alright, back to the news – let’s go get caught up for the week.

Buy Side

- The world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF), stated this week that it will no longer allow overseas shares to be loaned out from its $733B global equity portfolio. The headline announcement (FT’s take) is being colored as a blow to short sellers, or a positive for those focused on corporate stewardship, depending on your view. However, GPIF’s stance is that this decision is driven by its stewardship responsibilities as a long-term investor and concerns around the lack of transparency over the final borrower and their intentions. Put another way - GPIF has earned a net $300M in lending fees over the three-year period from 2015-2018 per its most recent annual report; this stance on stewardship is not without cost.

From a stewardship perspective, the main concerns are two-fold. While a stock is on loan the holder has the voting discretion and the asset owner forgoes their ability to vote the shares. The second concern is the transparency around who the ultimate borrower is and their intentions – potentially including activism, stock manipulation, and/or tax evasion. As is common for many index and pension funds lately, this announcement is a way for GPIF to advocate for ESG-friendly policies. Overall, GPIF’s overseas portfolio does not represent a huge portion of global lending, however, it is worth monitoring if this prompts a trend of other pension managers implementing similar policies. (Justin Vieira)

- CIO Magazine covers the asset owner community as its primary niche – so its exclusive story covering CalPERS firing nearly all of its public equity external managers to bring assets in-house is exactly what you’d expect from good beat reporting. An internal memo from CalPERS notes that the fund has struggled to meet its return goals, and hence has shrunk its external equity allocation from over $36b to $5.5b. While the memo doesn’t highlight any specific managers cut, CalPERS latest annual report mentions Arrowstreet Capital, Epoch Investment Management, and Wellington Management as the organizations receiving the highest management fees; all told, CalPERS is likely saving a large percentage of the $85 million in fees it paid out to external equity managers during 2018. The CIO piece contains a reminder that this is the penultimate move in a long history of bringing more management in-house to lower fees. Expect to see CalPERS a bit higher on each of your shareholder lists going forward – but also don’t be surprised if other large pension funds that have the scale to do similar put more pressure on their outside active managers as well.

IR Best Practices 

Cleary Gottlieb’s Neal Whoriskey makes a good point – there’s been a minor groundswell of coverage from both regulators and journalists looking at companies that have been more aggressive with revenue accounting recently. Whoriskey’s piece cites numerous headlines generated off companies that have set up incentive programs to pull revenue forward from future quarters. For context on the thought process, a McKinsey survey suggests that 47% of company executives facing a possible earnings miss that don’t have a self-described “long-term culture” would “take some action to close the gap” between actual and expected earnings. The piece also mentions some specific tactics that have drawn the ire of regulators, specifically citing “price rebates, discounted prices, free products, and extended payment terms.” The Autocorrect staff is not in the business of giving accounting advice, but we do think these stories are a good reminder for all levels of public companies; we’ll just leave it at that.

- Possibly our favorite story for the week comes with a hat tip to Bloomberg’s Matt Levine, who dedicated the lead of his recent daily column to a group of Stanford University researchers analyzing the strategy of a massive insider trading scheme. From 2011-2015, a small criminal enterprise was able to access 150,000 earnings press releases for a wide range of public companies prior to their broad distribution, with full details as to the headline EPS numbers in advance, making as much as $100m in ill-gotten profits. However, the research piece, entitled The Signal Quality of Earnings Announcements: Evidence from an Informed Trading Cartel, looks at the data from the point of view of the criminals – “if you had the press releases, could you come up with a better trading strategy?”

First off, 77% of the trades entered using the illicit information actually generated a profit – not much better than two coin flips. Further, the researchers note that the traders missed out on 70% of the most profitable trades that could have resulted from their advance knowledge; earnings announcements in the most profitable decile would have yielded 11.5% per trade, but the criminals only traded on events producing 5.15% per trade. Autocorrect readers know the answer here – the headline number on a press release is often the least important value therein. Guidance, discussions of market conditions, management confidence in business segments or geographies, and general context are all important inputs, and much more difficult to digest by an untrained (or illicit) eye. And, that’s why we have a financial community in the first place.


- At least some small part of every IRO’s time is spent painting an effective picture of why the company should be considered an “ESG investment” – but at least there’s no standards board making a central binding decision as to your “green-ness.” If you’re a European asset manager, the building blocks for that concept may be underway as we speak. IHS Markit’s Brian Lawson covers the takeaways from the latest International Capital Markets Association conference, featuring a heated debate about applying an EU “Ecolabel” to mutual funds and other investment products that meet particular “green” standards.  As anyone familiar with sustainable finance might guess, one of the core disputes underway between EU state regulators is around the “green” classification of nuclear power. There are plenty of organizations that have their own categorizations of ESG-focused investments (we currently incorporate Morningstar’s definition into our platform in addition to our own research), but the “definition of green” is not an open-and-shut case for asset managers either, much less stocks, bonds, or companies.  

Questions? Comments? Trying to explain basic economics concepts to the new FP&A intern and forced to resort to using cat videos? Reach out to your IHS Markit team, or