At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.
1. We’re paying our CEOs all wrong (Source: Bloomberg.com )
The article argues that compensation plans for CEOs may have “no empirically demonstrated validity”. In the 1990s pay experts favoured the use of stock options. Later awards of stock that vest over time became popular. Now, a full third of pay is triggered only if CEOs hit performance targets. Increasingly, that target is simply a higher stock price. Many critiques of CEO pay focus on the pitfalls of short-term thinking, with examples of leaders hitting their quarterly numbers to the detriment of their company’s health. But behavioural economics approach argues that short-term incentives can improve long-term performance. I.e., executives are more likely to put priority on their annual bonuses, which arrive sooner and are more often tied to measures over which they have some control, such as profit and efficient use of capital.
2. Two top asset managers to drop staff bonuses (Source: FT.com )
Two prominent UK asset managers have decided to stop paying executive bonuses as pressure mounts on the investment industry to rethink rewards top employees. It comes as the industry faces greater scrutiny over remuneration and investment performance. Some experts questioned the logic of removing staff bonuses as it could make it harder for fund companies to control costs in difficult market environments. Higher fixed salaries across the industry could also result in higher fees for investors, according to the head of a boutique fund house. “The issue the industry has is that it relies on too-high fees,” he said. “If everyone adopted Neil Woodford’s approach that [would] massively increase fixed costs, which means the industry is even less incentivised to change its fee [structures].”
3. Investment: Rise of the DIY algo traders (Source: FT.com )
Google: Will tech-savvy amateurs be able to beat the market?
Dan Houghton, a London restaurant chain owner by day and algorithmic stock trader by night, stumbled on a company tailor-made for him: Quantopian, an online trading platform and “crowdsourced” hedge fund. “Burrito-Dan” is one of a swelling number of mathematicians, programmers, data engineers and physicists taking advantage of cheap, powerful computers and the availability of financial data to code their own trading strategies. Some believe this new wave of amateur algo traders can be harnessed using crowdsourcing techniques to disrupt one of Wall Street’s elite professions — the hedge fund manager. While the conventional hedge fund industry grapples with losses, the quant hedge fund industry is on its seventh straight year of client inflows, with total assets going from $407.7bn in 2009 to $878.7bn this year. New platforms like Numerai, Quantopian, Quantiacs and QuantConnect enable a new generation of iconoclasts who will help upturn the traditional hedge fund model.
4. Rural India is eating less than it did 40 years ago (Source: Scroll.in )
A National Nutrition Monitoring Bureau says 70 years since Independence, rural India, where 833 million Indians (70%) live, people are consuming fewer nutrients than required. On average, compared to 1975-79, a rural Indian now consumes 550 fewer calories and 13 gm protein, 5 mg iron, 250 mg calcium and about 500 mg vitamin A lesser. Lower status of women in South Asia was offered as an explanation. However, despite declining nutrient intake, malnutrition levels in India have decreased. In absolute terms, however, these levels remain among the highest in the world. Malnutrition in India is still 13 times worse than in Brazil, nine times worse than in China and three times worse than in South Africa. Unfortunately, not enough attention is paid to this problem – in 2015, the National Nutrition Monitoring Bureau, the only source of longitudinal data on nutrition levels and food intake across 10 states of India, was shut.
5. How unwanted second-hand books became big business (Source: FT.com )
Google: The company that turned its counter-intuitive idea into a multimillion-pound venture
Over a decade ago three young men in England, taking a contrary view on second hand books, tried buying such books at car boot sales for pennies and auctioning them on eBay. The results were spectacular. Now, their business ‘World of Books’ employs more than 500 people in a business park premises in mundane Goring-by-Sea. It buys 70m volumes a year, turns over £30m and made £1.3m profit in 2015, its fourth profitable year. One of the many clever things about World of Books is that it doesn’t need to maintain its own retail site. Its system is integrated with all the major customer-facing platforms — when you buy a second-hand book on Amazon, it will often have come from Goring via the ecommerce behemoth.
6. The risky business of hiring stars (Source: Harvard Business Review )
A Harvard study argues that it is better to grow stars (CEOs, researchers, software developers or leading professionals in investment banking, management consultancy, law or public relations) within the company than hiring. The reasons: 1) The star’s performance falls sharply and stays well below old achievement levels thereafter. 2) The group’s performance slips due to interpersonal conflicts and a breakdown of communication. 3) The company’s valuation suffers as investors perceive the appointments as value-destroying events. The authors discuss how the companies can grow stars. Sanford Bernstein and Lehman Brothers spent inordinate amounts of time and money finding the right talent and grooming it. Others recruit smart people and develop some into stars, knowing that they may lose them to rivals. Only a few corporations recruit bright people, develop them into stars, and do everything possible to retain them.
7. Mafia management (Source: Economist.com )
A new TV soap making waves, Gomorrah, is a drama about a collection of Italian gangs known as the Camorra that run a criminal empire in Naples. The focus is on drugs, particularly cocaine. However, the most striking thing about Camorra is how good they are at business. It is organised like a corporation, with descending levels of power. Top tier of senior managers determine strategy and allocate resources; a second tier of middle managers purchase and process the product; a third level of sales chiefs co-ordinate distribution; a fourth grade of street salesmen deliver the product to customers. Camorra has also put its own unique spin on standard management techniques. Team-building: New recruits are initiated with quasi-religious ceremonies. Rising stars are given endearing nicknames such as Carlucciello ‘o mangiavatt (little Charles the cat-eater). They take care of the relatives of workers who die on the job. The CSR pays. Locals take the gangsters’ side during police raids!
8. The “sharing economy” is dead, And we killed it (Source: Fastcompany.com )
Collaborative consumption, or 'the sharing economy' took hold around 2010. Amid one of the worst recessions in history, this allowed us to focus on sharing rather than individualistic consumption. A number of startups came up. Ecomodo in 2007; Crowd Rent, Share Some Sugar, and NeighborGoods in 2009; Thingloop, OhSoWe, and SnapGoods in 2010. Today only NeighborGoods is alive. It was a beautiful idea that struck hard, but when it died, nobody seemed to notice. Most of these platforms discovered a incongruity between enthusiasm and actual use. Lyft debuted as a neighbourly version of Uber but now competes on price. Parking Panda once marketed itself as a way to share parking spaces with neighbours but now many of its shared parking spaces are in restaurants, hotels, commercial garages, and airports. It’s not that these tools and sites aren’t good services or that they don’t make things easier. It’s rather that they have little to do with the original promise of the sharing economy.
9. Indian startups lack the scale and depth to make another silicon valley (Source: Quartz India )
Three pillars characterize thriving startup ecosystems: breadth, scale, and depth. Breadth - how many sectors the ecosystem spans. Depth - how many players in each sector. Scale – size of the company in each sub-sector. Silicon Valley scores high. How does India stack up? Indian startup space offers breadth across sectors (Mitra Biotech, Freshdesk, Postman, Forus Health, The Viral Fever) but lacks scale. On depth, you can count on the fingers the number of startups in each sector. The lack of depth is partly due to the lack of scale. These structural problems need innovation to address the lack of widespread broadband availability and inadequate access to digital payment platforms, for instance. Government and large corporations will have a major role to play. The success of services such as Reliance Jio, which seeks to roll out a pan-India 4G network, and the unified payments interface will be crucial. The tailwinds are certainly in India’s favour given the many initiatives launched in the past 12 months.
10. Japan vs currency speculators (Source: Project Syndicate )
Even as Japan struggles with its deflationary torpor, it current travails arise from yen’s appreciation – 24% against major currencies last year. Expansionary policies – a pillar of Abenomics – should contribute to currency depreciation. However, the US Fed’s dovish approach to exiting its own quantitative-easing program and expansionary policies in other major economies have weakened the impact. Recently, Brexit, along with introduction of negative rates by central banks, including the Bank of Japan (BOJ), shook markets. Taking advantage of this, hedge-fund managers and other speculators have increasingly been betting on the yen’s appreciation. Government threats of action against exchange-rate movements deemed speculative have remained just that - threats. The author argues that the MOF should instead intervene courageously in currency markets to stem the yen’s appreciation. Speculators will learn a tough lesson and Japan’s economy could get back on track.