Finance

THE HISTORY of modern finance is littered with ideas that worked well enough at small scale—railway bonds, Japanese skyscrapers, sliced-and-diced mortgage securities—but morphed into monstrosities once too many punters piled in. When it comes to sheer size, no mania can compare with that for passive investing. Funds that track the entire market by buying shares in every company in America’s S&P 500, say, rather than guessing which will perform better than average, have attained giant scale. Fully 40% of the total net assets managed by funds in America are in passive vehicles, reckons the Investment Company Institute, an industry group. The phenomenon warrants scrutiny.Index funds have grown because of the validity of the core insight underpinning them: conventional investment funds are, by and large, a terrible proposition. The vast majority fail to beat the market over the years. Hefty management fees paid by investors in such ventures, often around 1-2% a year (and more for snazzy hedge funds), add up to giant bonuses for stockpickers. Index funds, by contrast, charge nearly nothing (0.04% for a large equity fund) and do a good job of hugging their chosen benchmark. Given time, they almost inevitably leave active managers in the dust.“Trillions”, a new book by Robin Wigglesworth, a journalist at the Financial Times, chronicles the rise of passive funds from 1960s academic curiosity to 1970s commercial flop and then runaway success in the 2000s. It estimates that over $26trn—more than a year’s economic output in America—is now lodged in such funds. That is more than enough to set nerves jangling, given high finance has in the past built structures that turn out to be too big to fail.Mr Wigglesworth, while broadly celebrating this passive revolution, also lays out where the pitfalls might lie. An obvious one is that index funds hand power to the companies that compile the indices. Once-dull financial utilities that reflected the performance of markets, such as MSCI, S&P and FTSE, now help shape them instead. Including a company’s shares in an index can force investors around the world to snap them up. The power of the index is indeed a potential shortcoming. But by and large the weakness is obvious enough for regulators and investors to guard against it.Another concern is corporate governance. BlackRock, State Street and Vanguard, the three titans of passive investing, together own over 20% of large listed American firms (among other things). Although one person’s vote makes no difference, active managers who pick shares in a handful of companies will push for them to be well-run. Passive investors whose portfolio includes several hundred names might not be so fussed. That is worrying, given they could control the outcome of many a boardroom spat.Passive giants respond that they are attentive owners, with staff dedicated to prodding the management of the companies they own. Better yet would be for their power to be diffused more widely. That is happening: BlackRock, which on October 13th announced it now manages $9.5trn in assets, plans to hand over some proxy-voting rights to the investors in its funds. This might also alleviate another concern, that companies owned by the same mammoth passive fund will not compete as energetically, lest their success damage other holdings in their shareholders’ giant portfolios.The biggest gripe of asset managers is that tracker funds free-ride on stockpickers’ hard work. Even mediocre active funds, taken together, help direct capital to worthwhile companies (and away from poorly run ones). Inigo Fraser Jenkins of Bernstein, a broker, once decried passive investing as “worse than Marxism”: Soviet planners did a lousy job of allocating resources to promising ventures, but at least they tried. Index funds, however, revel in their passivity.What to make of this risk? A market dominated by passive investors would indeed kick up concerns over whether capital is going to the right places. But domination is far from the case today. Active managers still play a big role in markets. Retail investing is vibrant (if sometimes over-exuberant). Private-equity firms keep public and private valuations broadly in line. Venture capitalists are flocking to startups.Furthermore, the hypothetical flaws of passive funds must be set against the very real savings investors have made since they arrived on the scene. The effects of rising passivity are worth pondering, but not reversing.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Passive aggressive” More

Here are the numbers: Earnings: 85 cents a share vs the 71 cents a share estimate of analysts surveyed by Refinitiv
Revenue: $22.87 billion vs the $21.8 billion estimate
Shares of the bank climbed 2.8% in premarket trading.

Bank of America posted third-quarter results on Thursday that exceeded analysts’ expectations as it benefited from better-than-expected loan losses and record advisory and asset management fees.
Here are the numbers:

Earnings: 85 cents a share vs the 71 cents a share estimate of analysts surveyed by Refinitiv
Revenue: $22.87 billion vs the $21.8 billion estimate

Profit surged 58% to $7.7 billion, or 85 cents a share, as revenue climbed 12% to $22.87 billion. Results were helped by a $1.1 billion reserve release that led to a $624 million boost after chargeoffs.
Shares of the bank climbed 2.8% in premarket trading.
“We reported strong results as the economy continued to improve and our businesses regained the organic customer growth momentum we saw before the pandemic,” CEO Brian Moynihan said in the release. “Deposit growth was strong and loan balances increased for the second consecutive quarter, leading to an improvement in net interest income even as interest rates remained low.”
Net interest income, a closely watched figure for banks, jumped 10% to $11.1 billion, exceeding the $10.6 billion StreetAccount estimate.
Investors had wanted to see loan growth improve from a weak first half of the year because that helps banks produce more interest income. Indeed, loan balances increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans, the bank said.

More loan growth is expected from here, Moynihan told analysts Thursday in a conference call.
Like rival JPMorgan Chase, Bank of America posted strong results in investment banking, wealth management and equities trading businesses.
Investment banking fees rose 23% to $2.2 billion, helped by a 65% surge in advisory fees to a record $654 million. Analysts had expected $2 billion in investment banking revenue.
The bank’s trading operations exceeded expectations for the quarter. Bond trading revenue dipped 5% to $2 billion, edging out the $1.93 billion estimate. Equities trading surged 33% to $1.6 billion, roughly $150 million higher than expected.  
The bank’s wealth management division posted a 17% increase in revenue to $5.3 billion, driven by record asset management fees of $3.2 billion.
Like other lenders, Bank of America set aside billions of dollars for credit losses last year, when the industry anticipated a wave of defaults tied to the coronavirus pandemic. Banks have been releasing some of those funds when the losses didn’t arrive, and analysts will be curious how much of a boost that dynamic will have in the second half of the year.
They will also likely ask CEO Brian Moynihan about succession planning after his most senior deputy, chief operating officer Tom Montag, announced his departure. Last month, Moynihan announced a sweeping management overhaul, including a new finance chief, technology head, general counsel and chief administrative officer.
Shares of Bank of America have climbed 42% this year before Thursday, exceeding the 36% gain of the KBW Bank Index.
On Wednesday, bigger rival JPMorgan posted results that beat expectations, driven by a $1.5 billion boost from better-than-expected loan losses. On Thursday, Morgan Stanley topped expectations as the firm posted record results in investment banking and asset management.
This story is developing. Please check back for updates.

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Wells Fargo signage on May 5th, 2021 in New York City.
Bill Tompkins | Michael Ochs Archives | Getty Images

Wells Fargo on Thursday posted a jump in profit in the third quarter, boosted by a release of its credit loss reserves as the recovery from the pandemic accelerated in 2021.
Shares of the bank rose about 1% in premarket trading following the earnings release. Here’s how the third-quarter compared with Wall Street estimates:

Net income: $5.1 billion, a 59% increase from $3.2 billion during the same quarter a year ago.
Earnings per share: $1.22 a share, adjusted, topping consensus estimate of 99 cents per share, according to Refinitiv.
Revenue: $18.83 billion, compared to consensus estimate of $18.35 billion.

Results were helped by a $1.65 billion reserve release that led to a $1.4 billion benefit after chargeoffs, the bank said in a release. Wells Fargo continued to release funds it had set aside during the pandemic to safeguard against widespread loan losses.
The bank paid a $250 million fine for its “unsafe or unsound practices” tied to its loan-modification program, according to the Office of the Comptroller of the Currency.
“We are a different company today and the operational and cultural changes we’ve made are enabling us to execute with significantly greater discipline than we have in the past,” CEO Charlie Scharf said Thursday in a statement. “I believe we are making significant progress, and I remain confident in our ability to continue to close the remaining gaps over the next several years, though we may continue to have setbacks along the way.”
Wells Fargo saw its net interest income decrease by 5%, primarily due to soft demand and elevated prepayments and the impact of lower yields on earning assets.
Wells Fargo repurchased 114.2 million shares, or $5.3 billion, of common stock in third quarter 2021. The bank also increased the common stock dividend to 20 cents per share, up from 10 cents per share in the prior quarter.

The bank paid $72.6 million to settle a government lawsuit accusing the bank of defrauding hundreds of commercial customers, a filing last month revealed. Wells admitted to overcharging 771 businesses on foreign exchange transactions from 2010 through 2017.
Shares of Wells Fargo are up more than 50% this year on the back of the economic recovery after losing over 40% in 2020.

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Russia has hinted it could move away from dollar-denominated oil if the U.S. continues to impose targeted sanctions.
Asked whether crypto could be used as an alternative to the greenback, President Vladimir Putin said it was “too early to say.”
“I believe that it has value,” he told CNBC Wednesday. “But I don’t believe it can be used in the oil trade.”

Russian President Vladimir Putin delivers a speech during the Russian Energy Week event on October 13, 2021 in Moscow, Russia.
Mikhail Svetlov | Getty Images

Russian President Vladimir Putin thinks cryptocurrencies have value — but he’s not convinced they can replace the U.S. dollar in settling oil trades.
Some months ago, Russia’s deputy prime minister, Alexander Novak, suggested the country could move away from greenback-denominated crude contracts if the U.S. continues to impose targeted economic sanctions.

Asked whether bitcoin or another cryptocurrency could be used as an alternative to the dollar in trading oil — a key export for Russia — Putin said it’s “too early to talk about the trade of energy resources in crypto.”
“I believe that it has value,” he told CNBC’s Hadley Gamble at the Russian Energy Week event in Moscow Wednesday. “But I don’t believe it can be used in the oil trade.”
“Cryptocurrency is not supported by anything as of yet,” Putin said. “It may exist as a means of payment, but I think it’s too early to say about the oil trade in cryptocurrency.”

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The Russian leader also flagged cryptocurrencies’ massive consumption of energy as a potential barrier to their use. Bitcoin requires lots of computing power to process transactions and mint new tokens.
However, Putin didn’t mince words on Russia’s attempt to move away from reliance on the dollar for trade.

“I believe the U.S. makes a huge mistake in using the dollar as a sanction instrument,” he said. “We are forced. We have no other choice but to move to transactions in other currencies.”
“In this regard, we can say the United States bites the hand that feeds it,” Putin added. “This dollar is a competitive advantage. It is a universal reserve currency, and the United States today uses it to pursue political goals, and they harm their strategic and economic interests as a result.”
In June, Russia announced it would drop U.S. dollar assets from its sovereign wealth fund.

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Check out the companies making headlines before the bell:
UnitedHealth (UNH) – The health insurer’s shares rose 2.2% in the premarket after beating on the top and bottom lines for the third quarter and raising its full-year earnings forecast. UnitedHealth earned $4.52 per share, 11 cents above consensus, helped by revenue gains at its Optum drug benefits unit.

Bank of America (BAC) – Bank of America shares gained 2.8% in premarket trading, after reporting third-quarter earnings of 85 cents per share. That compares with a 71-cent consensus estimate and revenue that also topped forecasts, helped in part by a double-digit percentage increase in net interest income.
Wells Fargo (WFC) – Wells Fargo reported adjusted quarterly earnings of $1.22 per share, compared with a consensus forecast of 99 cents, while revenue also came in above estimates. Wells Fargo’s results were helped by a release of funds that had been set aside to cover bad loans. The stock added 1.2% in the premarket.
Walgreens Boots Alliance (WBA) – Walgreens shares rallied 2.4% in the premarket as its adjusted quarterly earnings of $1.17 per share came in 15 cents above estimates. Revenue also beat consensus estimates, with results helped by more Covid-19 vaccinations as well as growth in sales of at-home Covid tests and sales of cold and flu products.
Morgan Stanley (MS) – Morgan Stanley beat estimates by 30 cents with a third-quarter profit of $1.98 per share, while revenue beat Street forecasts as well. The investment firm said its bottom line reflected strong performance across all its business segments. Morgan Stanley rose 1.5% in premarket action.
Caterpillar (CAT) – The heavy equipment maker was up 1.2% in premarket action after Cowen began coverage with an “outperform” rating, saying it sees the first “megacycle” for Caterpillar in 14 years.

Taiwan Semiconductor (TSM) – The chip maker reported a better-than-expected 13.8% jump in third-quarter profit, thanks to the surge in global chip demand and a shortage that’s pushed prices higher. Shares jumped 3.8% in the premarket.
Shopify (SHOP) – Shopify is partnering with Microsoft (MSFT), Oracle (ORCL) and other cloud providers to help businesses streamline their operations. Various tools from those providers will now be integrated into the Canadian e-commerce company’s platform for its customers.
Avis Budget (CAR) – Avis Budget was downgraded to “underweight” from “equal-weight” at Morgan Stanley, citing a number of factors including valuation. The car rental company’s shares have increased five-fold over the past 12 months, and Morgan Stanley feels Avis Budget is at peak cyclical earnings. The stock tumbled 4.3% in the premarket.
UPS (UPS) – UPS was upgraded to “buy” from “hold” at Stifel Financial, citing valuation, secular volume growth from e-commerce and continued focus on yield management. Stifel also increased its price target for the stock to $224 per share, representing a potential increase of 22% from current levels. UPS added 2.6% in premarket trading.

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In a speech Wednesday, Cunliffe likened the rate of growth of the cryptoasset market, from $16 billion five years ago to $2.3 trillion today, to the $1.2 trillion subprime mortgage market in 2008.
Regulators around the world have begun work to establish a public policy framework through which to manage the exponential growth of cryptoassets, but Cunliffe said this must be pursued as a matter of urgency.

A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.
Hollie Adams | Bloomberg | Getty Images

The Bank of England’s deputy governor for financial stability, Jon Cunliffe, has warned that cryptocurrencies could spark a global financial crisis unless tough regulations are introduced.
In a speech Wednesday, Cunliffe likened the rate of growth of the cryptoasset market, from $16 billion five years ago to $2.3 trillion today, to the $1.2 trillion subprime mortgage market in 2008.

“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he said.
Cunliffe acknowledged that governments and regulators must be careful not to overreact or classify new approaches as “dangerous” simply because they are different, and also noted that crypto technologies offer a prospect of “radical improvements” in financial services.
However, he contended that although financial stability risks remain limited for now, the current applications of cryptoassets pose a financial stability concern since the majority “have no intrinsic value and are vulnerable to major price corrections.”
Bitcoin and ethereum, the two largest cryptocurrencies, plunged more than 30% in value earlier this year before recovering, and have proven extremely volatile since their creation. Prices are susceptible to a variety of external triggers, from comments by Tesla CEO Elon Musk to regulatory crackdowns by the Chinese government.
“The crypto world is beginning to connect to the traditional financial system and we are seeing the emergence of leveraged players. And, crucially, this is happening in largely unregulated space,” Cunliffe said.

His comments echo those of Bank of England Governor Andrew Bailey in May, who cautioned that cryptocurrency investors should be prepared to lose all their money due to the assets’ lack of “intrinsic value.”

The U.K.’s Financial Conduct Authority has also warned of the risky nature of crypto investment.
Cunliffe said the risk to financial stability could grow rapidly if the market continues to expand at such a pace, but the scale of those risks will be determined by the speed of response by regulators and governments.
The price of bitcoin has fallen by 10% in a single day on almost 30 occasions in the past five years, he pointed out, the largest of which was a fall of nearly 40% after a cyber-incident at Seychelles-based bitcoin and cryptocurrency exchange BitMEX.
“The forward looking question is what could result from such events, if these cryptoassets continue to grow at scale, if they continue to become more integrated into the traditional financial sector and if investment strategies continue to become more complex?” Cunliffe said.
Central to whether major price corrections can be absorbed by the system, saddling some investors with painful losses but avoiding a knock-on impact on the real economy, depends primarily on interconnectedness and leverage, Cunliffe argued.

Both of these were present in the subprime mortgage market prior to 2008, enabling the knock-on effects that ultimately brought the global economy to its knees, and both are becoming increasingly prominent in the crypto space, Cunliffe suggested. He said it will be down to authorities to manage this increasing risk and ensure that the system is resilient to major corrections.
“Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance,” Cunliffe said.
Many regulators around the world have begun work to establish a public policy framework through which to manage the exponential growth of cryptoassets, but Cunliffe said this must be pursued as a matter of urgency.
“Technology and innovation have driven improvement in finance throughout history. Crypto technology offers great opportunity. As [Ralph Waldo] Emerson said: ‘if you build a better mousetrap the world will beat a path to your door’,” he said.
“But it has to be a truly better mousetrap and not one that simply operates to lower standards — or to no standards at all.”

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U.K.-based payment processor SumUp has acquired U.S. marketing start-up Fivestars for $317 million.
SumUp, best known for its small credit card readers, has 3 million merchants signed up across Europe, the U.S. and Latin America.
The firm competes with Sweden’s iZettle, which was acquired by PayPal in 2018, as well as Jack Dorsey’s Square.

A customer uses a SumUp payment card reader in Lisbon, Portugal, on Sept. 13, 2019.
Angel Garcia | Bloomberg via Getty Images

LONDON — SumUp, a U.K.-based payment processor, has acquired marketing start-up Fivestars in a bid to expand its reach across the U.S. and take on giants like PayPal and Square.
The company said Thursday it was buying Fivestars for $317 million in a mix of cash and stock. San Francisco-headquartered Fivestars helps merchants set up rewards schemes and promotions for customers. The deal gives SumUp access to Fivestar’s 12,000 customers and $3 billion in sales per year.

Founded in 2012, SumUp is best known for its mobile credit card readers that let small businesses accept payments. The company also provides other payment tools, including the ability for merchants to set up their own online stores. It has over 3 million merchants signed up across Europe, the U.S. and Latin America.
SumUp competes with Sweden’s iZettle, which was acquired by PayPal in 2018, as well as Jack Dorsey’s Square. As the start-up plots an expansion in the U.S., rivalry with those big players is set to intensify. But SumUp thinks there’s enough room for a number of different companies to co-exist.
“I would say where we focus and excel is truly on the smallest merchants,” Andrew Helms, U.S. managing director at SumUp, told CNBC. “We’re not looking to go into enterprise, we’re not going more upstream.”
Helms said the U.S. market has seen a shift in spending patterns during the coronavirus pandemic, with payment options like non-physical transactions, invoicing and payment links seeing increased growth.
However, “we’re probably underestimating the shift back to in-store and brick and mortar” as Covid restrictions are lifted and people are meeting in-person again, he added.

Prior to the deal with SumUp, Fivestars had raised a total of $115 million and won backing from investors including Lightspeed Venture Partners and Menlo Ventures, according to Crunchbase.
SumUp, meanwhile, has raised a total of $1.4 billion in equity and debt financing since its inception. The company has been backed by the likes of Goldman Sachs, Singapore’s Temasek and Bain Capital.

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Elon Musk’s Tesla sold more than 200,000 electric cars in China during the first three quarters of the year, China Passenger Car Association data showed Wednesday.
On a monthly basis, the best-selling electric car in China in September remained the budget Hongguang Mini, a tiny vehicle developed by General Motors’ joint venture with Wuling Motors and state-owned SAIC Motor.
Sales of new energy vehicles in China have climbed amid Beijing’s support for the industry, while passenger car sales overall slumped for a fourth-straight month in September.

A Tesla salesperson (L) speaks to a visitor as they sit in a Tesla Model Y car at a Tesla showroom in Beijing on January 5, 2021.
Wang Zhao | AFP | Getty Images

BEIJING — Tesla took two of the top three spots for best-selling electric car models in China, industry data for the first three quarters of the year showed.
That’s well ahead of start-up rivals like Xpeng and Nio, according to data released by China Passenger Car Association on Wednesday.

Here’s the association’s list of the 15 best-selling new energy vehicles in China for the first three quarters of 2021:
1. Hongguang Mini (SAIC-GM-Wuling)2. Model 3 (Tesla)3. Model Y (Tesla)4. Han (BYD)5. Qin Plus DM-i (BYD)6. Li One (Li Auto)7. BenBen EV (Changan)8. Aion S (GAC Motor spin-off)9. eQ (Chery)10. Ora Black Cat (Great Wall Motor)11. P7 (Xpeng)12. Song DM (BYD)13. Nezha V (Hozon Auto)14. Clever (SAIC Roewe)15. Qin Plus EV (BYD)
Elon Musk’s automaker sold more than 200,000 electric cars in China during those three quarters — 92,933 Model Ys and 111,751 Model 3s, according to the passenger car association. 
China accounted for about one-fifth of Tesla’s revenue last year. The U.S.-based automaker began delivering its second China-made vehicle, the Model Y, early this year. The company also launched a cheaper version of the car in July.
Tesla’s shares are up nearly 15% so far this year, while the U.S.-listed shares of Nio are down more than 25% and Xpeng’s lost nearly 7% during that time.

On a monthly basis, the data showed the best-selling electric car in China in September remained the budget Hongguang Mini — a tiny vehicle developed by General Motors’ joint venture with Wuling Motors and state-owned SAIC Motor.
Tesla’s Model Y was the second best-selling electric car in China in September, followed by the older Tesla Model 3, the passenger car association data showed.
Sales of new energy vehicles — a category that includes hybrids and battery-only cars — climbed amid Beijing’s support for the industry. However, passenger car sales overall slumped year-on-year for a fourth-straight month in September.

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Chinese battery and electric car company BYD dominated the new energy vehicle best-sellers’ list in September, accounting for five of the top 15 cars sold, the passenger car association data showed.
Xpeng’s P7 sedan ranked 10th, while none of Nio’s models made the top 15 list. In fact, Nio hasn’t been on that monthly list since May, when the Nio ES6 ranked 15th.
Some in China’s auto industry have cast doubt on the accuracy of the association’s figures.

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