The Pit - IMI Trust

Approximately 4 years ago I was looking at Corus Steel shares on the London Stock Exchange.  They were at the very low price point of 9p per share.  Earlier in the year they had been down to 5.5p.  Analysts believed then the company was going to go bust because there was little demand for steel in the market.

As Corus was the new identity of the formerly government-owned British Steel I believed that it was unlikely to go bust as the government would step in at some point if the situation got really bad.

I then moved house, moved country, started up in a different industry, spent some time with my wife and forgot all about the stock.  I was planning on a Buy and Hold strategy especially for stocks who have been affected by bad news.

I was browsing the newspaper today and lo-and-behold, Corus caught my eye.  As at close of trading 10 January 2007 it sat at 536p.  A 59.5x appreciation or a 5950% rise in that time.  My ‘dipping-the-toes’ investment of approximately $12,000 would have been worth around $800,000.

March 21 2003 - Corus Group - 9p. 
January 10 2007 - Corus Group - 536p.

I really should have bought shouldn’t I?

Whether it occurred by design or coincidence it is hard to say but the Commonwealth Bank has a smart, new advertising campaign.  An advertising campaign that other companies have utilised in the past - Making good news out of old bad news.

Their current campaign highlights the fact that their staff ‘Open Doors’ and they are recruiting new staff all the time to help you.  This is, of course, great news for you as a consumer because you are probably fed-up with inefficient systems and long delays to carry out even the most rudimentary of tasks like paying in a foreign currency cheque.

However, what the advertisement doesn’t highlight is that the Commonweath Bank has presided over 20,000 or so job losses over the previous decade.  This reduction in staff numbers has served a purpose.  To create this ‘new’ era of job creation.  It works very well in the public eye as the average punter has no idea or want to find out about a company’s track record.

This strategy has worked with other banks around the world with Natwest and Lloyds Bank in the UK closing huge numbers of branches over the 90’s, that inevitably turned into glossy wine bars and eateries, and then, some time after, opened new branches with large advertising campaigns promoting the fact. 

Having worked in large financial institutions for the early part of my career I recognise the banking ethos of ‘Making Hay While The Sun Shines’ and ‘Cutting The Fat When Necessary’.  In periods of recession or slow growth, banks readily chop uneccessary, unprofitable arms and when they are profitable, the money they make they spend recklessly with huge bonuses, frivolous spending and increased staff numbers.

So, what is the end result for the consumer?  Nothing really.  As long as the end experience is the same they don’t care.  If it isn’t they notice and they may be motivated to switch to a different provider.

As a business owner, you should look to bad news in the industry or within your company to create opportunity and good news.  The banks have demonstrated how this is done and you can too.  It doesn’t have to be a monumental story, just something that is a point of difference for you and how it can be exploited.   And yes, the use of the word ‘exploit’ is deliberate…

The newspapers and investment magazines around Australia seems to be hooked on trading CFD’s (Contracts For Difference) on the ASX (Australian Stock Exchange). Actually, there is very little editorial coverage of the CFD ‘phenomenon’. Most of the ink is on advertising the platforms on which to trade this relatively new instrument.

An analyst on CNBC claimed that approximately 50% of trades on the London Stock Exchange are CFD trades now dwarfing all the other instruments in the multi-billion dollar derivatives market. Australian investors are trading just a fraction of that number but the figures are anticipated to explode over the coming months.

Because of this, many players are scrambling for market position. How do you get ahead when there are so many people vying for market share?

We have recently been engaged by The Sharemarket College to assist marketing the SMC Trader online trading platform. One of the challenges we have is competing in a very competitive market.

A few months ago at the Melbourne Traders Expo there are booths 3×3 in size with companies all attempting to sign you up. As an investor how do you choose which CFD provider to go for?

The Sharemarket College is fortunate enough to have a brilliant product that offers investors state-of-the-art tools to facilitate their investment. In addition, they have over a decade worth of testimonials from their clients that have been through their investment education courses. But how else can you appeal to the average investor?

Do you look at the advertisements in Personal Investor, AFR Smart Investor and Intelligent Investor and think ‘That deal looks good, where do I sign up’? Do you read the ‘advertorials’ in Wealth Creator Magazine or Your Trading Edge and think they contain the right information to make an informed buying decision. Do you ask the man standing in the middle of the Sydney Investment Expo wearing an ‘I Hate CMC Markets’ T-shirt what his opinion on who’s the best CFD provider? I don’t think he will be trading CFD’s with CMC.

As an investor, the choice can be difficult. As a CFD provider trying to claim ‘that’ investor, the road is even more treacherous.

IG Markets, judging by their front-page advertisement on the Australian Financial Review, are offering a good deal. Low commissions on trading they advertise. Low commissions sound good but you’ll find that the discounted rates only apply if certain trading criteria are met. They are making a cut somewhere that’s for sure. They have to. That one advertisement would have cost around $15,000.

There are a dozen other entities all trying to earn your dollar and most show great examples of how NOT to go about your marketing. If you ever want to see poor marketing in action, you will commonly find these two elements.

1. Reduce trading commissions.
2. Throw amazing amounts of money at blanket marketing which offers no real benefits, but mentions your discount trading.

Sounds similar to the IG Markets marketing plan. Effective? Probably. But it may not be as efficient as it should be.

Other domestic players like Macquarie, Sonray Capital Markets and Tricom use a more corporate model. Day trading, online trading, full service brokerage and whitelabelling and referral plans. This is in own right is effective and profitable but they want a slice of the ‘mum-and-dad’ pie too.

The CFD trading revolution has fully hit Australia. Funnily enough, the centre of global trading, the US, doesn’t allow its citizens to trade CFD’s. The rest of the world can trade CFD’s on the New York Stock Exchange and Nasdaq with no problems.

And we will… The Online Trading industry in Australia is going to massively expand over the next few years. CFD’s are going to play a major role in that expansion and we look forward to enjoying the ride.

We’ll be working on promoting the SMC Trader until the end of 2007 so we’ll definitely give you updates on how it goes. If Commsec and ETrade, start issuing statements that they’re numbers are falling then assume we are doing well.
That should happen anyway as both are really limited in both functionality and product offerings. It’s true.

To view the SMC Trader go to http://www.smctrader.com  and to view the SMC Cafe, where traders meet, go to http://cafe.smctrader.net  

For as long as financial service providers have been operating there has been debate on fees.  The focus in the trade press has been on keeping fees ultra-low for the ‘public interest’.  To highlight how interested the public are Newspoll conducted a survey recently identifying that 60% of investors had no idea how much commission they pay. 

The current market sentiment is that fees they pay have to be low.  Fund managers, financial advisors and superannuation managers are striving to keep their fees low because ‘high’ fees are perceived to not represent value.  However, this philosophy is misguided.

Low fees mean that service, diligence, research, endeavour, expertise, good management and a host of other desirable qualities have to be sacrificed. 

The supporters of low fees, time and again, use the arguement that high fees erode returns massively in the future because of compouding and low fees give you, the investor, the service user, the client, more money in your pocket. 

This though is making the incorrect assumption that both services, the high fee service and the low fee service are delivering the exact same product.  They are not.

I Couldn’t Believe I Was Able To Buy A Convertible For Under $5000

We specialise in web and marketing for the financial services industry.  So here are a few questions about web costing. 

• Would you expect the same value or performance from a website that cost $1,000 to a website that cost $100,000? 
• Or a website that cost $100,000 to a website that cost $1,000,000? 
• Or a website that cost $1,000,000 to a website that cost $10,000,000? 

In all three cases the answer would be a clear and resounding ‘No’.  If you pay more money for more features, more scope and more functionality your results end up being a lot different.  In terms of marketing, here are a couple of other questions:

• Would you use your marketing budget to make one television advert that appeared once?
• If you answered Yes, how would you then market to people who missed that advert?

Again, with marketing you have to spend time and money on strategy, management and research to get optimum results.

How can a financial service provider operate with such restrictions?  They can’t.  Not well enough to for you to be confident that you money is being managed well.  The square peg doesn’t fit in the round hole in this instance.

And if you are the discount chaser and you want low fees, are you disappointed when the value delivered is low and performance less than expected?  You should be but really you only have yourself to blame.

Job applicants that want a job where they can ‘travel’ can send their applications right here.  What a 10 days.

• Gold Coast (our hub) to Brisbane, then back to base
• Gold Coast to Sydney
• Sydney up to Cairns via Gold Coast
• Cairns back to the Gold Coast (for a change of clothing)
• Then, finally, Gold Coast to Melbourne and back 

I really must learn the art of appointment booking. This also explains the lack of blogging recently.  Sorry.

Please Note That Trips Were Longer Than 5cms In Real Life 

Brisbane
We met with clients to discuss processes they need to implement to streamline their services and become more efficient.   Their processes were too ‘key person’ specific.

Technology allows businesses to provide consistency. Relying solely on humans for the support of your clients can cause serious problems.  Do not remove the human element completely but support your staff by underpinning their role with strong systems.

The reason.  The potential impact of losing just ONE client is:

• You can lose the upfront profit a sale will generate
• You can lose any ongoing trails or commissions that sale will generate
• You can lose any referrals that client can provide
• You can lose the sales, trails & commissions from those referrals and their referrals
• You lose the potential to upsell any new products
• That ONE unhappy client will tell lots of other people and ruin your reputation amongst their peers

Can it be emphasized enough the amount of loss suffered from weaknesses in company processes? 

Sydney
The point regarding loss of reputation leads me nicely onto the next stop of the trip, Sydney for the “Banking & Financial Services Reputation Management Summit”. Hosted by Frocomm Australia, the event was focused around “Trust and the Impact on Reputation”. 

One of the speakers at the event was John Brogden, CEO of Manchester Unity and former Opposition leader in NSW.

This event confirmed for the direction we’ve been taking with our clients. Building trust & loyalty through community & support and communicating this clearly.

John Brogden was so accurate when he said the key to retaining clients is developing loyalty through service and information as the public can access your competition in seconds online.

In line with our philosophy, he noted that the power of the internet in developing their business.  When he started with Manchester Unity, he was of the belief that the internet would provide a lower quality, less loyal client base. What he has found is precisely the opposite.

His reasoning was the client who purchase online have developed a lot stronger product knowledge before making their decision. Exactly the way we have been working with our clients.

The line-up of speakers was second to none and a thank you must be extended to Glen Frost at Frocomm for organizing the event and Mark Hollands from Factiva for being a superb MC.  Also I won an iPod mini for my troubles.  Bonus!

Cairns
The trip to Cairns ended up being like a weekend away. I would have to say thank you to the Shangri-la Hotel for the fantastic stay. Cocktails and Wedges (not in the same glass) by the pool topped a perfect weekend.

Another One Of Those Texas Planes Landing

Melbourne
The road trip ended with Melbourne, which included a meeting with one of the big four banks to improve their marketing and distribution. It is amazing how the largest organisations in Australia can be ‘old school’ in their marketing approach. Get on the phones, sell, sell hard and quickly. We offered a few solutions and soon we’ll see if we’re allowed on board.  The signs so far are good.

The road trip was a great success, next time though I need to allow more time for sleep.

The flying kangaroo, Qantas is the talk of the investment town with speculation that private equity group, Texas Pacific Group, together with Macquarie Bank, may takeover the Australian icon.  This move would remove the ciompany from the ASX.  There is also talk that Fosters may be off the ASX soon if it is taken over.  The Seven Network and PBL have also been targeted by wealthy US-based private equity companies with deep, deep pockets.  Other blue chip stocks are following suit. 

The pattern for leaving the ASX started early in the year when, Rupert Murdoch’s News Corporation, the then biggest company on the ASX switched stateside.  Large companies in Australia are considered medium-sized (or smaller) to their counterparts on the NYSE and the Nasdaq.  Remuneration for the board of directors at companies like Pfizer for one year, for instance, would be more than the market capitalisation of the majority of Australian listed companies. 

The private equity companies involved like Texas Pacific Group (TPG) and Kohlberg Kravis Roberts (KKR) have nearly endless resources after decades of acquisition and growth.  These are just the big two.  There are literally hundreds of these companies with the ability and inclination to buy Australian growth assets. 

Rebranding Will Be Straightforward As Shown

Is the Australian stock market going to be white elephant in the eyes of global trading giants?  More importantly, are local investors going to be satisifed with the only B-grade or speculative investment opportunities?  

This trend is making life difficult for financial planners and fund managers in Australia.  Many conservative planners and managers rely on big ticket stocks across a variety of industries.  Now, more than ever, Banks and Resources underpin the Australian Stock Exchange but for how much longer. 

Will the up and coming companies succumb to the lure of the greenback and turn the ASX into a Sunday Market or Australian companies going to show some backbone and compete with the big fish in the global economy? 

Flying back from Sydney on Tuesday night I flicked through the Virgin inflight magazine. An advertisement caught my eye for an investment strategy.   

The advert proudly displayed that if I purchased a Crude Oil bull warrant at US$66.00, then every US$1 increase equated to over AUD$31,000 profit on each movement. Wow-wa-wee-wa! As the global hype machine Borat would say. 

The fine print said this.  You have to initatially invest $57,500.  Well, that’s disappointing because the hook of the headline was about a $1 movement on a $66 warrant.  Better yet, the text continues that if, and it’s a big IF, the price of oil shoots to $72 from $66, you make $200,000.  Sounds great. Triple digit percentage returns in a matter of days. 

Better still, that $57,000 controls over $2m of assets in the commodity.  Did anyone use the words ’Hideously Leveraged’.  Better again, the advertisement mentions that this scenario is hypothetical.  Cool.  So hypothetically, what would happen if oil went from $66 to $57 as it stands today?

Unsurprisingly there is no mention of this.

In advertising, use real trading scenarios. These frame the investment for the client.  Then present different scenarios to demonstrate typical gains and losses.  An advantageous strategy to use would be to highlight potential hedging positions.  This shows that you have the nous to protect investments.  As this is a lot of information to impart most companies use historical data in their advertising as a safe method of demonstrating the ‘potential’ of an investment. 

All hype, no risk.  When you see that you should be suspicious.  Especially in unfamiliar investments. In your marketing, are you safe, balanced and present the facts?  And have you seen examples of ‘glossy’ presentation? 

On Friday, the largest IPO the world has seen will occur on the Hong Kong and Shanghai Stock Exchanges.

The company is the Industrial and Commercial Bank of China (ICBC). As China’s largest lender, institutional and retail investors are scrambling to become a part of the world’s largest IPO, especially with all the hype surrounding the stunning economic growth of China.

Here’s some impressive statistics…

• The ICBC has 18,000 branches (Australia’s largest banking corporation, NAB has under 800)
• Accounts for 15.4% of all loans in Chinese banks
• More than US$1 trillion in assets.

The ICBC has also admitted to some other impressive statistics…

• The ICBC has publicly admitted to over 50 substantial fraud cases per year over the last few years.
• Its critical default loans total sit around 10% of their portfolio.
• 80% of its loans are to the corporate sector which is dominated by state-owned companies
• Of the 80%, 40% of those companies are in the red.
• The Bank is rapidly increasing its loans to this sector by almost 25% a year (as reported in The Australian - Oct 23).

If an Australian bank admitted to this level of imprudent banking it would be under serious investigation and would have few investors risking their money. 

New Target Market With Growth Potential Identified

However, more astonishingly… 

• The float is now 270x over subscribed for the retail portion (as an informal guide, bankers are normally happy with 20x oversubscription or above).
• Investors have placed orders for over US$500bn dollars of ICBC stock.
• Goldman Sachs who invested $2.6bn 6 months ago, now stand to make nearly $4bn from the IPO. This is the largest profit from a transaction since the company was formed in 1869.

From every angle, this IPO is spectacular. Keep an eye out for the listing on Friday. At current value they will be among the largest banks on the planet. You can be assured that investors around the world will have their attention focused on Hong Kong and Shanghai.

Either that, or it may just end up being a deal which is hype over substance, however, we very much doubt it.

After commenting on AAMI and Zyrtec on their mixed messages, one of the top Australian banks, the ANZ Bank have out-clevered everyone, even themselves, to deliver the worst message to their customers - the result can be viewed here.

For those not inclined to download the video, here’s a quick summary.  The theme of the advert is to demonstrate the lengths ANZ go to, to provide security for their clients.

The nerdy, secure banking guy goes through an eye scanner, a finger print scanner, has to smash open a small glass cabinet to press a button and so on, just to get into his office.  At the end of this sequence this is where the advertisement goes pear-shaped. 

After all the security measures, the door to the office does not open. So the nerdy looking character knocks on the door and a lady lets him in.  What the advertisement is saying that the security checks are pointless, technology doesn’t work and human intervention will resolve the issue.  It is clear that ’no matter what security measures we implement, there are always ways around the system’.

I seriously hope this is not the case.  Of course, adverts are supposed to be humourous but I am sure there are many people who viewed this in the same way.  This means lost customers and lost revenue.

At the moment it seems, the advertising industry does not have its values aligned with the finance sector.  Financial groups not to continue reassure clients and build relationships that their money is safe.  An advert like this could cause a lot of damage.  If ANZ was your company, would you allow your reputation to be harmed in this way?