In Praise of High Volatility - February 2015 · 2020-05-08 · The Cult of Low Volatility, is...

Scottish Mortgage Investment Trust PLC February 2015

ENLIGHTENMENT PROVIDES NEW INSIGHTS INTO BAILLIE GIFFORD’S PHILOSOPHY AND FOCUS. THIS ISSUE LOOKS AT THE OBSESSION OF SHORT-TERMISM AND HOW WE CAN TREAT VOLATILITY AS A FRIEND.

IN PRAISE OF HIGH VOLATILITY

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In Praise of High Volatility February 2015

Tim Garratt

This article has been written by Tim Garratt and Scott Nisbet both of whom work in the Clients Department at Baillie Gifford with the Long Term Global Growth team. It is this team that is responsible for managing the Scottish Mortgage Investment Trust portfolio.

Scott Nisbet

Important Information and Risk Factors

The views expressed in this article are those of Tim Garratt and Scott Nisbet and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

Scottish Mortgage Investment Trust PLC is managed by Baillie Gifford & Co Limited and is a listed UK company. The Trust is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority. As a result, the value of its shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. Investments should be viewed as long-term.

This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions.

Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. The Trust’s risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may be greater.

All data is source Baillie Gifford & Co unless otherwise stated. Past performance is not a guide to future performance.

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I’d been sent there by another old timer from Baillie Gifford (our own oils analyst from 20 years before). I arrived somewhat reluctantly – like a child pressured to visit an elderly relative they’d never actually met. Soon, however, I was impressed by John’s wisdom so I asked rather undiplomatically (I was 26) how come he’d ended up in such modest digs? His one word answer was: “Enron”.

It’s not what you think. This, after all, was late 1999, and Enron was flying high.

The problem was that John Olson could never work out how Enron soared so unerringly (not sure you can soar metronomically) – how it managed, in such a volatile business, to post such smooth progression in earnings year after year. Eventually, the company got fed up with him asking these awkward questions on quarterly calls and banned him from their meetings. Excommunicated by Enron, my new friend was no longer much use to his then employers – an investment bank which wanted lots of its clients to put on deals in soaring buy-rated mega caps – like Enron – whom they’d later be advising on the next deal.

So John Olson ended up in the little independent boutique. We continued our enjoyable chat, but when I was leaving

he got up and took down a framed letter from his wall. I thought it would be a pat on the back from an ex-president or something with a warm nostalgic glow. Instead it was an irately written letter in which the author described what a misguided boy-scout, a cynical non believer, and all-round idiot my frail sell-side friend was. The letter was signed at the bottom in sweeping, dramatic strokes. By Jeff Skilling.

“One day”, glinted Mr. Olson, “I’ll hand this round at dinner parties”.

He didn’t have long to wait.

PrologueAround 15 years ago, I had a meeting in Houston with a Wall Street old timer – John Olson – a wiry septuagenarian who’d spent decades looking at oil and gas companies. He’d been a well known analyst but was now working for an obscure boutique I’d never heard of.

JOHN OLSON COULD NEVER WORK OUT HOW ENRON SOARED SO UNERRINGLY (NOT SURE YOU CAN SOAR METRONOMICALLY) – HOW IT MANAGED, IN SUCH A VOLATILE BUSINESS, TO POST SUCH SMOOTH PROGRESSION IN EARNINGS YEAR AFTER YEAR.

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Hobbling equities in this way is diminishing the chance of providing returns for savers, many of whom will live for a long time and will rely on these proceeds to maintain their lifestyles.

Populations are ageing and future liabilities are inflating at a dizzying pace. The growth required to meet these liabilities can be delivered by using equities to their full effect.

So, low volatility equities are anathema. Equity managers are at the wheel of a hugely powerful asset class, but some are afraid to take it out of second gear.

Of course, investment managers need to manage their short-term cash flows to cover withdrawals and provide stability. Low volatility asset classes such as bonds play an important role here but using them as stabilising assets should free up equities to provide long-term growth.

The Cult of Low Volatility, is costly and dangerous to join. But there are ways to leave the Cult behind and to properly unshackle equities, the most powerful of asset classes. Indeed, we believe in embracing volatility as a friend rather than seeing it as foe.

Those of a queasy disposition can turn away now.

The boy is given two options. He can invest in Winner Fund which will return a guaranteed £300 in 10 years’ time. Or he can invest in Loser Fund which will be worth £150 in 10 years’ time. In the meantime, he won’t be able to look at the valuation of these two funds.

Unless he’s crazy, the boy is going to choose Winner Fund. Why wouldn’t he? He’ll be able to take the £300 to pay his £200 school fees and he’ll have a good amount left over to spend on cavorting.

But let’s consider a second scenario where the boy’s father demands to know what Winner Fund and Loser Fund are worth once every year. The eventual outcomes are still the same: £300 and £150, but Winner Fund has more fluctuations in value. It often falls below £100 whereas Loser Fund ekes out a stable few dollars of return each year. The boy will probably still choose Winner Fund. He might worry a bit more about incurring the wrath of his dad, but he knows it’s the right choice on a 10 year view. After all, Loser Fund isn’t going to return enough to pay his fees and he’d rather avoid having to do a paper round to top up the shortfall.

Now, let’s consider a third scenario. This time, the boy needs to report to his father’s study with the value of each fund every week. He knows that his father will be anxious if his chosen fund is down in value and he will be berated about how he’s going to pay his fees. “Explain yourself, child!”. Now the stomach required for the Winner Fund is much, much tougher. After all, the fund often falls below £100. There’s a decent chance that the boy will pick Loser Fund just to avoid the rows and the heartburn, even though he knows it won’t be enough to pay the fees. Maybe something will turn up to help him out with the extra cash he’ll need in 10 years’ time. It’s a long way away anyway. He’ll worry about that another day and, in the meantime, he’ll have a less stressful existence.

Introduction It’s easy to share these anecdotal tales of woe. But the main point of recalling that meeting with Mr Olson is to highlight the real dangers of the investment community’s obsession with tempering equity volatility.

£300

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WINNER FUND

LOSER FUND

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Imagine a father who takes his young son into his study one day. He reaches into his drawer and pulls out £100. He tells his son to invest that money to pay for his school fees he will need to pay £200 in 10 years’ time.

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This is a simplified example, of course. No return is guaranteed. But in recent years, many players in the investment industry seem to be behaving like the overbearing father in this last scenario: choosing the equivalent of Loser Fund in order to avoid the inconvenient bumps and troughs along the way. We’ve seen it happen across geographies and across different types of client. A Cult of Low Volatility has sprung up.

Some asset classes and diversified growth funds are intrinsically designed to offer smoothness of returns (and often do a fine job of delivering it), but others do not lend themselves to being tamed in this way. Equities are a case in point.

Unfortunately, smoothness and predictability – whether it relates to earnings, revenues, returns or share prices – are not natural traits of companies or equities. And yet there is a growing trend to base investment decisions on such an assumption.

What Lies Behind this Folly? Short Termism is the Main Culprit, and This can be Largely Attributed to Regulation

Fund managers are among the worst culprits. Short termism is rife. The name of the game is to ‘avoid being near the bottom of the peer group this year’! Which is exactly what could happen in the short term if you accept more volatility than your peers. The annual and quarterly league tables have a lot to answer for. The fact that embracing equity volatility may be the only way of being able to provide adequate returns over a 15 year time horizon is simply not front-of-mind. The focus is firmly on what is happening now.

This abject terror of ‘standing out’ is not particularly new. And nor is it peculiar to humans. William Hamilton popularised the idea of the ‘selfish shoal’ of guppies. The risk of predation is higher at the edge of the shoal than in the middle, so each individual guppy tries to stay in the middle. That way, others end up between themselves and the predators. No harm in that, you might argue, except that the result of this self preservation behaviour is that the shoal’s form and movement ends up being aimless and dysfunctional.

THIS ABJECT TERROR OF ‘STANDING OUT’ IS NOT PARTICULARLY NEW.

UNFORTUNATELY, SMOOTHNESS AND PREDICTABILITY – WHETHER IT RELATES TO EARNINGS, REVENUES, RETURNS OR SHARE PRICES – ARE NOT NATURAL TRAITS OF COMPANIES OR EQUITIES.

There are all too many guppies in our industry. By remaining suitably anonymous, they’re able to continue extracting their annual toll from the ultimate beneficiaries – just so long as they keep their head down and put in an average showing. Low equity volatility is a good proxy for low career risk for equity managers, but it’s a million miles away from being a suitable measure of investment risk which, ultimately, is the permanent and irrevocable loss of capital.

There is also the nefarious topic of agency issues, the excessive number of layers in the investment industry and the incentives which are also too short term. How many fund management executives are incentivised on the value of their fund in 10 or 15 years’ time? The time horizon is all wrong.

Media commentators recommend the panacea of low volatility. Stock brokers want to generate activity: “Buy! Sell! Transact!” Their advice is never “sit tight for the next 10 years, buddy”. Investment managers also tend to conjure up new investment strategies to suit an individual’s every need. But all of this change and activity is rarely in the best interests of individuals.

“BUY! SELL! TRANSACT!” THEIR ADVICE IS NEVER “SIT TIGHT FOR THE NEXT 10 YEARS, BUDDY”.

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The low volatility folly is exacerbated by the industry’s obsession with metrics: this overwhelming desire to distil all the dynamic and organic complexities of an equity investment back to a single (spuriously precise and backward looking) number such as rolling volatility or tracking error. People like picking out and interpreting patterns in numbers – looking at whether the metrics of choice have risen or fallen – but they’re massively vulnerable to misinterpreting them. Perhaps this is what lies behind the popular misperception that volatility is high – a narrative supported by the appalling political situations in the Middle East, and the recent recalcitrance of the Russians. It’s not borne out by the facts though. Equity volatility is low. It has been for years – and yet the ‘flee volatility’ drum is being banged more loudly than ever.

So we’ve Explored the Reasons for the Cult. But Why is it a Problem?

This fear of short-term volatility has cost savers a fortune and will continue to do so. The following example shows why.

We’ve taken a look at the companies that are currently held in the unconstrained equity portfolio of Scottish Mortgage Investment Trust. We’ve honed in on the companies with a decade’s worth of stock market history.

The chart (on the left) below is the short-term one. It shows the worst one year rolling returns delivered by each of these companies over the past decade.

As you can see, holding them would probably have felt pretty uncomfortable at times. Board members and shareholders in the trust would almost certainly have asked difficult questions. Five of the stocks have temporarily lost more than 70% of their value

at one point or another. Another nine have lost more than half of their value. Anyone trying to manage returns or volatility over this sort of time period would avoid these stocks like the plague. But, crucially, this loss was temporary. And a year is nowhere near long enough to judge these stocks.

Let’s look at the worst returns (chart below on the right) delivered by those same companies over any rolling five year period within the past decade. Remember – this is still less than one-third of the average time horizon for an investor with retirement in mind, but much longer than the period over which most participants in the industry are evaluated.

CRUCIALLY, THIS LOSS WAS TEMPORARY. AND A YEAR IS NOWHERE NEAR LONG ENOUGH TO JUDGE THESE STOCKS.

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Worst rolling 1 year return over the past decade ($US) (Aug 2004 – Aug 2014)

Source: Datastream.

Past performance is not a guide to future performance.

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Worst rolling 5 year return over the past decade ($US) (Aug 2004 – Aug 2014)

Source: Datastream.


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Suddenly those career suicide stocks don’t look so bad. Those whose bosses or regulators or clients permit them to hold out, avoid difficult short-term questions, stay off the naughty step. Returns over the worst possible rolling five year period within the past decade have generally been positive. In the worst case, rolling five year losses have been around 10%.

Extending the time period helps significantly. And the long-term benefits of holding onto these stocks vastly outweighs that short-term bumpiness.

Although they’ve not all been held for the entire 10 year period, they’ve been held for a decent chunk of this time span. Their returns serve to underline why it’s so important to maximise our chances of identifying them early. This means thinking long term and embracing the inevitable peaks and troughs.

Let’s consider the picture over a rolling 10 year period: Now we are starting to approach a timeframe that is more relevant to most longer-term shareholders. How have these ‘career suicide’ stocks performed?

So there’s an interesting trade off to consider. Anyone who is willing and able to weather some short-term volatility and think over more relevant and sensible timeframes could be set to enjoy improved results. This is orders of magnitude more effective than the alternative: exerting tremendous energy trying to micromanage the daily ups and downs in performance.

This is so different to the conventional wisdom peddled by our financial training handbooks. From the moment we open them, we’re brainwashed into believing two flawed notions that are joined at the hip: firstly the idea that equity markets are efficient, and secondly that historic volatility is a good proxy for risk.

A stock like Walmart would fit this framework well. It has bobbled around much less than the stocks in the charts on the previous page. But it would have delivered a mere 1.7x return over the full 10 year period – largely in line with other steady Eddie stalwarts, but less than the very worse performer in our example overleaf.

Let’s remind ourselves that the role of equities is to generate capital growth to pay expenses that are likely to arise only in the long term. In this context, a stock such as Walmart is the risky stock, not Amazon which has returned over 10 times the amount, despite bouncing around a little more along the way.

Standardised performance to 31 December each year

Source: Morningstar, total return.


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2014 %

Scottish Mortgage 33.9 -15.2 30.1 39.8 21.4

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Let’s think back to our old friend John Olson. By no means was Enron a unique case. The chart below spans one of the least volatile years in the recent history of the stock market and each line represents a different stock.

The purple and blue ones are Amazon and Baidu. We’ve chosen them because they happen to be the two of the largest holdings in the Scottish Mortgage portfolio at the time of writing. They’ve bounced around over the short term but grown vibrantly and they continue to do so today.

Those benign looking green and orange lines look more reassuring don’t they? But they are Bear Stearns and Eastman Kodak. Both of them completely collapsed the following year!

So in no way is volatility a helpful guide to where the real risks lie. Dangerous complacency lurks. Many perceived safe havens, such as the big pharma companies and utilities firms, are equally risky because their business models are structurally flawed.

Dangers for Company Management Teams

This obsession with limiting equity volatility is pretty disastrous for the management teams of listed companies too. It imposes huge constraints on them all and it massively hampers progress. Repeated studies have shown that most CFOs at listed companies would be quite prepared to cancel a project with long-term economic value but with short-term costs, in order to smooth earnings or meet Wall Street’s myopic expectations.

Companies are organic and dynamic entities. Just like any living organism, they should thrive on disorder, change and shocks – improving their resilience and learning from each unexpected twist and turn. Instead, what do they do? They try to eliminate unpredictability or defer it at almost any cost in order to assuage regulators and in turn, short-term shareholders.

This is just like the paranoid parent that sterilises every work surface, spoon and plate in an attempt to insulate their offspring from the bacterial rigours of the real world. Their children may have fewer small bugs, coughs and colds for a few years, but isn’t it uncanny how often they ultimately succumb to much more serious maladies by dint of their feeble immune systems?

Suppressing natural shocks rather than embracing them can mask huge underlying issues, just as John Olson anticipated. The complacency and calcification that stems from brushing uncertainty under the carpet is terribly risky. The whole idea of uncertainty and bumpiness needs to be treated as a welcome and necessary part of investing in any progressive company. Volatility leaves management teams stronger, humbler and more resilient. As Mark Zuckerberg points out “The biggest risk is not taking any risk... In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

Incidentally, the same applies to the pensions system. Allowing a few schemes to fail (and mopping up the mess) could ultimately leave the system much stronger – free from overbearing regulation that forces schemes to obsess about short-term funding levels to the detriment of long-term returns. Guarding against the 1% is forcing the remaining 99% to obsess about volatility and invest in a way that is severely compromised.

Other Dangers of the Cult So the Cult imposes a huge cost: The opportunity cost of missing out on substantial long-term returns. But there are other dangers as well:

Rolling One Year Volatility (Based on 2007 monthly returns)

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Suggestion 1: Measure Less Often and Stretch Out the Time Horizons

These days it is de rigueur to measure the performance and volatility of investment strategies as frequently as IT systems allow. Regulators often demand it, despite the fact that the goals of asset owners are typically dimensioned in decades. And the problem is getting worse.

In the context of equities, intraday volatility is commonly used. Monthly at best.

But why on earth is it rational to think in these timescales? We are measuring a journey of miles with a pocket rule and just because we have the computing power to do so, it doesn’t mean that we should.

It is worth reminding ourselves of the role of equities here. To repeat, equities are most effective as investments when they are held for periods of five years or more. Their role is not to pay for short-term cash flows. In this context, the obsession with short-term measurement of attributes such as volatility seems misguided to put it mildly.

Suggestion 2: Think in Absolute Terms – Not Relative

Most people talk of volatility in relative, rather than absolute terms. Tracking error seems to be the most commonly accepted measure of risk. This seems absurd, and as is so often the case, we can learn from sport here. When interviewed before a big game, the star player is often asked “How will you stop the opposing team tomorrow?” The answer typically goes something like this: “We can’t worry about the other team, we just have to play our own game”.

Why should active managers be any different? In our case, the opponent is typically a structurally flawed benchmark, packed with the walking dead. The business models of many large index constituents within the utility, banking, retail and pharmaceutical industries look structurally unsustainable. Surely we should want to be volatile relative to such a feeble yardstick!

Some Solutions Leaving the Cult Behind So the low volatility Cult needs to be re-examined. Especially for equities. But we’re realists and we know that it won’t be banished overnight. So let’s at the very least, offer some suggestions on how to couch the V word in a slightly different way.

TO REPEAT, EQUITIES ARE MOST EFFECTIVE AS INVESTMENTS WHEN THEY ARE HELD FOR PERIODS OF FIVE YEARS OR MORE. THEIR ROLE IS NOT TO PAY FOR SHORT-TERM CASH FLOWS.

THE BIGGEST RISK IS NOT TAKING ANY RISK... IN A WORLD THAT’S CHANGING REALLY QUICKLY, THE ONLY STRATEGY THAT IS GUARANTEED TO FAIL IS NOT TAKING RISKS.

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Suggestion 3: See the Wood for the Trees

Many people obsess about the volatility of individual managers or portfolios. But why talk of volatility budgets or tracking error budgets for each manager in isolation? There are two big problems here:

The first problem is the implicit assumption here that volatility is additive. It isn’t! This is one of the greatest fallacies in investing.

Our growth portfolios are, almost invariably, paired with value funds for the purposes of measuring performance. They do well and badly at different times in both absolute and relative terms, so it makes sense to think about these factors in aggregate.

Another observation is that most funds are massively overdiversified. And most admit it. One of Baillie Gifford’s institutional clients was recently lamenting the fact that his line up of concentrated equity managers had become so convoluted, that it resembled blancmange. Those bold stock picks are watered down to the point of insignificance across their manager mix. It is not uncommon for a 10% holding in one of our funds to be diluted to well under 1% when all of a client’s equity exposures are aggregated.

Suggestion 4: Look at the Volatility of Fundamentals, Not Share Prices

Volatility is – almost always – couched in the context of share prices. To our minds, consistently robust corporate health and leadership vision is at least as important. Changes in balance sheet strength, leadership teams and strategy have far greater long-term consequences than short-term share price movements. The CEO of an average company in the Scottish Mortgage portfolio has been at the helm for very close to a decade (far longer than the market at large) and the strength of their balance sheets has consistently improved in recent years. Operational performance has also been much more consistent. This matters much more than the (mostly random) intra-day volatility of a company’s share price.

In the meantime, as an investment manager, we use volatility to your advantage. We can treat volatility as a friend rather than a mere acquaintance with whom we need to get on.

Over the past decade, we’ve been offered some fantastic firesales – for goods whose intrinsic fundamentals were actually improving. What a joy to be participating in an industry where most of the contestants run a mile from such an opportunity, rather than queuing down the street!

Following the summer of 2011, China was not flavour of the month with the stock markets because newspapers were strangely obsessed about slowing economic growth there. At the same time, Baidu’s founder CEO had the tenacity to invest for the long term – moving his whole online search offering onto a mobile platform. This infuriated Wall Street because it dented short-term profitability. But it was absolutely the right decision for the long-term future of Baidu. Revenues grew 2.7 fold and operating profits almost doubled during the period from 2010 to 2012. The number of mobile users grew to 130 million from a standing start. None of this progress was reflected in the share price and it proved a golden opportunity for us, as long-term investors, to add to our holding.

BAIDU CHINESE INTERNET SEARCH

Volatility in the share price of Wholefoods has provided similar opportunities. From 2006 to 2011 revenues and operating income roughly doubled. The store count rose by over 70%. But this period also spanned the financial crisis. Organic food retailing was an abhorrence to the stock market and a capital raising was required. CEO John Mackey’s mindset during this period was pretty instrumental: “It’s not very inspiring for most people to be told that the purpose of business is to maximize profits and shareholder value. Maybe that’s highly motivating for people who work on Wall Street. For most people that just doesn’t cut it.”

At the time of writing, Wholefood’s share price is experiencing another bout of volatility, this time based on market concerns about the competitive environment. We are reflecting on the investment case. Are the prevailing market worries well founded? If not, this could be another opportunity to add.

WHOLEFOODS US ORGANIC FOOD RETAILER


Image source: © Getty Images/Jonathan Nackstrand/Stringer, © Baillie Gifford, © iStockphoto.com/gmutlu.

Here are a couple of examples:

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Equity Volatility is – and will Remain – One of Our Closest Friends

The obsession with metrics such as tracking error and short-term relative performance have serious implications for investment returns. Trying to measure or manage these metrics deflects attention from the main risk at hand: the failure to enable equities to generate a high enough long-term return to meet longer-term spending plans.

There are a number of other pressures – the guppy like self-preservation instinct, the hype of media stories and the shrill short termism of measurement periods – combining in such a way that shareholders in investment trusts seek smooth returns, and recoil in terror from nature’s volatility.

We believe much of this quest is certainly misguided, and probably doomed. Low volatility equities are anathema. Our strong suspicion is that they will come unstuck, both in the paucity of returns and probably in sudden turbulence from unforeseen circumstances.

After all, most of us ought to have a very long-term time horizon. Most of us need actual returns. Short-term equity volatility does not really matter; long-run returns do.

We regret not having bought Netflix when it fell in 2012. CEO Reed Hastings had elected to split the company into separate DVD and streaming businesses, allowing them to price independently and compete with each other for business. Many customers chose to drop one of the services and the stock market punished the stock severely. With the benefit of hindsight, Hastings’ decision to cannibalise his existing installed base was both bold and brilliant. Milking the installed but outdated DVD business for cash to build out the faster growing, but lower margin, streaming business allowed Netflix to grow revenue, and grow profits, while making the transition from the DVD platform to the streaming one. For every DVD subscriber Netflix loses, it is now adding five new streaming ones. It is currently experiencing another wobble so we are thinking carefully about whether the current gloom is justified. Is this a great opportunity to buy a long-term growth stock at a knock down price?

NETFLIX VIDEO RENTAL BUSINESS

In the wake of Facebook’s IPO, the share price more than halved. The stock market seemed particularly concerned by the company’s ability to make the transition from desktop to mobile, and by the stickiness of its network of users. We followed up on these concerns in substantial detail, via meetings with the management team, the use of our Devil’s Advocate process and some inquisitive research on user habits. The conclusions were reassuring. We should have added but didn’t. Did the inevitability of tough questioning from a small group of our clients and consultants deter us?

FACEBOOK ONLINE SOCIAL NETWORKING

SHORT-TERM EQUITY VOLATILITY DOES NOT REALLY MATTER; LONG-RUN RETURNS DO.


Image source: © Getty Images/Jonathan Nackstrand/Stringer, © Baillie Gifford, © iStockphoto.com/gmutlu.


If you require further assistance or information, please contact:Baillie Gifford & Co Limited, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN

Or telephone the Client Relations Team on 0800 917 4752.

You can email us at [email protected] or visit our website at www.bailliegifford.com

Your call may be recorded for training or monitoring purposes.

Copyright © Baillie Gifford & Co 2009. Authorised and regulated by the Financial Conduct Authority.

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