Corporate access Here is a story about how big asset managers used to rely on brokers to set up conferences where they could meet with corporate managers, but now they're doing it themselves: Fidelity Investments, Capital Group, Wellington Management, T. Rowe Price Group Inc. and Norway's government fund are planning a series of private conferences where their analysts can meet CEOs, according to people familiar with the matter. The agenda: cocktails and dinner, followed by a full day of one-on-one meetings, 75 minutes each. CEOs only. "There was this idea that brokers had magical access to the C-suite," said Octavio Marenzi of Opimas, a consulting firm to banks. "Asset managers are starting to realize, 'I can pick up the telephone as well.'" Honestly when you put it like that it is a little amazing that they … missed this? Fidelity and Capital and Wellington and T. Rowe are among the biggest shareholders of hundreds of public companies. They vote to elect directors and endorse CEO pay and approve mergers, they can move the stock price with their purchases and sales, the executives have fiduciary duties to them, surely if they called the companies someone would call them back? This story hits on any number of long-running Money Stuff themes. Most obviously, we have talked before about "corporate access," which is the name for this sort of business, in which banks set up meetings—ad hoc or at conferences—between their investing clients and their corporate clients. I have argued that corporate access is essential to understanding the business of investment banks' research departments: Bank research is notoriously positive, much more likely to rate a company "buy" than "sell," which some people find outrageous but which is more sympathetic when you remember that (1) a "buy" rating helps the bank maintain good relations with the company and (2) those good relations are much more valuable to the bank's investor clients than an accurate rating would be. The investors mostly do their own work to decide what stocks to buy; they rely on the banks not for stock picks but for access to the corporate managers. But if the investors don't rely on the banks for access—if they just get the access themselves—then the value of the research departments is rather diminished. But you shouldn't worry too much for the banks, because they have a lot of clients who aren't Fidelity or Capital or T. Rowe. The value added by banks' corporate-access businesses is not mostly in introducing huge household-name investors to huge household-name companies; presumably BlackRock's Larry Fink and Apple's Tim Cook have, like, heard of each other. The value added is in introducing smaller—but still institutional—investors to smaller public companies; it's coordinating a whole big complicated market rather than just a few big names at the top. But the ownership of public markets is becoming increasingly concentrated in those few big names at the top, and we are not too far from a world in which, as Harvard's John Coates puts it, "roughly twelve individuals will have practical power over the majority of U.S. public companies." That's bad for the banks—those dozen people can cut out the banks and do their own corporate-access work—but it is also sort of weird and unsettling for public markets generally. If you add a couple of names (BlackRock, Vanguard, etc.) to the Fidelity/Capital/Wellington/etc. conference circuit, pretty soon that circuit will control a majority of the shares of a majority of public companies, and then those conferences will be a good replacement for shareholder meetings. Why care about or talk to your other shareholders, when you can meet with the only ones who matter in a single day? That points to another theme, "should index funds be illegal?" The particular names here aren't the traditional index-fund names, but still it is interesting to see several of the biggest owners of public companies explicitly banding together to chat with all their companies. Chat separately, of course, but still. If all of the CEOs of all of the airlines go to a Big Investors Airline Conference, and all of the CEOs meet sequentially one-on-one with all of the airline analysts for all of their big investors, then … look, the meetings are all in separate rooms, but they're in the same building, and isn't that sort of odd from an antitrust perspective? "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices," wrote Adam Smith, and here the merriment and diversion (cocktails and dinner) are just a prelude to the full day of 75-minute shareholder meetings. It would be weird for the airlines analyst to walk into each of those meetings and urge the CEO to try to cut prices to take business away from the other airlines. She's meeting with them next! They can't all take business from each other! But if they raised prices ... Also, of course, if you are a retail investor who owns 100 shares of stock in a few big blue-chip companies, try calling up those companies and inviting them for dinner and cocktails at your house, followed by a full day of one-on-one meetings to talk about their businesses. "CEOs only!" It won't happen. I am constantly making fun of the notion that insider-trading laws are meant to ensure a "level playing field" for all stock market investors, and this right here is why. Yes yes yes sure of course Regulation FD prohibits the CEOs from giving the analysts any "material nonpublic information" at these meetings, but these analysts' time is valuable, and if they are spending the time and money to set up the meetings then presumably they expect to learn something from them. We talked yesterday about the popular belief that there is some sort of high-level insider-trading conspiracy in which powerful hedge-fund managers are constantly getting secret tips from a network of highly placed sources, but this is just the straightforward and open and legal version of that: Powerful asset managers really are constantly having private meetings with the CEOs of public companies. Maybe they learn nothing useful in those meetings that they couldn't get from the companies' annual reports, maybe they only go to the meetings for the cocktails, but I think you're entitled to doubt that. Tiger Cubs A good statistical fact about asset management is that asset managers who grow up poor tend to outperform those who grow up rich. This is just a statistical fact, though; it is not universally true, nor is it causal. Growing up poor probably does not give you better insight into security selection than growing up rich. It's just that growing up rich makes it relatively easy for you to get into asset management: You play the right sport at the right college, you get the right internship at the right bank after interviewing with the right frat brother, you move to the right hedge-fund job after exchanging the right sailing anecdotes with your interviewer, you raise the right amount of startup capital for your own hedge fund from the right father-in-law, etc. etc. etc., at every step of the way things are easier for you. You can end up running a hedge fund without ever proving your investing acumen to a skeptical audience. Meanwhile there are hundreds of poor kids who don't get those breaks and who face nothing but skeptical audiences, and so virtually none of them end up running hedge funds. But if one does, she got through a lot of filters that were supposed to screen her out, and the only way for her to do that was by being really good at investing. So if you randomly choose one successful hedge fund manager from a rich family, and one successful hedge fund manager from a poor family, the odds are that the poor one will be a better investor, just because being good is absolutely necessary for a poor hedge fund manager and less necessary for a rich one. Conditional on being a hedge fund manager, growing up poor predicts being better at it.[1] But that is a big conditional, and if you randomly choose one rich teenager and one poor teenager and wait 30 years, the rich teenager is much more likely to become a successful hedge fund manager than the poor one. Or if you just look at a list of top-performing hedge fund managers, more of them will have grown up rich than poor, just because if you look at a list of any hedge fund managers they'll mostly have grown up fairly well-off. Growing up rich probably does give you better insight into security selection than growing up poor! Like, there you are, investing your bar mitzvah millions in the leveraged-loan market, sitting in on family-office investment committee meetings as a teen, getting your first ISDA as a graduation present, I don't know, surely being exposed early and often to financial assets gives you valuable familiarity and comfort with them? Anyway here's a profile of Chase Coleman: Born into New York aristocracy and educated at fine schools, Charles Payson "Chase" Coleman III was all of 25 when the hedge fund legend Julian Robertson handed him $25 million to start his own fund. At 29, he married a chemicals heiress who'd been featured in the documentary "Born Rich." A gifted athlete, he's been known to catch a few waves in the morning near his $19 million Hamptons home before helicoptering to his Manhattan office. ... Coleman … grew up on the north shore of Long Island, the son of a lawyer and an interior designer. A descendant of Peter Stuyvesant, he attended Deerfield Academy, the elite boarding school in Massachusetts, and went on to co-captain the lacrosse team at Williams College. "I've known Chase since he was a young boy on Long Island and a good friend of my son Spencer," Robertson said. So it was natural that his first hedge fund job was at Tiger Management. Also he's good though! His fund, Tiger Global Management, runs $30 billion and is up 25.5% this year. Sure yes of course playing prep-school lacrosse and growing up with the sons of famous hedge fund managers predestines you to manage a hedge fund, but some people in that situation will be good at it anyway. In a sense, Coleman had to work extra hard to overcome the adversity of having such an obvious path into hedge fund management. Also, delightfully: Not everything's perfect, though, of course. For one thing, the firm may actually have too much money … Yes! That is exactly the problem you'd expect him to have! "People just cannot resist giving me their money to invest, it is a curse." It kind of is! People are worried about bond market liquidity Oh yeah, this is the good stuff right here, the old-school, Old Testament worrying about bond market liquidity: Bank of England governor Mark Carney has said funds that invest in illiquid assets but allow investors instant access to their money are "built on a lie" and called for changes to regulations. His warning comes after high-profile problems at Neil Woodford's flagship fund, which froze withdrawals this month and at another asset manager H2O, which lost close to €2.4bn in a single day after investors took fright over illiquid bonds. "These funds are built on a lie, which is you can have daily liquidity," Mr Carney told MPs at a parliamentary hearing. For assets that "fundamentally aren't liquid" or might become illiquid in a market downturn, he said the damage of that "lie" for financial stability is that it "leads to an expectation for individuals that it's not that different from having money in a bank". There are two schools of thought, really. One is that, if you take a bunch of things that don't trade very much, and you pool them together and let people invest in the pool, and you let them take their money back out of the pool whenever they want, you have improved the situation. Through financial structuring you have given people something—exposure to weird bonds with daily liquidity—that they didn't have before, and that they wanted. You have made those bonds more valuable by offering a product to liquefy them. Financial engineering has created value. The other school of thought is that you can't create value with mere financial engineering like this, and that your thing is built on a lie. Of course both of these views are true, at least for some times and some states of the world. If you pool weird bonds into a vehicle offering daily liquidity, then people will get the benefit of the weird bonds (basically: higher yield due to an illiquidity premium) along with the benefits of liquidity, and they will be happy, and they will invest more, and the price of the weird bonds will go up, and there will be a virtuous cycle and value will be created. And then sometimes something will go wrong—the bonds will default, or someone will just write an article being like "hey wow some weird bonds you got there"—and the confidence will evaporate and people will stampede for the exits and the prices will crash and it will all be revealed to have been built on a lie. Perhaps this is the inevitable fate of all such "improvements," but I'm not sure. People once really worried that stock mutual funds were built on the exact same sort of lie, that in a downturn they would be forced to dump stocks and exacerbate panics. That was like 50 years ago, and now no one has those worries because stocks are insanely liquid, and maybe that's partly because of the rise in pooled professional ownership facilitated by mutual funds. Maybe the third, synthetic view here is that this sort of financial-engineering-by-pooling does create value because it is built on a lie, that the lie—the willing suspension of disbelief—is what allows finance to create value. Maybe, like so many things in finance, it really does work, as long as you believe in it. Elsewhere here's this: The question of liquidity -– the very essence of financial markets -- is now resonating on both sides of the Atlantic. "It's like air," Eric Jacobson, a senior analyst at Morningstar Inc. said of the ability to readily buy and sell assets. "You can breathe it regularly, and it's fine. But when you're without it, you notice." My favorite thing about liquidity, I think, is that people are always reaching for different states of matter for metaphors to describe it. They discuss the "liquidity landscape," or say that liquidity is "like air." Why can't it be like a liquid? Discount brokerages Patrick McKenzie, of Stripe, has been promising for a while to write a blog post explaining the economics of discount brokerages, and he did it yesterday and it's great. It is sort of notionally about payment for order flow—where his views are similar to mine—but there are also interesting discussions of stock lending, commissions and other aspects of the business model. Most of all, though, it is about cash balances and net interest margins: 57% of Schwab's revenues are from net interest. The firm could literally give away every other service; discount the mutual fund fees to zero, do away with commissions, etc etc, and they would still be profitable. ... Brokerage customers keep ~10% of their assets in cash. The 200 basis point spread between cash in brokerage accounts and money market funds or insured bank accounts, all of which are functionally riskless, is equivalent to a 20 bps asset management fee across the portfolio. Vanguard's flagship funds charge about 10 bps for wrapping the entire stock market, SPY (an ETF, which structurally has lower costs) does it for 4 bps, and people think the roboadvisors might be expensive doing similar for 25 bps on top of the underlying investments… and the discount brokerages charge effectively 20 bps over all your assets just for managing the tiny portion that is in cash, the easiest asset to manage. But instead people get mad about payment for order flow, because nobody writes books about Interest Rate Spreads Are Just Too Darn High. One thing that always amazes me is that nothing I write about makes people angrier than market microstructure, high-frequency trading and payment for order flow and maker-taker and all these other buzzwords. It is puzzling because this stuff is boring and technical and has no significant effect on almost anyone's life. Something about the opacity of it, that fact that it happens so fast, I don't know. People seem particularly attracted to imposing moral judgments on the actions of machines that occur in increments of milliseconds and fractions of pennies. Maybe it is appealing because it is so counterintuitive; you have to work so hard to care about an algorithm pricing stocks at $10.631 rather than $10.632 that, when you do it, you feel particularly committed to your conclusion. Meanwhile no one cares that their broker pays them way less interest than it receives. Things happen A $1,800 Drop in Minutes: Bitcoin Volatility on Full Display. First IPO on China's Nasdaq-Style Tech Board Sparks a Small Frenzy. Private equity races to spend record $2.5tn cash pile. "Public equity markets are shrinking because companies can find cheaper capital elsewhere." Carl Icahn Seeks to Replace Four Occidental Directors. Canon Gets $32 Million EU Fine for Jumping Gun on Toshiba Deal. Drugmaker Deals Are Near Record Pace in 2019, but Investors Don't Love Them All. Lynch Says HP's Meg Whitman Couldn't Cope With 'All The Fires.' Saudi Regulator Scraps Ownership Limit for Strategic Investors. The Global Economy Runs on Parties You're Not Invited To. Crypto Traders Also Enjoy Investing In Tesla, Claims Redundant Study. Dan Davies live-tweets his viewing of the Goldman Sachs movie. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Nassim Nicholas Taleb makes a well-known version of this argument, saying that "the one who doesn't look the part, conditional of having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception." | 
Post a Comment