BHP: Back Down Under - An Ideal Direct Indexing Use Case IV
Financial markets can be cruel but they can also have a sense of humor, full of irony and a savage, Norm Macdonald-esque sense of timing.
It is hard not to feel amused by the outrage that has greeted the announcement that mining giant BHP plans to de-list from the United Kingdom's FTSE 100 and relist in its home of Australia.
This underlines a) the importance of what index you own b) how all indices are constantly changing and c) changes in policy or index conclusion can really reward (or punish) investors and savers.
It is also hard not to feel for BHP's leadership: they are struggling to run a global resource company from Australia, a country VERY isolated from the rest of the world during this pandemic.
To step back for a second, there are really three distinct yet overlapping BHP aims here:
The company wants to simplify its business structure. Multiple listings are an expensive headache.
The move is part of a broader plan to transform BHP's actual core business by pivoting the mining giant to focus on "cleaner" metals such as nickel, copper and iron ore that are necessary for the Green Revolution, and also, in parallel, offload their dirtier oil and gas assets into a new vehicle and merge it with Australian Woodside Petroleum.
It also wants simply relocate to the country where BHP has a lot of its principal assets - Australia - and where it was actually founded way back in 1885.
The only problem is that this deprives the United Kingdom and especially the FTSE 100 - the UK's signature stock market - of one of its iconic companies.
The issue isn't purely symbolic either. BHP is one of the largest companies in the FTSE 100 (the second at the time of writing) and, more significantly still, it is also one of the most reliable payers of large dividends.
Now UK savers and especially pensioners and pension funds love those dividends because they are a reliable source of quarterly income and once BHP leaves they won't be easily or even necessarily replaced.
The reason? There are two:
Well there are only so many gigantic mining companies that pay huge dividends every quarter.
Furthermore, many UK pensions and investment managers have strict mandates that keep them investing in anything outside of the FTSE 100 (or UK stocks etc).
Cool, makes sense but isn't very funny. What gives?
There are a few ironies:
The first is that, despite the howls from UK savers and fund managers, BHP is actually an Australian company (and always has been). Even in a globalized age it doesn't make a ton of sense to have your stock principally listed on an exchange on the other side of the world when you are pulling iron out of the red earth of Western Australia's Pilbara region.
(The pandemic has underlined the illogical nature of this arrangement: in another telling episode, to announce this potential index change the BHP CEO, Mike Henry, had to petition the Australian government for special permission to fly to London and then quarantine two weeks on his return.)
Second, ironically, there was an activist campaign to follow exactly this strategy a few years ago that was then staunchly resisted by the company and its then cadre of executives. The quarantine has only underlined that this structure is unwieldy and difficult - and expensive - to manage. ESG pressures have also helped things along. And what was once anathema to BHP's leadership has instead become advisable.
Lastly, one of the truly delicious ironies of this whole affair is that one of the only reasons BHP ever even had a London listing was its 2001 merger with South African giant, Billiton and became BHP Billiton for a time. Concerns around South Africa's market size (and the stability of its currency) meant that, despite being in a pre-ESG age, the company decided to list in London.
So, in conclusion, a gigantic mining company formed out of a merger that literally ravages the earth and pollutes heavily to pull the (very mission critical) metals out of the ground for our modern industrial economy is now trying to do what its investors wanted it to do a few years ago and a company that originally listed in the UK for partially ESG reasons is now leaving for partially ESG reasons and no one is happy, especially its UK-based shareholders.
Anyway, that might not be haha funny but it is pretty wryly amusing and you certainly feel for the CEO and his board who will likely fail to secure enough shareholder votes (must be 75%+ of both UK and Australian shareholders) and therefore spend years with an overly expensive corporate structure and also dedicate inordinate amounts of time in quarantine hotel rooms near - but not with - his family and colleagues.
C'est la vie.
There is also a lesson here about how important where and how a company is actually publicly listed. The key point suggests there is real value in paying some attention to what is happening to your passive index - even if you should likely stay passively invested.
For instance, US investors who invest in passive indices of large US-based companies have done very well over the last decade. A UK based investor who have invested primarily in UK based indices have done far less well.
The reason for this is principally that the FTSE 100 has not had nearly so many globally dominant and exponentially growing tech companies. Its performance has instead actually been weighed down by the large number of oil and mining companies that have suffered during the long bear market that began in 2013.
Now FTSE and by extension UK investors risk losing one of their most significant companies at what looks like the start of another super-cycle for commodities. Which way would you vote?!
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