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The man leading Mitsubishi UFJ’s push in Australia

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Mark Steinberg enjoys testing his stamina. The chief executive of First Sentier Investors, the A$215bn Australian asset manager, is a dedicated runner who has completed 63 marathons and 15 ultra-marathons stretching up to 90km.

“The exhilaration after finishing was always greater than the exhaustion and pain,” says the 56 year old. Injuries ended his participation in endurance events but the South African native still runs daily.

“I get that runner’s high. It’s good for the mind and the body but I might need some new parts put in. I’m slower than when I was younger but my records still stand from 5km up to 90km in the Steinberg household and they are there to be taken,” says the father of two teenage sons.

Mr Steinberg has led First Sentier Investors since October 2018, returning to the business previously known as Colonial First State Global Asset Management. Commonwealth Bank of Australia last year sold the investment group to Mitsubishi UFJ Trust and Banking Corporation (MUTB) for A$4bn.

First Sentier will operate as a stand alone business under its new owner and it will retain its existing sub-brands Stewart Investors, FSSA Investment Managers and Realindex Investments, a smart beta specialist.

It ranks as Australia’s second largest asset manager behind Macquarie and is a global player with a presence in nine countries and 17 investment teams covering equities, fixed income, infrastructure and multi-asset strategies.

The acquisition provides MUTB with greater revenue diversification through First Sentier’s presence in Australia’s vast A$3tn pensions market, known as superannuation. It also allows First Sentier to use Mitsubishi’s distribution network to enter Japan’s institutional and pension fund market.

“One of the big attractions for Mitsubishi was the growth embedded in Australia’s superannuation system and First Sentier’s footprint in that market,” says the former accountant.

First Sentier Investors

Established 1988

Assets under management A$215bn

Employees 850

Headquarters Sydney with offices in 9 countries

Ownership Mitsubishi UFJ Trust and Banking Corporation

First Sentier has retained a presence on the pensions platform operated by Commonwealth Bank. But the change of ownership has allowed it to build relationships with other superannuation platforms and win new mandates that would not have been possible when it was owned by a local bank.

“New doors have opened for us in the superannuation market following the deal with Mitsubishi,” he says.

However, First Sentier declines to name names and would not provide guidance on new business activity.

“The change in ownership has brought about a change in strategy. The growth of asset management was not a strategic objective for Commonwealth Bank, which placed a greater emphasis on investing in other parts of its business.”

Direct infrastructure and niche small and mid-cap equity strategies where First Sentier has already built successful businesses are priority areas for expansion.

A portfolio of six Australian wind farms was acquired for A$285m from John Laing in October. First Sentier also bought stakes in several UK plants that generate electricity from industrial waste for £995m from SSE last month.

Acquisitions too will be considered in infrastructure debt, real estate debt and private credit, while First Sentier’s New York office with a team of 40 staff provides a jumping off point for US expansion.

“Client demand is increasing for strategies that are less correlated with equities,” says Mr Steinberg.

Debate in Australia over how to respond to climate change has been supercharged by apocalyptic wildfires that have cost dozens of lives, killed hundreds of millions of animals and scorched more than 10m hectares of land.

Mark Steinberg’s CV

Born July 1964 Johannesburg

Total pay not disclosed

Education

1983-85 Bachelor of commerce, University of the Witwatersrand

1986-88 Bachelor of accounting, University of the Witwatersrand

Career

1986-89 Senior accountant, PwC

1989-96 Senior manager, EY

1996-98 Various roles, Optus

1998-05 Various roles including Australia CFO, Vodafone

2005-07 Director, financial operations division, Macquarie Bank

2008-15 CFO for asset management and later for wealth management, Colonial First State

2015-17 Group CFO and later Asia-Pacific chief executive, Cover-More

2017-18 chief operating officer, Colonial First State Global Asset Management

October 2018-present Chief executive, First Sentier Investors

The powerful coal industry retains strong support from the government and the Murdoch-owned press is often hostile to environmental reforms but pressure is building on local pension funds and asset managers to step up efforts to shift to a low-carbon economy.

“There is a realisation that shifting to a more environmentally sustainable future is important. The argument is how to get there. Every investment manager is trying to paint their strategies as green,” says Mr Steinberg.

Jane Hume, Australia’s assistant superannuation minister, has voiced opposition to the inclusion of climate change considerations into investment decisions, saying that a pension fund’s mission “is not to change the earth’s temperature”.

But Mr Steinberg disagrees, saying that considering environmental, social and governance issues within an investment portfolio can reduce volatility and preserve capital.

“Actively engaging with companies to drive positive change can also enhance returns,” he says.

First Sentier has improved its carbon footprint reporting to strengthen its ESG disclosures and adopted the Transition Monitor Tool developed by the 2 Degrees Investing Initiative, which enables users to assess the alignment of their portfolios with the global warming targets agreed in Paris in 2015.

It is also monitoring how its funds are assessed by external agencies, such as Morningstar, which rates about 38 per cent of First Sentier’s strategies as low carbon with only a small exposure to fossil fuels.

“Putting ESG at the centre of our investment decisions is a crucial obligation [to our investors],” says Mr Steinberg.

The Financial Services Council, an association representing Australian asset managers, life insurers and superannuation funds, recently issued a series of recommendations aimed at improving gender balance across the investment management industry.

First Sentier has work to do on that front. Women only held 22 per cent of the investment roles and 27 per cent of the senior leadership roles at the end of June 2019.

More women are being recruited, says Mr Steinberg. “We’re committed to building a diverse and inclusive environment. It contributes to better decision making.”



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Why it might be good for China if foreign investors are wary

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Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.



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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms

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Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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Biden puts workers ahead of consumers

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US economy updates

For the past 40 years in America, competition policy has revolved around the consumer. This is in part the legacy of legal scholar Robert Bork, whose 1978 book The Antitrust Paradox held that the major goal of antitrust policy should be to promote “business efficiency”, which from the 1980s onwards came to be measured in consumer prices. These were considered the fundamental measure of consumer wellbeing, which was in turn the centre of economic wellbeing.

But things are changing. A White House executive order on competition policy, signed last month, contains some 72 discreet measures designed to stamp out anti-competitive practices across nearly every part of the US economy. But it isn’t about low prices as much as it is about higher wages.

Like the Reagan-Thatcher revolution, which took power from unions and unleashed markets and corporations, Biden’s executive order may well be remembered as a major economic turning point — this time, away from neoliberalism with its focus on consumers, and towards workers as the primary interest group in the US economy.

In some ways, this matters more than the details of particular parts of the order. Many commentators have suggested that these measures, on their own, won’t achieve much. But executive orders aren’t necessarily about the details — they are about the direction of a government. And this one takes us completely away from the Bork era by focusing on the connection between market power and wages, which no president over the past century has acknowledged so explicitly.

“When there are only a few employers in town, workers have less opportunity to bargain for a higher wage,” Biden said in his announcement of the order. It noted that, in more than 75 per cent of US industries, a smaller number of large companies now control more business than they did 20 years ago.

His solutions include everything from cutting burdensome licensing requirements across half the private sector to banning and/or limiting non-compete agreements. Firms in many industries have used such agreements to hinder top employees from working for competitors, as well as to make it tougher for employees to share wage and benefit information with each other — something that Silicon Valley has done in nefarious ways.  

This gets to the heart of the American myth that employees and employers stand on an equal footing, a falsehood that is reflected in such Orwellian labour market terms as the “right to work”. In the US this refers not to any sort of workplace equality, but rather to the ability of certain states to prevent unions from representing all workers in a given company.

But beyond the explicitly labour-related measures, the president’s order also gets to the bigger connection between not just monopoly power and prices, but corporate concentration and the labour share.

As economist Jan Eeckhout lays out in his new book The Profit Paradox, rapid technological change since the 1980s has improved business efficiency and dramatically increased corporate profitability. But it has also led to an increase in market power that is detrimental for people in work.

As his research shows, firms in the 1980s made average profits that were a tenth of payroll costs. By the mid 2000s that ratio had jumped to 30 per cent and it went as high as 43 per cent in 2012. Meanwhile, “mark-ups” in profit margins due to market power have also risen dramatically (though it can be difficult to see this in parts of the digital economy that run not on dollars but on barter transactions of personal data).

While technology can ultimately lower prices and thus benefit everyone, this “only works well if markets are competitive. That is the profit paradox,” says Eeckhout. He argues that when firms have market power, they can keep out competitors that might offer better products and services. They can also pay workers less than they can afford to, since there are fewer and fewer employers doing the hiring.

The latter issue is called monopsony power, and it is something that the White House is paying particularly close attention to.

“What’s happening to workers with the rise in [corporate] concentration, and what that means in an era without as much union power, is something that I think we need to hear more about,” says Heather Boushey, a member of the president’s Council of Economic Advisors, who spoke to the Financial Times recently about how the White House sees the country’s economic challenges. 

The key challenge, according to the Biden administration, is that of shifting the balance of power between capital and labour. This accounts for the emerging ideas on how to tackle competition policy. There are many who regard the move away from consumer interests as the focus of antitrust policy as dangerously socialist — a reflection of the Marxian contention that demand shortages are inevitable when the power of labour falls.

But one might equally look at the approach as a return to the origins of modern capitalism. As Adam Smith observed two centuries ago, “Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” Reprioritising it is a good thing.

rana.foroohar@ft.com



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