The crowd lauds its strengths but ignores its structural weaknesses and ethical shortcomings. I assess both and consider their implications.
During the long stretches outside crises, bear markets, panics, recessions, etc., Leithner & Company constantly seeks suitable candidates for investment – and when we find them, we research them thoroughly. The minority of contenders which meets our demanding criteria proceeds to our “buy and sell list,” i.e., the register of securities we’d purchase if their prices descend to our conservative valuations, and the prices at which we’d commence sales (both, if possible, via “short positioning;” for details, see How we prepare for – and profit from – recessions, 18 August).
That’s hardly unusual: many investors, ranging from major global institutions to personal investors of modest means, have developed a “circle of competence” (as Warren Buffett has dubbed it) and associated set of target investments. The methods we use to compile our list, however, are highly atypical. For this article’s purposes, two are most significant. First, we “stress-test” prospective investments against bear markets, financial and other crises, recessions, etc. In particular, we ask of each potential purchase: how did it fare during the slump of the early-1990s? The Dot Com Bust, GFC and COVID-19 panic? On these bases, how might it cope with the next downturn?
Secondly and more importantly, we also ask normative as well as empirical questions: “ethically, do this company’s operations pass muster? Morally, is it something that we want to add to our portfolio?”
Three Key Results and a Preview of Our Assessment
In both respects, Macquarie Group provides an excellent example of Leithner & Company’s approach. In this article, I detail three key results of our assessment:
- In a crucial respect, the consensus isn’t wrong: investors who purchased Macquarie Bank’s (as it then was) shares when they listed on the ASX and reinvested their dividends have received a superb long-term return.
- Equally, however, the mainstream ignores two key empirical weaknesses: first, Macquarie soars during the artificial boom but crashes during the genuine bust. Secondly, its future total returns are vulnerable to bonds’ rising total returns (as opposed to their yields).
- The mainstream is also oblivious to Macquarie’s ethical shortcomings. It’s incidental to its returns but important to its credibility: like many others, it “greenwashes.” Far more fundamentally, one of its pillars inhabits a morally questionable zone. Specifically, I’ll clarify and justify what utterly escapes the crowd: to a significant extent Macquarie is a “millionaires’ factory” because it’s a government-protected workshop for white-collar wharfies.
Without these props, Macquarie Group ceases to outperform. Nonetheless, under certain circumstances Leithner & Company would add it to our portfolio – albeit with a thumb and finger pinching our nostrils.
Long-Term Total Returns
Figure 1 plots the market values per $1 invested in (a) Macquarie Bank Ltd (which in 2007 became Macquarie Group) since it listed on the ASX in July 1996, (b) a portfolio that’s mirrored the All Ordinaries Index and (c) AMP Ltd since it listed in February 1999.
Figure 1: Growth per $1 in Three Investments (Adjusted for Buybacks, Dividends and Issues of Shares), July 1996-July 2023
Taking into account issues and buybacks of shares, assuming the reinvestment of dividends and ignoring tax, each $1 invested in Macquarie at its IPO grew to $78.48 in July of this year. That’s a compound annual growth rate (CAGR) of 17.5% per year over 27 years. Few other entities on the ASX can match that track record.
In contrast, the market value of each $1 invested in a portfolio that mimicked the All Ordinaries Index in July 1996, dividends reinvested and ignoring tax, etc., grew to $9.43 in July of this year. That’s a respectable CAGR of 8.7%.
AMP’s failure underscores the magnitude of Macquarie’s success. AMP forcefully reminds us that not all IPOs – even of major and venerable financial institutions – succeed.
The market value of each $1 invested when it listed on the ASX in February 1999, dividends reinvested, shrank to just $0.08 in July. That’s an abysmal total loss of 92% and an appalling CAGR of -10.0% per year over more than 24 years. Extremely few large caps implode like AMP has. It’s not just been a long-term underperformer: it’s been nothing short of a generational disaster.
As an aside, can somebody please tell me why anybody takes the pronouncements of AMP’s staff remotely seriously? Whatever Macquarie’s are, they’re not unsuccessful; whatever AMP’s are, judging from its abysmal long-term returns, collectively they’ve been unable to reverse – indeed, arguably they’ve caused – its long-term collapse.
If achievement in the form of returns to shareholders is a necessary condition of credibility, then AMP is a penny-dreadful rather than a blue chip – and investors, the media et al., should treat it accordingly.
Macquarie’s First Achilles’ Heel – and Biggest Short-Term Risk
The mainstream isn’t always wrong; indeed, in important respects it can be correct. Yet major value investors broadly agree: the consensus isn’t just often wrong: at crucial junctures it’s usually – indeed, sometimes it’s catastrophically – mistaken (see, for example, How we’ve prepared for the next bust, 28 November 2022). As a result, as an investor you can’t simply “go with the flow” – that is, unthinkingly follow the crowd – and expect to do well.
How does this apply to Macquarie? History rarely repeats, but it’s routinely rhymed: the assets and ideas which bulls hype most during the artificial boom are the ones which disappoint worst during the genuine bust. And for all its vaunted expertise at “risk management,” Macquarie can’t withstand downturns. It thrives in fair weather but shrivels during storms.
Figure 2 quantifies this crucial point. Each month since Macquarie’s IPO has fallen either within or outside the beginning and end points of a recession (as determined by the National Bureau of Economic Research, the unofficial arbiter of the business cycle in the U.S.). As I’ve demonstrated elsewhere (see, for example, Recessions usually crush shares – but investors can always reduce their ravages, 31 October 2022), when America sneezes Australia catches cold: recessions there reliably clobber shares here.
Figure 2: Three Investments’ Average Monthly Total Returns
Recessions impact Macquarie more than many other investments – including the All Ordinaries Index. During recessions in the U.S., Macquarie’s total return has averaged -2.71% per month. That’s an average annualised total return of (1 – 0.0271)12 = -28.1% per year. AMP has fared even worse: during recessions its total return has averaged -4.14% per month. That’s a mean annualised total return of -39.8% per year.
Both AMP and MQG have underperformed the Index: during recessions in the U.S. the All Ords’ total return has averaged -2.26% per month. That’s an average annualised total return of -24.0% per year.
How Did Macquarie Fare during the GFC?
Clearly, Macquarie doesn’t always outperform. Indeed, during recessions it systematically underperforms. Moreover, it doesn’t merely lag during recessions: over one long post-recession interval it’s greatly underperformed. Specifically, during and after the GFC it was utterly crushed. If you invested in Macquarie, AMP and the All Ordinaries Index in April 2007 – the month which marked Macquarie’s shares’ pre-GFC peak – how would you have fared? Figure 3 shows that
- by the nadir of the GFC in early-2009, the investment in Macquarie would have collapsed a gut-wrenching 78% (versus AMP’s 50.5% and the Index’s 39%);
- more than five years later, in June 2012, Macquarie’s total return was still abysmal (-61%, versus the Index’s -16%) – over this interval, even AMP outpaced it;
- only after seven years – in April 2014 – did you recoup this loss (the Index had broken even in December 2012; AMP did, albeit temporarily, in May 2015);
- only after eight years – in March 2015 – did your investment in Macquarie begin to outperform the Index;
- this outperformance evaporated, albeit briefly, during the COVID-19 panic (from its pre-panic peak to its panic trough, MQG sank 54% versus the Index’s 37%).
Figure 3: Growth per $1 in Three Investments (Adjusted for Buybacks, Dividends and Issues of Shares), April 2007-July 2023
Did the GFC Nearly Asphyxiate Macquarie?
According to Joyce Moullakis and Chris Wright (The Millionaires’ Factory, Allen & Unwin, 2023, p. 252), Nick Moore (its CEO at the time) and Greg Ward (its then-CFO) “will argue until they are blue in the face that Macquarie was never at risk (during the GFC) … (and) that they didn’t need a government guarantee in order to survive … But there is, to this day, a school of thought, including among people who have served at the highest level of (Macquarie), that (it) could have been brought to its knees … by the withdrawal of credit lines.”
Kevin McCann, the board’s lead independent director, was Macquarie’s acting chairman during the GFC. “They were very, very challenging days,” he recounts, “from the severe shorting of (our) shares to the manipulation of credit default swaps, casting doubt on Macquarie’s creditworthiness … We also had a situation where some counterparties would not deal with Macquarie … while Macquarie (had) cash available to post collateral, some leading banks still declined to deal with us.”
“Some, even at the board level,” Moullakis and Wright continue (p. 255), “wondered if one of the big banks would be told by the RBA, or APRA, or the government, to take Macquarie over. We know now that the idea was canvassed in meetings at the RBA, with the Commonwealth Bank as the likeliest candidate.”
We also know that on 26 February 2009, in an announcement to the ASX entitled “Macquarie Group comments on market speculation,” it stated: “there are no current plans for a capital raising.” But “current plans” soon materialised: on 30 April it halted the trading of its shares “because it is contemplating a capital raising.” It contemplated less than 24 hours: on 1 May it announced that it had “successfully placed an $A540 million capital raising in the domestic and international markets.” It placed these shares at $A26.60 – versus their pre-GFC intra-day all-time high of $A97.01 on 17 May 2007 and their all-time intra-day low of $14.75 on 3 March 2009.
Moullakis’ and Wright’s account excludes some crucial information, but Ian Verrender (“Debunking the Great Australian Banking Myth,” ABC News, 20 October 2014) supplies it. “What,” he asks, “are the two greatest weapons in a businessman’s arsenal?” His answer: “chronic memory failure among the broader community and a compliant business media. Macquarie boss Nick Moore used both to full effect last week when he issued a dire warning to David Murray, the man heading the inquiry into the future of Australia’s financial system.”
Verrender continues: “think twice about imposing new regulations on our banks to protect taxpayers from a collapse, Moore warned. Such regulations could backfire and cost the nation dearly. Missing was any hint of the frantic desperation six years ago as Macquarie careered out of control, under siege from an army of steely-eyed traders betting the bank would go down. The panic took hold just a few hours after the collapse of Lehman Bros on September 15, 2008. What did Moore and his executives do? They went begging for help.”
He details: “Freedom of Information requests by Sydney Morning Herald reporter Michael Evans and your correspondent back in 2010 uncovered a deluge of emails to federal government ministers, Treasury officials and the corporate regulator that began almost immediately after Lehmans imploded. But you’ll never see or read the juicy details. They’ve been suppressed.”
“Moore helped create what became known as the ‘Macquarie Model,’ a structure so admired for its capacity to generate wealth during the boom that Wall Street’s mightiest institutions belatedly set their minds to emulating it. Its genius was that the Macquarie mothership seemingly was impregnable. All the debt and risk was loaded into its myriad satellites, Macquarie Infrastructure, Macquarie Airports. The list went on.”
“But when the attack finally came, the defences crumbled. Investors cared little about the distinction between the parent and the satellites and sold everything named Macquarie … (Its) then chief financial officer Greg Ward always claimed the bank had adequate funds and was never in danger of collapse. It’s a cute argument. For it ignores the fact that banking is the most dangerous and highly leveraged business on the planet. It relies on confidence. And when that evaporates, banks collapse.”
Verrender concludes: “according to Treasury, should the contents of those emails or meeting notes ever come to light, they ‘could reasonably be expected to adversely affect the Macquarie Group.’”
“Heaven forbid! What we do know is that (its) pleadings were devilishly effective. Within days, the government shored up offshore Australian bank debt with a taxpayer guarantee. And the corporate regulator banned short selling of Australian banks, a move that staved off the short selling attack. Macquarie was saved.”
Macquarie’s Second Achilles’ Heel – and Biggest Long-Term Risk
It’s become a commonplace observation over the past quarter-century: Macquarie, as well as some other owners and managers of infrastructure assets, are “bond proxies.” These proxies, says Commsec (“What You Need to Know about Bond Proxies,” undated), “are shares that are likely to offer predictable returns … A true bond proxy ideally aims to grow cash flows over time. Infrastructure assets, particularly listed infrastructure companies, can offer a revenue stream similar to bonds.”
The comparison to bonds of equities such as Macquarie Group’s is at best crude – and at worst is the opposite of what Commsec asserts. The total returns (distribution plus capital gain or loss) of so-called bond proxies, like those of many bonds, can fluctuate dramatically over time. Most importantly, Macquarie’s total return varies inversely to benchmark bonds’ returns.
Using data from the Federal Reserve Bank of St Louis, I calculated the 12-month total return (that is, payment of interest plus capital gain or loss) of U.S. 10-year Treasury securities since July 1996. I then (1) merged these data with monthly observations of MQG’s 12-month total return, (2) sorted these series by the Treasuries’ total return, (3) divided the dataset into five ranked groups with equal numbers of observation (“quintiles”) and (4) computed MQG’s average 12-month return within each quintile. Finally, (5) I sorted each quintile into two subgroups: (a) those whose last month occurred during a recession as decided by the NBER and (b) those which fell outside a recession; I then computed Macquarie’s average 12-month return within each subgroup.
Table 1 summarises the results. The higher is the 10-year Treasury’s 12-month total return, the lower is MQG’s (the observations during recessions in Quintile #4 occurred exclusively during the GFC). Moreover, MQG generates high total returns only during the 60% of months when Treasuries’ returns fall below 7% – otherwise they’re pedestrian.
Table 1: MQG’s Return as a Function of 10-Year Treasuries’ Return, by Quintile, July 1997-July 2023
These results highlight the consequences of a crucial fact that Macquarie’s boosters have discounted, denied or overlooked. Since its IPO, 10-year Treasuries’ 12-month total return has averaged 4.7%; that’s in Quintile #3. Since the nadir of the GFC in March 2009, their return has averaged 2.6%; that’s in Quintile #2. And since March 2021, it’s averaged -7.9%; that’s in Quintile #1.
In other words, over the past quarter-century the bond market has blown a stiff wind at Macquarie’s back – and thereby boosted its results. Treasuries’ total returns since 1996 have by historical standards increasingly been comparatively low; partly for this reason, Macquarie’s 12-month total return has (compared to the All Ords Accumulation Index) been relatively high.
Table 1 also highlights another key fact: the incidence of recession and Treasuries’ 12-month total returns are highly correlated. Specifically, since 1996 recessions have occurred only when Treasuries’ returns have exceeded 7.2%. In other words, bond returns below 7.2% coincide with the absence of recession – and both factors have boosted Macquarie’s 12-month total return.
What do these results imply about the future? Over the past 12-18 months Treasuries’ yields have zoomed, and it’s very likely that they’ll remain much higher than the depths they plumbed during the decade to 2021. Assuming that the volatility of their prices (and hence the magnitude of capital gains and losses) remain unchanged, it’s reasonable to assume that henceforth their total return (interest plus capital gain or loss) will be higher than they’ve been during the past decade.
“Even the investment-grade bonds are giving you equity-like returns” with half the volatility, the CEO of a Singaporean fund manager told Bloomberg Television on 24 August. “This is a dawn of a new era for fixed income; we never had such fantastic yields for almost 20 years.” If so, that’s bad news for Macquarie’s future total returns.
What will be Treasuries’ average total return over the next decade? Neither I nor anybody else knows. Unlike Macquarie’s boosters, however, I know that if bonds’ total returns during the next few years average 7% or more, and if a relationship like the one in Table 1 continues, then Macquarie’s total returns will shrink drastically.
Figure 4: U.S. Treasuries’ Average 12-Month Total Return, by Decade
Figure 4 reiterates and quantifies a key point: at and since its IPO, Macquarie has benefitted from a generational movement of financial tectonic plates. Year after year and decade after decade since the 1980s, 10-year Treasuries’ average 12-month return has fallen. This fundamental trend, in turn, has boosted Macquarie’s 12-month total returns.
Will Treasuries’ total returns during the next decade revert to their average of the 1990s? If so, other things equal and judging from Table 1, they’d crimp Macquarie’s average 12-month total return into the single digits.
In fairness, an increase of bonds’ total returns adversely affects not just Macquarie but stocks in general. Yet it affects Macquarie more than most (for reasons of brevity I’ve omitted the details). That’s not all: Table 1 reported the results of analyses of 12-month total returns, but the inverse relationship also exists over the medium term. I replicated the foregoing analysis using five-year compound annual growth rates (CAGRs); Table 2 summarises the results.
The higher 10-year Treasuries’ total five-year CAGR rises, the lower Macquarie’s total five year CAGR falls. If bonds’ five-year CAGR rises above ca. 6%, then Macquarie’s medium-term CAGR ceases to outperform the Index.
Table 2: MQG’s CAGR as a Function of 10-Year Treasuries’ CAGR, by Quintile, July 1997-July 2023
What’s the mainstream’s consensus about Macquarie? An assessment dated 29 November 2022 encapsulated it: “in recent years, (it) has become the market leader in infrastructure projects for both financial advice and as a fund manager. (Its) growing infrastructure expertise coupled with an increasing global focus on energy transition investments (means) that the acquisition of Green Bank in 2017 (is) likely to support an acceleration in earnings growth … Such tailwinds, we believe, should underpin medium term share price outperformance.”
Moullakis and Wright (p. 337) elaborate: “renewables and the energy transition are Macquarie’s most visible priority, the driving force of its infrastructure business.” Moreover (p. 338), “this increasingly feels like Macquarie’s future. It has over 30 GW of renewable capacity under development across 240 projects in 25 markets worldwide, from South African hydro to Indian solar and Polish onshore wind. Over the years, renewables and ESG data have moved from occasional references in the annual report to long sections that dominate the page count, while the reports themselves have turned steadily, both figuratively and literally, green.”
The consensus, as well as Moullakis and Wright, spouts nonsense and parrots Macquarie’s propaganda – and its numbers prove it.
“Greenwashing” is the act of overstating a company’s “green” status, or of making misleading statements about the environmental advantages of its products or services. It “is rampant. With money to be made from environmental credentials … greenwashing has never been more of a temptation” (see Greenwashing: Why Is It So Common and How Can We Combat It? Columbia Business School, 30 March 2023). In this respect, almost 60% of Australian businesses make “concerning claims” (see Greenwashing by Businesses in Australia, Australian Competition and Consumer Commission, March 2023).
Macquarie, it seems to me, is among them. Its presentation and update for the first half of the 2023-2024 financial year, released to the ASX on 6 September, states that it “invested, committed or arranged” $2.2 billion of “green energy assets” in FY23.
What it doesn’t say – but its figures on p. 17 and 21, as well as p. 11 of last year’s presentation, plainly show – is that this $2.2 billion comprises a paltry 0.25% of its $870.8 billion of its total assets under management (AUM), and just 2.9% of its increased AUM of $75.2 billion over the past 12 months!
Moreover, Macquarie’s web site (“Supporting Climate Solutions”) states that it’s “invested, committed or arranged into green energy assets” $34 billion “in the past six years.” In the presentation and outlook it released to the ASX on 11 September 2017, it reported AUM of $462.5 billion. So that’s an increase of $870.8 – $462.5 = $408.3 billion over the past six years – of which just $34.0 billion – 8.3% – are “green energy assets.”
Reprising Kevin Rudd, Macquarie claims that “climate change is one of the defining challenges of our time.” Like Kevin07, whose actual commitment to “climate action” was as thin and as sturdy as a sheet of paper, Macquarie talks big but does next to nothing – and distracts attention from its inaction by drawing notice to its moral preening (see also “ANZ, Macquarie Worst in Green Credentials,” The Australian, 14 August).
So ignore Macquarie’s soft words about its “climate solutions” and “net zero commitments” on p. 14 of its most recent Annual Report: its own hard numbers show that its dedication to “green energy assets” is paltry and fading.
And that’s a good thing. Macquarie hardly lacks astute people, and surely they know that these “assets” are utterly uneconomic: they cannot survive without enormous – and growing – subsidies from governments. This dependence, concludes The Wall Street Journal (“The Great Northeast Wind Bailout,” 21 September), “exposes the folly of government industrial policy that force-feeds an energy transition that makes no economic sense, and won’t matter to the climate in any case. The corporate welfare demands will keep coming, and consumers will pay one way or another.”
Do Macquarie’s employees and executives inwardly know what they cannot publicly admit: the real purpose of its “green energy assets” is not to help “save the planet” but to extract government handouts?
“Britain’s net-zero ambitions,” adds the Journal (“Britain Blinks on Net-Zero Climate Mandates,” 21 September), will “collapse eventually … under the weight of their steep cost and global irrelevance. The warning for politicians everywhere is that the rush to net zero is a costly political loser. The longer policy makers wait to admit it, the more painful the reversal will be.”
The warning to asset managers like Macquarie is that green energy assets are costly, uneconomic and financial losers. Fortunately for its shareholders, Macquarie’s commitment to these assets is rhetorical rather than substantial.
“Millionaires’ Factory” or Sheltered Workshop of White-Collar Wharfies?
Macquarie’s “greenwashing” would earn it a low score if ESG were anything other than scam (see Why ESG is fatally flawed, 19 September 2022 and “Elon Musk Says ESG Is a ‘Scam.’ Why He May Have a Point,” Barron’s, 24 May 2022), but in the greater scheme of things it’s trivial. Macquarie’s ethical shortcomings are far more fundamental, deeply ingrained (indeed, perhaps part of its DNA) – and the mainstream, and Macquarie itself, are utterly oblivious to them.
To be as clear as possible: I’m NOT asserting that any of its people act unethically; I’m making the case that certain of its structures are – and their modus operandi is – perfectly legal, highly remunerative but highly lucrative. In this respect, too, Macquarie’s hardly alone: most other commercial and investment banks, ESG market darlings, “green” asset managers, etc., inhabit the same ethically-leaky boat (see, for example, “‘Greenwashing’ Crackdown Sinks Green Investing Claims,” The Age, 20 September).
Its Annual Review (2013) opened thus: “In 1813, Governor Lachlan Macquarie overcame an acute currency shortage by purchasing Spanish silver dollars (then worth five shillings), punching the centres out and creating two new coins – the ‘Holey Dollar’ (valued at five shillings) and the “Dump” (valued at one shilling and three pence).”
“This single move,” continued the Annual Review, “not only doubled the number of coins in circulation but increased their worth by 25% and prevented the coins leaving the colony. Governor Macquarie’s creation of the Holey Dollar was an inspired solution to a difficult problem and for this reason it was chosen as the symbol for Macquarie Group. This year celebrates the Bicentenary of the Holey Dollar.”
The preceding two paragraphs are misleading and false. The Holey Dollar is indeed an entirely fitting symbol of Macquarie Group – but in a way that it would presumably and indignantly refuse to admit.
Governor Macquarie’s “inspired solution” was actually a government-sponsored scam that benefitted “insiders” at the expense of “outsiders.” It took one coin which the market had valued at 60 pence, cut it into two – and decreed that henceforth they’d collectively be worth 75p! Macquarie Group extols fiat money (whose value the edict of government, in the form of legal tender laws, and not voluntary exchanges of multiple buyers and sellers in the market, ultimately establishes). That’s because its fortunes presuppose the monetary inflation that necessarily follows in fiat money’s wake.
Not only does Macquarie Group’s very survival assume the government’s overt support during crises like the GFC: its prosperity takes for granted the government’s continuous and covert assistance in the form of monetary inflation. Macquarie generates high returns because it takes big risks; and it can afford to take these risks because, in extremis, the government has its back.
The details and mechanics of this nexus between the state and banks long preceded the early-19th century, and have changed greatly since Governor Macquarie’s day, but the fundamentals – and their effects – haven’t altered significantly. “I am afraid the ordinary citizen will not like to be told that banks can and do create money,” admitted Reginald McKenna, Chairman of the Midland Bank, in 1924. “And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.” A century later, nothing is very different.
The actions of central banks (and of the commercial and investment banks with whom they closely liaise) necessarily benefit some people and penalise others. This is hardly news: it’s a component of what’s become known as the Cantillon Effect, after the 18th-century economist, Richard Cantillon, who first described it. “Insiders” (i.e., agents of government and their allies such as commercial and investment banks) stand first in the queue to receive new money (and use it to buy assets at today’s prices).
Conversely, “outsiders” (namely the general public, particularly people of modest means) stand last in the queue; by the time they receive the money, they must purchase goods and services at higher prices. Heads, banks win; tails, people of modest means lose!
In its announcement to the ASX on 22 March 2005, Macquarie let the cat out of the bag: it described openly – indeed, brazenly – “the characteristics of (its) investments.”
It seeks “a high degree of government regulation, a sustainable competitive advantage (presumably the protection from competition afforded by “a high degree of government regulation”), and stable revenue streams and predictable cashflows, primarily from government funding and subsidies.”
Today, nothing much has changed. According to The Australian (9 March), “Macquarie Asset Management boss Ben Way has been spelling out where the next wave of opportunities are to be found. And Joe Biden’s $US369 billion package of green incentives under the Inflation Reduction Act looms as one of the biggest.”
Macquarie has developed its appetite for government subsidies into a colossus that spans the globe. On 17 May 2007, in “Mac Bank and the Art of Super Profits,” an editorial in The Australian described its modus operandi: “The rise of firms such as Macquarie Bank (as it then was) has completed the circle from inefficient state-owned enterprises to government-owned corporations to private companies which deliver many of the services essential to daily life such as water, electricity and transport infrastructure.”
Moreover, “companies such as Macquarie have soared, not so much on running these businesses better, but from generating the complicated financial schemes that have facilitated the transfer of (state-owned infrastructure) into private hands. Its large profits have come from the hefty fees that flow from advice and finance packages.”
“In short,” The Australian concluded, “the money is in devising the complicated structures necessary to minimise tax obligations, maximise profits and offset risk, often to the governments that are selling the assets in the first place. This is why many people do not believe companies such as Macquarie actually do anything productive … This, rather than excessive salary packages, should be the real focus of attention.” Sixteen years later, has anything changed?
Conclusions and Implications
Macquarie Group clearly possesses undoubted strengths. In particular, three of its four divisions provide essential goods and services:
- Banking and Financial Services “provides a diverse range of personal banking, wealth management and business banking products and services to retail clients, advisers, brokers and business clients.”
- Commodities and Global Markets offers “capital and financing, risk management, market access,” (etc.) to “its diverse client base across commodities (and) financial markets …”
- Macquarie Capital supplies “advisory and capital raising services,” as well as “access to equity research, sales and execution … across the capital structure …”
CGM and MC are its most attractive businesses. Among CGM’s activities, LNG storage and energy trading attract us most. In sharp contrast, its fourth division, Macquarie Asset Management (MAM), sticks in my craw.
To remove the biggest ethical millstone around its neck, Macquarie should offload MAM. It could easily do so, and the divestment’s impact upon its overall long-term profitability would be modest: in FY23, MAM contributed just 23% of Macquarie Group’s overall profit; the other three divisions provided 77%. Alas, there’s effectively no chance that’ll happen.
In particular, and as a priority, Macquarie should dump its “green energy assets.” Others are already heading for the exits. Bloomberg (“BlackRock, State Street among Money Managers Closing ESG Funds,” 21 September), citing data from Morningstar, reports that funds managers have unwound more than two dozen ESG funds this year. The latest is BlackRock, which recently told regulators that it plans to close two ESG emerging-market bond funds.
“This trend,” reckoned Zero Hedge on 22 September, indicates that “the ESG bubble has likely popped.” Morningstar’s associate director for sustainability research told Bloomberg: “we have definitely seen demand drop off in 2022 and 2023.” “Also,” added Zero Hedge, “let’s not forget about the ‘greenwashing’ across (the) ESG industry.” It cited a portfolio manager at T. Rowe Price: “it’s becoming increasingly difficult to find credible sustainability-linked bonds.”
Stripped of its many complexities, Macquarie is ultimately a commercial and investment bank with a significant asset management business. Since the 19th century, commercial and investment banks in Britain, the U.S. and elsewhere have invariably ridden artificial booms for all they’re worth – and usually been smashed during the resultant genuine bust. Specifically, Macquarie teetered on the verge of collapse at the height of the GFC; but it didn’t collapse because the government backstopped it.
In mainstream parlance, Macquarie’s a textbook “high beta” stock: its price fluctuates more than others’ – on the downside as well as the downside. Such stocks, says Investopedia, “are therefore high-risk investments.” In short, and as they did during the GFC and COVID-19 panic, during the next bear market its shares will likely suffer disproportionately.
Moreover, I doubt that Macquarie’s next twenty-five years will be as rosy as its previous quarter-century. This is common sense: mature trees can’t grow forever. Additionally, financial tectonic plates may no longer be moving to its advantage. From 1996 until recently, 10-year Treasuries’ sagging returns boosted Macquarie’s.
Today, however, it’s vulnerable not so much to these Treasuries’ yields as to their total returns: should their long-term average rise to the level of previous decades, and the relationship I described in Tables 1 and 2 continue, then Macquarie will cease to outperform.
Leithner & Company acknowledge Macquarie’s strengths. Equally, we don’t overlook its glaring – certainly to us, but apparently not the mainstream – weaknesses. We also recognise that, just as the future is cloudy, the past and present are messy. One of its four pillars is questionable, and its “greenwashing” is obvious; but three solid pillars out of four ain’t bad, and it’s hardly the only exaggerator of its climate credibility. And who among us – company or individual – is without blemish?
At present – thanks to its boosters’ exuberance – Macquarie Group remains greatly overvalued (I’ve omitted details). It also ranks among the major entities whose shares will likely suffer disproportionately during the next downturn. If and when that occurs, and our estimate of its value significantly exceeds its price, we’ll likely buy – albeit with misgivings about MAM and particularly its “green energy assets.”