UBS’ billionaire boondoggle 


A former billionaire. © Bloomberg

Last week, UBS made a pretty bold claim.

Companies run by billionaires outperform other public companies, it argued in a report from its wealth management department that broadly defended the ultra-rich. More controversially, it attributed this so-called Billionaire Effect to “smart” risk-taking.

Even given the obvious commercial interests, there’s nothing inherently wrong with expressing unpopular views that cut against the political grain.

Except when, you know, those views are actually wrong, or completely unsupported by the evidence. Which is unfortunately the case here.

This is the particular claim made in the UBS report:

Over the 15 years to the end of 2018, billionaire-controlled companies listed on the equity market returned 17.8 per cent, compared with the 9.1 per cent of the MSCI AC World Index.

This is later spiralled into a broader set of statements about billionaires, from Josef Stadler, head of ultra-high net worth at the bank’s wealth management department:

Billionaires are creating and steering businesses that consistently outperform equity markets. This business acumen has also translated into their philanthropy, as billionaires seek new ways to engineer far-reaching environmental and social change. This ‘Billionaire Effect’ is alive and well across the world – and shows little sign of slowing.

Outperformance? Not so fast. On page 30 of their report, the methodology used to arrive at this 17.8 per cent figure is broken down in more detail.

We identified publicly listed companies controlled by billionaires at the end of the years 2003, 2008, 2013 and 2018, narrowing this selection further to companies that represent a respective billionaire‘s primary source of wealth.

From this selection, the stock performance data were collected for 604 companies from 1 January 2003 to 31 December 2018, using Bloomberg as data source. We calculated the average annualised returns for the companies selected in 2003, 2008 and 2013, and constructed an index that switches the universe every five years to the new set of billionaire-controlled companies in order to reduce the selection bias. The index has been adjusted to reflect the sector and regional weightings of the MSCI ACWI.

Before we get to the real statistical issue, the wording in the report is already misleading. It is not true that a set of particular companies “controlled by billionaires” have, on average, returned “17.8 per cent”. Instead, as above, UBS are selecting three distinct groups of companies, that overlap, and taking a measure of their performance over 5-year periods. There is no actual 17.8 per cent return over 15 years.

The question then naturally arises: what happens if a company is run by a billionaire in 2003, but that owner is no longer a billionaire in 2008? It is removed from the index. What are removed companies replaced with? New companies, run by newly-minted billionaires.

So the index is not, by any stretch of the imagination, capturing the performance of a particular set of billionaire-controlled companies from a given date onwards. It is capturing the performance of a shifting set of companies: those run by people who became billionaires between 2003 and 2018 (selection bias), and those run by people who were billionaires in 2003 and stayed billionaires (survivorship bias).

This is not a useful contribution to the overarching debate on billionaires. It amounts to a thinly-disguised tautology. You may as well record the rising prices of London houses, eliminating only the ones that went down.

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And even if there is outperformance for companies run by current billionaires, which is possible but for which there is currently no good evidence at all based on the report, there is even less evidence for what the report claims it is caused by.

Billionaires, the authors confidently state, outperform because they are “smart risk-takers”, a kind of evidence free assertion exacerbated by the warped market data accompanying it. Let’s take a moment to enjoy the full quote, and coinage of the Billionaire Effect, from the press release:

This Billionaire Effect can be attributed to billionaires’ appetite for smart risk taking and their greater willingness to plan and invest for the long term.

Presumably, the People-Who-Became-And-Remained-Billionaires-But-Not-Those-Who-Were-Once-Billionaires-And-Did-Badly-Effect didn’t get through the marketing department. Either that, or the immutable characteristics of billionaires mysteriously evaporate when they fall out of the three comma club.

So if this report is not a serious empirical exercise, what is it? Perhaps it’s a kind of targeted flattery, encouraging the billionaires of the world to invest through a company that appreciates them. But even then, the whole exercise would be subject to one final flaw.

If those billionaires really are smarter than everyone else, and really do outperform, then they would be the least likely people to invest their money based on mere flattery. And this whole episode would be a complete waste of everyone’s time.

UBS declined to comment.


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