CHART OF THE DAY: ETFs, Active Managers, and Human Specialization

Today's Chart of the Day comes to us from the world of Finance and our pals at Bloomberg and shows just how once type of job, the "active", (and human) mutual fund manager is being disrupted by another kind of manager - a 'passive' one, modeled against the market more broadly, and dominated by algorithms and sophisticated computers.

Long story short - investors have been migrating their money away from the active, people-driven funds and strategies and towards the passive, ETF-type funds. Here's the chart from Bloomberg, then some comments below from your favorite active blog manager (me).

Some really interesting things to note from this chart. And recall, just like when we blog about basketball here, this blog about finance and investing isn't really just about finance and investing.

1. Highlighted on the chart is the worst of the financial crisis, September 2008. This appears to be the inflection point where investors bailed on active investment management in favor of passive investing. In other words, when times were tough, investors didn't seek 'expert' human management for their diminishing funds. In fact, they sought out the opposite.

2. As the chart above demonstrates, the current active management model for investments simply can't compete any longer with the cheaper passive/ETF model in either total asset gathering (trying to simply grow the way to prosperity), or in terms of returns. Whatever the current strategy is for the active managers, it is definitely not working and has not been for a decade.

3. So what can these highly-paid, expensive, and under threat active fund managers do to at least try and maintain some relevance and hold on to their country club memberships and beach houses? Bloomberg suggests one approach - hyper specialization.

From the piece:

What does the future of active management look like? We believe it should only seek a portion of an investor's assets. To do this, they will have to create highly idiosyncratic and concentrated portfolios. They will have to find the one thing they do well and do it in a concentrated, risk-seeking way, whether it be health-care, emerging markets, macro themes, algorithms, technology or trading. The manager will need to be known as the "go to" person in that space to emerge as the next star, allocating capital as efficiently as possible.

Again, the specific example/industry/job role doesn't matter here. What matters is the method and approach for people to remain valuable and competitive in a situation where machines and algorithms have plenty of advantages. The advice is not to try and out-compete the robots where you simply can't defeat them, but rather to seek out those areas, pockets, and opportunities where you can leverage uniquely human skills and experience to stay one step ahead of the machines.

Super interesing article and one that I think no matter what industry or job you are in, has something we can learn from as well.

Have a great day!

US companies are flush with cash, where does 'raise wages' fall on the priority list?

Last week on the blog we noted the shift in the mix of annual employee compensation increases - companies have and are continuing to increase their use of one-time and variable comp increases like annual bonuses and lessen their use of base (and in theory, recurring), salary and wage increases. The argument, many companies make, is that variable comp awards tie comp more closely to individual and organizational performance measures and provide the organization more flexibility and adaptability to respond to changing market conditions and business performance.

We have even seen this trend play out in the wake of two recent legislative decisions that have combined to create a pretty significant windfall of excess cash/after tax profit for many of the US's largest companies. One, the reduction in the 'stated' corporate income tax rate from 35% to 21%. And two, the reduction of the tax rate on the repatriation of US company cash that has been parked in overseas accounts, and now can be brought back to the US at a lower tax rate (about 15%).

With all this additional cash available to many large companies (most of whom are large employers), it makes sense from an HR / Talent point of view to ask a pretty simple question: Will and to what extent will all this cash flow to employees in the form of salary/wage increases or bonuses?'

Well, sadly for most employees, and for HR and Talent leaders who might be advocating for increased investment in people, the short answer to the question is 'Hardly'. Take a look at the chart below, from a Fortune piece citing some recent BofA Merrill Lynch research on just what these companies plan to do with their soon to be repatriated earnings:

Looking though that list of top six likely uses of this repatriated cash, maybe you could argue that the one that came in sixth, 'fund pension' has some direct benefit to current employees. Share repurchases, which we will see again in a second when looking at the knock-on effect of lower income tax rates, could also benefit employees who participate in ESOP plans or have a decent bit of their 401(k) tied up in company stock. But that is an indirect, and incomplete benefit at best.

Another review, this time by the financial firm Goldman Sachs, paints a similar picture of who the likely beneficiaries will be from lower corporate tax rates. From a piece reported by Marketwatch:

Buyback announcements are up 22% this year to $67 billion in just six weeks, Goldman Sachs said in a note to clients. This follows a report by benefits consulting firm Aon Hewitt finding that 83% of large companies don’t expect the tax cut to boost salaries at all — just help pay for small bonuses companies like WalMart  and AT&T, gave workers, which reporters soon discovered were, themselves, skewed toward higher-paid, longer-tenured employees in many cases.

And it comes as Goldman finds companies have raised guidance on re-investment in their businesses — the putative reason for cutting corporate taxes at all — only 3%.

A couple of things to note here. CEOs and Boards do have a responsibility to their shareholders - some would certainly argue that the shareholders' concerns matter more to corporations than any other stakeholders. So moves to increase the share price (repurchases), and return profits to the holders, (increased dividends), are definitely proper and prudent uses of excess cash/profits.

But the really small levels of internal re-investment, and commitment to improving the long-term compensation levels for employees is a little bit disconcerting. But it also reminds us of something really important. Namely, that for most large organizations labor cost, (and by extension, their investment in people), is just that - a cost that has to be managed.

What the organization is willing to invest, and whether they are willing to increase this investment is subject to a complex set of variables - competition for talent, product/service strategy, overall labor market conditions, the impact of automation and outsourcing, and even the legal/regulatory climate.

But what does not, yet, seem to be moving the needle on investment in people and employee compensation,(aside from the slew of copycat one-time $1,000 bonuses we heard all about), is this sudden windfall of excess corporate cash/profits as a result of recent corporate tax changes.

More simply put, organizations increase what they are willing to pay for any resource only when they have to, not because they are able to.

Apple won't volunteer to pay more per piece to their supplier of iPhone screens just because they can.

And they won't volunteer to pay their engineers, accountants, and facilities staff more just because they can as well. Interesting times for sure.

Have a great day!

Learn a new word: Goodwill Impairment

If you follow the tech and finance news at all, you will no doubt be familiar with the recent and ongoing troubles and challenges being experienced at Yahoo.  

Yesterday the 'old school' internet company announced some strategic shifts, including the plans to reduce its workforce by 15% in the coming months, resulting in an employment count of about 9,000 -  42% below the level in 2010.

Part of the earnings announcements included this statement, about on-paper losses totaling about $4.4B due to an accounting exercise known as 'Goodwill Impairment'. Here is the language from Yahoo, then we'll break it down a little, because well, that's what we do here on the blog:

We concluded that the carrying value of our U.S. & Canada, Europe, Latin America and Tumblr reporting units exceeded their respective estimated fair values. The goodwill impairment resulted from a combination of factors, including decreases in our market capitalization, projected operating results and estimated future cash flows.

Seems kind of boring, almost normal accounting-speak right? Let's look at the definition of a 'Goodwill Impairment', courtesy of our pals at Investopedia:

Goodwill that has become or is considered to be of lower value than at the time or purchase. From an accounting perspective, when the carrying value of the goodwill exceeds the fair value, then it is considered to be impaired. Negative publicity about a firm can create goodwill impairment, as can the reduction of brand-name recognition.

And in the notes about the accounting requirements related to Goodwill Impairment for companies, Investopedia says this:

Generally accepted accounting principles, (GAAP), require businesses that have the type of assets that might be impaired to make periodic tests to see if those assets are, in fact, impaired.

So the accounting rules require if your business has a potentially 'impaired' asset like Yahoo's $1.1B Tumblr division, that you must from time to time evaluate (and likely have audited), the 'true' value of the asset. And in the case of Tumblr, it turns out that it really isn't worth $1.1B and the true value is something like $300M, then you have to take a charge for the difference, ($800M), in the financial statements. And that stings investors a little bit. Ok, maybe a lot.

Why the mini-accounting lesson?

Because the periodic review, valuation, and write-down of financial assets in the accounting sense is probably an exercise we can and should apply to all kinds of projects, technologies, programs, even personal relationships. 

Does that 'progressive' and high-tech performance management system and process you implemented in 2012 still have value today? Or does it need some kind of 'impairment' write-down as well?

Does the new employee orientation guide that you spent big bucks developing and printing up in 2010 still have relevance today, in light of all the changes in business, technology, employee expectations, and more?

Does your 'best work friend' that you have had since 2008 remain the 'right' person for you to pal around with, or are they kind of holding you back at the office?

As Yahoo's experience with it's Tumblr acquisition remind us, things can change really, really fast. And an asset that was worth $1.1B just a couple of years ago suddenly is worth less than half that amount today. But the 'Goodwill Impairment' while painful, at least provides financial types a mechanism to recognize these changes, attempt to make them right on the financial statements, and give leaders a chance to move forward from a new starting place. And when times are bad, that at least offers a little bit of hope moving forward.

If you could take a 'Goodwill Impairment' charge in your business or life today, what would it be?

PODCAST: #HRHappyHour 231 - Employee Financial Wellness

HR Happy Hour 231 - Employee Financial Wellness

Recorded Friday January 22, 2016

Hosts: Steve Boese, Trish McFarlane

Guest: Steve Wilbourne, CEO, Questis 

Listen HERE

This week on the show join Steve Boese and Trish McFarlane as they discuss the increasingly important topic of employee financial wellness and well-being with guest Steve Wilbourne, CEO of Questis, a software and services provider of employee financial wellness technology and resources.

On the show, we discuss the issues that many employees are facing with financial planning, financial readiness in case of unforeseen expenses or challenges, and the benefits to organizations and to employees in providing more modern, personalized, and affordable tools for employees to help manage their finances.

In addition, Steve (the host Steve), made a semi-serious pitch for the return of employee pensions, Trish shared a bit of a preview for the widely anticipated HR Happy Hour Oscars show coming soon, and Steve shamelessly appealed for some big-time corporate sponsors to come on board, (are you listening Delta and Dr. Pepper?).

You can listen to the show on the show page HERE, or by using the widget player below (Emaill and RSS subscribers will need to click through)

This was an interesting and informative show about employee financial wellness, many thanks to Steve Wilbourne from Questis for joining us. To learn more about Questis, please go towww.myquestis.com.

Thanks for listening and remember to add the HR Happy Hour Show to your podcast subscriptions in iTunes, Stitcher Radio, or any of the major podcast apps. Just search for 'HR Happy Hour' to subscribe.

CHART OF THE DAY: How's your retirement fund?

Real quick shot for a busy Thursday...

In the last year I have hit the entire topic of the tightening labor market from a few different angles (companies reporting jobs are hard to fill, candidates control the conversation, more people are voluntarily quitting their jobs than at any time in a decade), and today I wanted to share one more data point that suggests a tougher market for employers.

Many folks retirement piggy banks have come back from the lows of the 2008/9 financial crisis.

Here's the chart, courtesy of Financial Planning, and then of course some FREE commentary from me.

Some quick thoughts:

1. US retirement assets (from all sources) stood at $24.7 trillion at the end of 2014, an all-time high. And a remarkable comeback from the huge drop in 2008 when so many folks had to dip into their savings after they lost a job and the markets themselves were in free fall. 

2. One of the reasons older workers have been unable or unwilling to consider either retiring or moving to some kind of reduced work schedule in the last few years, that their 401(k) balances were in the dumpster, has for many, disappeared. Sure, there might be other compelling reasons someone will extend their working career, but a rock-bottom retirement account balance is less likely to be one of them.

3. There is no doubt in my mind that in just about every organization there are older workers who will open their 1st quarter 2015 account statements and think to themselves, "Hmm.... Maybe it's time to hang it up." And for most of these folks, it won't matter if they are the only person at the company that knows how to do XYZ or they are the one with the key relationship with important customer ABC. For them, it is just about totally a decision about $ and quality of (retired) life.

4. HR/Talent pros - keep one eye on the S&P 500 and one eye on your voluntary termination trends this year - particularly with your experienced, senior-level, 50+ employees. I bet the two lines are going to move in the same direction, and if you don't want to be the one who has to explain what is going on in November when the CEO asks you why all the VPs are retiring at once.

Happy Thursday.