Commercial Awareness Breakdown: 17–21 Feb 2020

Private Jets, Inrupt and the Bloomberg Barclays US Aggregate

Posted at youthlaw.co.uk…

Commercial Awareness Breakdown deconstructs three of the week’s commercial stories in an understandable and jargon-free manner. Terms bolded and underlined may be more difficult to understand and are explained at the bottom.

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1) Private Jets

The demand for private jets between Hong Kong and Australia and North America has increased by 214% since last year, due mainly to the outbreak of the coronavirus disease. Non-private flights have also seen an increase of 34.2% compared to January of last year.

The outbreak of this strain of the coronavirus disease, COVID-19 caused by SARS-CoV-2, started in December 2019 in Wuhan, the capital of Hubei, China. As the death toll increased across January and commercial flights from China continued to be grounded, companies and governments sought to move their staff to the US, EU and Middle East via private jets. Private jet brokers have described the increased demand as “crazy”, noting that many organisations have taken a “knee-jerk” reaction and are trying their best to move away from the risk of harm.

Airlines and global carriers, it is estimated, will be subject to $30 billion in lost revenues in 2020 (International Air Transport Association) as a result of the disease. Specifically, Asia-Pacific airlines will be hit the worst, accompanying the first fall in passenger demand for these airlines since the financial crisis over 10 years ago.

The majority of the growth comes from flights out of Hong Kong. The region, despite not having been subject to mass groundings of planes, has suffered a reduction of about 55% of flights over the past four weeks. It seems that operators will not fly from China due to quarantine requirements, and thus Hong Kong is now a hot spot for private jet departures.

It is not just organisations, however, who have increased their use of private air travel. Wealthy individuals and families concerned about exposure, who normally fly in commercial airlines, are increasingly booking private flights to avoid contamination.

In a time when concerns are so fixed on the environmental risks of air travel, many will likely be disappointed to see the use of private jets sky-rocket as it has. If, when and how climate groups respond to the 214% increase is uncertain, however there is a chance that the statistics may prompt renewed tensions in the climate change debate.

2) Inrupt

Sir Tim Berners-Lee’s start-up, Inrupt, is launching pilot projects in the hopes of developing a “massively scalable, production-quality technology platform”. Berners-Lee, who developed the world wide web in the 1980s, is highly critical of the way in which his creation has been captured by corporations, and, with the help of open-source developers and entrepreneurs, seeks to decentralise the world wide web.

The firm’s most recent goal is to establish a scalable platform, and as such has hired five leading technology experts. Mr Schneier, a leading cryptography expert, who has been hired as head of Inrupt’s security architecture team, states that he supports Berners-Lee’s model of “distributed data ownership” in challenging the “digital feudalism” of the previously mentioned corporations. Mr Schneier warned that the population’s data is not under their control, and is instead owned by many different companies on their private servers. Inrupt’s ‘Solid’ technology seeks to solve this by creating workable, implementable authentication and permission processes.

Inrupt is in its fourth year of operation, having being founded in 2017 to implement the Solid technology created by Berners-Lee and his team. Some corporations take a negative stance on Inrupt’s work, brushing it off as merely an “academic project that is unlikely ever to succeed”. Others, however, including members of the ‘Big Four’ (Amazon, Google, Facebook and Apple), are publicly backing open-source projects that could integrate with Solid in the future.

In terms of pilots, the firm has recently launched a project in Manchester alongside the Greater Manchester Combined Authority to help push an “early years” app that digitises children’s healthcare records up to the age of 2.5 years. Mr Bruce, Inrupt’s co-founder and CEO, writes that the UK’s current system involves healthcare data residing “across the NHS”. He writes it would be much better if the data could be “securely delivered straight to your nurse or your caregiver”.

Data is one of the most important areas of interest for technology firms at the moment, with controversy and innovation never being far around the corner. For many of the Big Tech corporations, storing data locally is preferable. However, whether this is a reasonable approach to data storage is doubtful, particularly as the public becomes increasingly aware of how their personal data and information is treated.

3) Bloomberg Barclays US Aggregate

Some of the worlds largest bond funds (funds investing primarily in bonds) are being subject to increasing accumulations of risk as a result of ultra-low interest rates and debt issuance by US companies. Around $140 billion of assets following the Bloomberg Barclays US Aggregate (BBUSA or “Agg”) bond index are controlled by exchange traded funds managed by fund managers such as BlackRock and Vanguard, among others. The BBUSA bond index is an important benchmark, and is used by traders globally to analyse the bond markets and compare the risk on investments.

Alongside the $140 billion mentioned above, trillions of dollars lie in mutual fund trackers based on this same BBUSA index. GMO, a US fund manager, has stated that the risk of losses for investors investing in BBUSA tracking funds has significantly increased due to increased US bond prices and low yields. One particular example of these low yields come from the US 10-year Treasury bond, which recently dropped to a record low of 1.47%. Similarly, the average yield across all US investment grade bonds currently sits at a record low of 2.57%.

As a result of these, the yield on the BBUSA has fallen to 2.6%, which has caused a significant increase in risk of losses if interest rates rise. Recent ultra-low interest rates have led to an increase in debt issuance by US companies, which surpassed $13.6 trillion over the past 10 years. This issuance has been accompanied by poor quality corporate bonds held under the BBUSA, with more than 50% rated as BBB.

Peter Chiappinelli, a member of GMO’s asset allocation team, wrote that the BBUSA (or “Agg”) “offers some of the lowest expected returns in history”, with BlackRock expecting the funds to deliver annualised returns of 1.8% over the next decade. BlackRock’s own fund, which tracks the index, returned 8.68% in 2019 and delivered annualised returns of 4.05% since its creation in 2003. Similarly, Vanguard’s fund, which tracks a slightly modified version of the index, returned 8.82% in 2019 and delivered annualised returns of 5.88% since its creation in 1986.

Despite the dire looking predictions, it is worth noting that bonds are normally held in a portfolio as “ballast for the portfolio’s equity risk” (Josh Barrickman, Americans Head of Fixed Income Indexing, Vanguard). Seemingly, so long as this balance remains, portfolios will continue to deliver returns.

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Difficult Terms:

Annualised Returns — The average amount of money returned/earned by an investment over a given time period.

BBB — This is a degree of bond credit rating, which represents the credit worthiness of bonds. BBB normally refers to bonds with an upper to lower medium credit grade, making them investment grade bonds.

Bond — A financial instrument through which an investor buys the bond, loaning money to the issuer. This loan has a certain duration, and the investor receives a coupon (interest payments), often annually. The face value of the bond is what will be paid back to the borrower once the bond matures.

Bond Index — A method of measuring the value of a certain section of the bond market — these may be tracked.

CEO — Chief Executive Officer — the most senior officer in charge of an organisation.

Debt Issuance — This occurs when a company borrows money (thus issuing debt) on the open market through a bond issue.

Decentralisation — The process of removing authority from a central body and delegating it to other locations.

Equity — Investment in capital not listed publicly (for example on the public stock exchange).

Exchange Traded Funds — An investment fund traded on stock exchanges.

Feudalism — An ownership system wherein all of the property is owned by one individual.

Fund Manager — A firm paid to invest individuals’/companies’ capital with the aim of growing their finances.

Interest Rate — An interest rate is a percentage charged against the amount you borrow or save.

Mutual Fund — A fund in which many investors’ money is pooled together to purchase financial instruments.

Open-Source — Software is open-source when it is released, by the copyright holder, under a licence allowing anyone to edit, study and distribute the software.

Pilot — An experimental scheme put forward and tried to assess whether a full-scale project is possible.

Revenue — A company’s income from its regular trading.

Servers — Computers, connected to a network, which store information and perform desired functions.

Start-up — A new company intending to grow to be a large-scale organisation.

Traders — An individual, or entity, who buys and sell financial instruments such as stocks and bonds.

World Wide Web — An information system where data, identified by by Uniform Resource Locators (URLs), is accessed over the internet.

Yields — The yield of a bond is the return an investor realises on that bond.