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02-11-2024 : Boeing: largest-ever capital increase in the United States

$16.1bn, not including, as is often the case in such cases, $5bn in convertible bonds, and a possible extension (greenshoe) of $3.2bn, i.e. a total of $24.3bn.

But there was peril in the air. If in 2018 Boeing made $101bn in sales, delivering 806 aircraft and generating $14bn in free cash flow; in the first 9 months of 2024, its sales fell to $51bn, with 291 aircraft delivered and negative free cash flow of $10bn. Since 2019, the start of its industrial woes, Boeing has lost $24bn, including $8bn in the first 9 months of this year.

Since the same date, Boeing has had negative book equity (sic), -$24bn at September 30, because, while it has a lot of net debt ($55bn or 9.3 times its expected 2025 EBITDA (EBITDA 2024 is negative)), it has few fixed assets ($29bn) after years of outsourcing, and very low working capital thanks to customer advances ($2bn). But this source of financing could shrink, as with 5,400 aircraft still to be delivered, orders taken today may not be delivered until the next decade. And since 2025 is also expected to be a loss-making year, debt could only continue to rise.

To increase the number of its shares by 18%, Boeing had to concede a discount of only 5% to the syndicate of underwriting banks, compared with Monday evening's price. This shows the depth of the American financial market, in stark contrast to the European markets. Remember our post a month ago on the capital increase of ID Logistics, a star in its segment, which had to concede a 10% discount on the closing price to place a miserable 6% of new shares. A double discount to place 3 times fewer shares relative to the size of the company...

As we explain in the foreword to Vernimmen 2025, entitled Make equity great again, this is due to the funded pension system in the USA, which has created pension funds that buy equities over the long term; and in France to our preference for liquid, inflation-protected low risk investments, which are largely tax-exempt and tax-advantaged. It's high time, in these times of budget shortages, that the tax advantages of life insurance were reserved for risky equity investments, and not bonds (euro contracts), which account for 74% of assets under management of those contracts. This is exactly what the Swedes have done since 1980, with a financial market 2.6 times deeper than those of other European countries, 16% of Swedish companies with more than 250 employees listed (3% in France), and a number of IPOs since 2013 (501) that exceeds the combined IPO volumes of Paris, Frankfurt, Amsterdam and Madrid.

 

29-10-2024 : Tribute to John McQuown, passive investing pioneer

In 1971, John McQuown created the first investment fund to replicate the performance of an index, thus creating index investing (also known as passive investing), whose assets under management today exceed $20,000 billion. He passed away a few days ago at the age of 90. An engineer by training, he had been hired by the innovation center of Wells Fargo, then just a regional Californian bank.

In 1970, an heir to the family that owned Samsonite was looking for a team that could manage $6 million, or around $47 million today, according to the principles he had learned in Chicago studying the work of Harry Markowitz, William Sharpe, Eugene Fama, Merton Miller, Myron Scholes and Fisher Black, all young finance professors who had just created the CAPM or Capital Asset Pricing Model, in other words, modern finance. They had also demonstrated that, over time, active managers underperformed the market. As The Vernimmen.com Newsletter reminds us in its October issue, only 17% of active equity managers have beaten their benchmark over the past 10 years. 

It is therefore more efficient to hold the market portfolio represented by an index fund (ETF), and then adjust your level of risk by adding risk-free assets to run less risk than the market; or by taking on debt to invest in the market portfolio if you want to increase your risk relative to the market. More efficient, because management and transaction costs are lower, and because no random bets are made on this or that stock.

In July 1971, John McQuown launched the first index fund on behalf of the Samsonite pension fund, and a new stage in collective asset management was launched. Like all trailblazers, John McQuown had to battle against prevailing skepticism and, above all, the criticism of asset managers who saw passive management as a far inferior source of income to active management. But he had on his side the research of the aforementioned scientists, all of whom went on to win Nobel Prizes in economics a few decades later.

53 years on, I've just sat on the selection committee for a new employee savings fund manager at an institution of higher education. Although the specifications explicitly called for at least one equity-index fund, only one of the six candidates proposed one in its response to the invitation to tender, and it won the contract.  

While employee savings schemes have been pioneers in ESG investment, thanks to employees and their representatives, there is still much to be done in terms of investing efficiency, with passive equity investing virtually non-existent in this field, where the few players do not play up to the innovation that is so embarrassing for their margins, unless you insist on it.