06 Oct Volkswagen – The Wider Implications
Volkswagen is the latest household name to betray the trust of the general public by falsifying their emissions readings to save the company money and boost profits. As well as damaging the company’s reputation, the financial cost is likely to be considerable. Texas County is one of the first to seek reparations by issuing a 100 million dollar lawsuit. The idea of beleaguered VW executives being pursued across the globe by a posse of morally outraged Texans is an image to savour!
Volkswagen’s deceit will leave many people not only feeling cheated but actually financially damaged. Their behaviour also negatively impacts on shareholders and other, external investors.
When you invest in the shares of a company, either directly or via an investment product, the price you pay for the shares is partly determined by the current and estimated future earnings potential. In other words, if future earnings and profits look attractive, you are likely to pay more for the shares and vice versa.
If you buy shares on false or misleading information, you are likely to pay more for the shares than they are actually worth, generate a lower return than predicted and possibly suffer a financial loss. Whilst investing in equities carries an additional element of risk, it should not become a gamble where the odds are stacked against you.
As financial advisers, we are tasked with balancing investment risk with future potential rewards. It is not only our duty, but a regulatory requirement to ensure that investments best suit a clients investment risk profile. Risk can be managed in two ways, diversifying between different asset classes and selecting higher quality equities and bonds within the asset classes.
Volkswagen's deceit will leave many people not only feeling cheated but actually financially damaged. Their behaviour also negatively impacts on shareholders and other, external investors.
Volkswagen has been regarded as a “blue chip ” and ” investment grade” company. This means that shares in the company, whilst unlikely to double in value, can be regarded as more reliable, less volatile and likely to provide an attractive amount of dividend income along with a capital gain. Their bonds (company loans) are regarded as extremely safe, almost guaranteed to be repaid. These type of assets help to balance a portfolio, introducing a more safe and reliable element. When companies deceive the public, shareholders and fund managers, investors end up taking risks that they neither expected or deserved.
In our latest newsletter, we compared passive with active investing and the V W scandal is a perfect example of the potential downside to a passive strategy. If you hold a company like VW in your portfolio because it remains in the particular index that you are tracking, you have no choice but to remain invested. This is a bit like being on the deck of the Titanic. You know what is about to happen but there is nothing you can do about it.
Unfortunately, corporate malfeasance appears to be fairly widespread. It wasn’t long ago that a major retailer admitted to falsifying its accounts by including future and as yet unearned profits on its balance sheet. This too would have the affect of inflating the share price. They obviously believed that every little helps! The list of banking malpractices is so long that if I included it here, you would need to take the afternoon off in order to finish the article!
This type of corporate malpractice can have far reaching consequences. The government and regulators need to act decisively and they need to act now!