It’s worth reading a cracking article by my colleague David Tuckwell, out this week on www.etfstream.com. The link is HERE. It’s all about a new US gold ETF from the Western Australian government-owned Perth Mint, a companion body to our own Royal Mint.
The ‘gist’ of the article is that it’s another gold tracker at a low (but not necessarily THE lowest) cost but with two “differences”.
The first is that all profits go back into the coffers of the Western Australian government.
The second is that index tracker – US ticker AAAU , developed jointly with Exchange Traded Concepts – is that it is structured as a debt on the balance sheet of the Western Australian government. It is not structured as units in a grantor trust. As Tuckwell’s article argues this gives the investor an added layer of protection. According to Terry Hicks from the Perth Mint ““If the vault falls over, where do you go? If the gold is found to be fake or impure, where do you go? With us, you have the government standing behind everything we do. Companies fall over. Governments don’t fall over. When you’re investing in gold it’s all about holding an asset that’s been trusted as a store of wealth for centuries.” The ETFs also allow physical delivery of the gold, although that isn’t necessarily unique – over here in the UK what was ETF Securities also had a deal with the Royal Mint to allow for delivery in physical gold.
The fee for this ETF – available both in Aus $ and US $ – is 18 basis points which compare favorably with the US competition. According to David Tuckwell, the main competitors are as follows (with AuM in $m after):
- SPDR Gold Trust 0.40% $33 bn
- iShares Gold Trust 0.25% $12 bn
- Aberdeen Standard Physical Swiss Gold Shares ETF 0.17% $917m
- GraniteShares Gold Trust 0.17% $456m
- Perth Mint Physical Gold AAAU $103m
Mr Hicks from the Perth Mint suggests that this could be a successful ETF – “For one extra basis point you’re getting a sovereign guarantee and the option to take physical bullion. We have a Rolls Royce fund in a world of Kias”. I have to say I quite like Kia’s!
I think there’s a much bigger argument here that David Tuckwell rightly points to – the role of governments and asset management. Economist Mariana Mazzucato has rightly forced a debate about the role of the Entrepreneurial State. I don’t agree with all her arguments, but I think four points stand out.
The first is that the existing consensus that the default setting for all entrepreneurial endeavors should be based on private ownership doesn’t hold water anymore. The capitalist system could do with competition from all forms of ownership – mutual, state enterprise, worker-owned, cooperative. The market should be allowed to decide who provides the best service but the automatic presumption that private ownership is ALWAYS AND ONLY the most economic and optimal ownership solution for delivering a good or service are up for debate.
The second key point is that the government might well have a role to play in what Mazzucato has called National Missions – large scale endeavors which require government intervention to produce some major technological or productivity based breakthrough. One can find echoes of this debate all the way over in the right wing with former Brexit maestro Dominic Cummings making similar points about the need for concerted action to boost our national technology position.
The next point is that the state can and should intervene directly where there is a failure of the market mechanism to provide a fair and cost-effective service. This isn’t widely debated anymore, outside of the US and can most easily be seen in approaches to healthcare provision.
The important last point, and the most hotly debated is that the state can be entrepreneurial and for extended periods of time produce innovative goods and services. The free market position is to say “fine, let’s privatize the successful state enterprises “ but this misses a crucial dimension. Some state enterprises have the business provision of a service bound up with a wider social good. Take the Forestry Commission which was about to be privatized but is still firmly in state hands. Here is a public enterprise that is efficient(ish) and profitable and could be in private hands but a wide range of people – left and right – think its wider social purpose requires it stay to in public ownership. I think the same argument should have been applied to the Green Bank which I think will be hugely diminished in its scope by being a part of Macquarie. Better to have kept that in the ownership of the state if we are to achieve the national missions we require in the future, such as large scale national decarbonisation.
I rehearse all these arguments simply to say that the boundary between the state, other forms of ownership and the private sector should be fluid and not subject to right-wing ideological purity (were already seeing the corrosive effects of this purity in the vicious Brexit debates and the counter revolution from the Corbynite Hard left). In most other countries this isn’t remotely controversial – even in the US these boundaries are very fluid. I think Singapore can also be held up as an example – its government is not too bothered with these divides and is ruthlessly pragmatic and evidence-based. If the state can do a good job, it activates it. If it can’t it gets out of the way. This is I think the sensible approach and the best way of combatting the malignant influence of Marxist inspired ideas currently infecting our debate. What matters is what works for all of us, not some Chicago inspired evangelical tenet.
Which brings us back to ETFs. I have no idea if the Perth tracker will succeed but ETFs are a back door to changing the order of priorities in the world economy. They are increasingly powerful and are vehicles for financial disruption. They are cheap, simple to implement and useful for investors – and thus popular.
Already governments are paying attention, not just in Western Australia. Here in Europe, the EU, the European Parliament, and the Euro regulators are taking a keen interest in ESG benchmarks, investigating how to frame reporting of carbon usage and the way in which institutional investors thus direct their cash. Over in Japan, the BoJ is buying into ETFs extensively as part of its QE programme and has also been instrumental into goading corporate Japan to change its way. New indices have been built which only include those businesses which take corporate governance seriously, with ETFs tracking those indices a priority in ETF buying programmes.
At this point, I should say that I have my severe doubts about the government’s interfering recklessly in indices – a subject I will return to another time. I worry that bureaucratic overreach will have corrosive effects – the idea that state bureaucrats could do any wrong is, of course, an alien concept for many on the Left. But the point is clear. ETFs could be viewed as instruments of radical change, with government playing a role. My core argument is that the biggest change could come via public enterprise built on the Perth Mint model, fulfilling a known market need by a useful good or service that is competitively priced.
I have in mind here NEST or the National Employment Savings Trust. This is a defined contribution workplace pension scheme that is used by many UK SMEs. It’s CIO Mark Fawcett has built a solid reputation for providing cost-effective long-term savings solutions for all sorts of workers. In effect, it is exactly what I argue for. A publicly established corporation which reports to the government and which has no shareholders or owners. The scheme is run in the interest of its members. A mutual meets a public enterprise. Scrub away the language and we are one step away from a mutual model a la Vanguard.
I’m sure Chicago School zealots are already angling to have this body privatized. They should be stopped. I would argue that Nest should be more ambitious and fully embrace the ETF revolution – it already makes extensive use of ETFs within its portfolios.
One market failure is that most investors don’t really like picking individual ETFs – or frankly making a financial plan overall, let alone building up a portfolio of ETFs. It is boring and time-consuming, and risky of course if you make the wrong choice. Wealthier clients can use an IFA but for most with less than £100,000 the economics don’t stack up.
This I think exposes the need for a one-stop fund and wrapper solution for long term savings – delivered at low cost. Robo advisers are trying to address this market but I have my doubts about their collective business models. Cue Nest. It has a brand, a strong market reputation, and position and an ability to offer cheap products to ordinary investors – currently articulated as an auto-enrolment pension solution.
Why not build ETFs based on Nest’s portfolio solution architecture, allowing ordinary non-auto enrolment investors to shadow the long term investment strategies of the core pension products? These might look like the risk grade or target date solutions – or maybe something more radical?
They’d be offered at exceptionally low cost and NEST could even work on more ESG compliant solutions for those clients who seek that solution. Crucially these NEST ETFs would come to compete directly with Vanguard and the robos. Free market purists will immediately cry foul – its unfair competition. But I would argue that the brand name of NEST would broaden the visibility of one size fits all fund of fund ETF solutions to the whole market i.e grow the whole market. If you want to the Vanguard solution – or the AJ Bell, or LGIM or Scaleable solution – go ahead and buy their investment strategy. But we’d have a strong public enterprise/mutual provider in the pack of competitors offering a different product at incredibly low cost. This solution architecture could then be quietly guided over time to offer solutions that the main market might not want to offer – maybe a left-wing product architecture that refused to invest in businesses who overpaid their CEOs relative to front line staff. Crucially at all points, the market would decide the outcome but non-private ownership structures would be keeping big capitalist institutions such as BlackRock on their toes. They’d hate it, of course, but those of us who believe in capitalism and free markets need to realize that we should back what’s in the interests of customers and ordinary people, not the mega large cap corporations who claim to be the only bastions of capitalism. Free markets and capitalism amount to much more than just big corporations, using their scale to kill the competition.