Monday, 4 February 2013

Some half truths and some racing . . .

A couple pf weeks back I mentioned my concerns about the concentration of "ownership" within the ETF market. Someone out there was watching because today comes the news that Blackrock, the largest player in the market is being sued by a couple of US pension funds who claim the slice of securities lending revenues retained by Blackrock was “disproportionately large”, bore no “reasonable relationship to the services rendered or costs incurred” and was “vastly higher” than the fee that could have been negotiated with an unaffiliated lending agent, amounting to “money for nothing”. I know a lot about this side of the business, but I know nothing about how Blackrock runs it's security lending book. The idea amongst all investment banks was to sell customers so-called "delta one" trackers that saved the individual fund managers the time, money and and effort of putting together baskets of securities and managing the periodic rebalancing that occurs within an index. Now this isn't a problem with the well followed and liquid indicies within well regulated markets like the S&P500, but if we're talking emerging markets and a myriad of access and regulatory rules then it kind of make sense. Of course the other side to this is that the banks selling the products hold the physical shares and therefore so long as they pay the "delta one" buyer the returns promised there shouldn't be a problem, but there is. You see the banks then allow other customers to borrow the shares in order to short trade or hedge other instruments (such as convertible bonds). This "stock banking" business generates a lot of fees, so much in fact that some sophisticated customers have gotten wise to this and demanded a different fee structure in respect of their investment. This is at the heart of the law suit that was filed. Blackrock and all other ETF "manufacturers " will claim that the stock banking business offsets their costs and allows them to give access to investors who otherwise may have had to create specialist offices to trade in many of the markets covered by ETF's. My betting is that when the math hits the whiteboards in courts there's going to be some embarrassment amongst the bankers and the press if they do their homework are going to have a field day. I have some sympathy for Blackrock, but my advice would be to try and settle this now.

Meanwhile the Greeks are back trying to ease the conditions of the bailout. I don't know about you, but I'm still of a mind thatGreece should exit the zone in some way. Their existence in the eurozone seems to be purely as a crutch for the Spanish and Italians. What if they took the view that tax in it's current state was impossible to collect (as Russia did some time ago) and make it so cheap that the revenue will flood in. Why couldn't they just have a Singapore like 20% top bracket making it just too good to avoid. Food for thought? Clearly strawmen lock France's Hollande would hate it.

On to the road and I managed to get in a good 34k's today along Sydney's beaches. I'm hoping to head to the northside on Thursday to do Akuna Bay again. Anyone interested in a ride should just drop me a line. Thursday will be at cafe pace as it's a coming out for one of my students . . . no one gets left behind and the bunch will be stopping at the top of climbs.

On Friday I should be in position to announce a charity ride. I know most of you are not in Australia, but I have three bikes and will be looking to build a team of 5. So if you'd like to make the trip from far away I can assure you some good riding with interesting people. 

A reminder that the Giro d'Italia is getting closer. It begins on May 4th in Naples and need I remind you again that it's the highlight of the year in my view. I'm a big fan of Naples, if you've never been there or to Capri etc. the scenery should be magic.

A reminder of what to look out for:

The Maglia Rosa (pink) is the jersey worn by the leader of the time general classification.
The Maglia Rosso (red) is worn by the leader of the points general classification.
The Maglia Azzurro (blue) is the symbol of the King of the Mountain classification leader.
The Maglia Bianco (white) is worn by the best young rider in the general classification.


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