Financial advisers When you hire investment bankers, you're paying for two things. One is technical expertise: Your bankers will build financial models to value your business; they'll price derivatives for you and structure deals to minimize your taxes. The other is people skills: If you want to buy or sell a company, the bankers will know the people who are selling or buying, and have good personal relationships with them, and give you a warm introduction. Then when you are negotiating the deal, the bankers will give you advice on strategy and sound out the other side's objectives and play good-cop-bad-cop and counsel you after the day's negotiating session and generally help you with the fraught human drama of a high-stakes negotiation. The best investment bankers combine these skill sets: They have great strategic sense, a grasp of all the details, a strong intuitive ability to understand and get along with people, and enormous Rolodexes full of powerful people who consider them friends. But most people don't. Most people are stronger in one area or the other. Good-but-not-great investment bankers will work to improve their weak points, and try to use their strong points to compensate for the weaknesses. Banks can also compensate for weaknesses with staffing: You put a people person on the deal to charm the client and out-negotiate the other side, and you put a technical person on the deal to run the models. This is the normal model in a lot of businesses, where the salesperson selling the product and the engineer building the product will of course be different people. It is vaguely frowned upon in banking. I mean, not entirely; it is absolutely the norm for deal teams to have a managing director who owns the client relationship and leads negotiations and has a limited grasp of the details, and an analyst who owns the spreadsheets and never sees the client. But those people generally come from the same group at the bank; they are, ideally, the same sorts of people at different stages of their careers. The MD was once an analyst building spreadsheet models, and her time building models gives her an effortless familiarity with financial matters that helps her in the high-level negotiations. The analyst hopes to one day be an MD leading the negotiations, and was hired not only for his familiarity with Excel but also for the promise that he shows of one day being able to charm clients over golf. This doesn't always work. Banks hire a lot of awkward nerds to build spreadsheets, and they build spreadsheets for two years and then go do something else because client relationships are not for them. (It helps that most people hired as junior investment bankers go do something else after a few years, and don't even want to stay in banking; junior banking jobs act as sort of a general finishing school for financial skills, and the people who graduate from that school and have the right people skills end up being senior bankers.) Conversely, in banking, you will occasionally encounter analysts with a charming manner, an authoritative confidence, a low golf handicap, rich friends and no ability to build a decent spreadsheet. These people will be in a sort of a race against the clock: There's a good chance that they'll be fired for the bad spreadsheets, but if they can avoid that fate for a few years, the good people skills will become more important and they will be wildly successful senior bankers. Terrible analysts can make very good MDs. Not very technical MDs, usually, but good ones. Just from the point of view of efficiency, though, it is a little weird to hire a lot of applied-math graduates of top colleges and make them build spreadsheets for a few years, and then pick the ones who are best at befriending rich people and let them run your business. If you want to hire senior bankers who are good at befriending rich people, should you really limit your pool of candidates to people who got good grades in college and had nothing better to do afterwards than build spreadsheets? Shouldn't you focus on, you know, people who got bad grades in college and then spent their time yachting? And so in fact there are many cases of banks hiring people purely and transparently for people skills, and people generally get pretty mad about them. The most obvious and most scandalous cases are all the banks who hired the relatives of powerful Chinese government officials hoping to win business from those officials. (We discussed them here and here.) There's no better way to build connections with powerful dealmakers than by being their child, I know this is unfair but it is nevertheless true. Banks hired these kids for their connections and then were fined for bribery, and I get it, but I always find it a bit strange. The kids would get bad performance reviews because they were bad at making spreadsheets, but they were good at other things, really important things like winning lucrative investment banking mandates (from their mothers). Privileging the spreadsheets typically made by junior bankers, over the actually profitable work of convincing powerful executives (their mothers) to do deals with their bank, just seems like a mistake. Also though U.S. financial firms will often hire big-name former political figures into senior roles, and people will tut-tut "what does he know about building financial models," and the answer is always, senior bankers do not build financial models. Most of them built financial models, earlier in their careers, and it's useful training, but much of what they do now is just charm clients and outwit counterparties. Being a politician seems like obviously good training for that, obviously better training than building financial models. Anyway here's a Wall Street Journal story titled "How a Reality-TV Producer Became Rainmaker to $300 Billion Saudi Fund": Businesses looking for cash from Saudi Arabia's $300 billion sovereign-wealth fund, one of the world's most influential investors, have found it helps to enlist a former reality-TV producer from Sarasota, Fla. Carla DiBello, 35, has become a high-profile figure in Saudi Arabia's investment scene for her connections with the kingdom's Public Investment Fund, or PIF. … Ms. DiBello also has a close relationship with the Saudi fund's 49-year-old chief, Yasir al-Rumayyan. Their relationship has raised concerns among some PIF officials, who have grown frustrated with his attention to Ms. DiBello during a time when the fund's major investments are struggling, Saudi officials at the fund say. She has been helping foreign companies gain access to top Saudi officials, sometimes via formal business meetings and sometimes in more casual settings, say the people familiar with her dealings. Ms. DiBello arranges compensation for her role in such deals, generally from the company seeking PIF investment or from others involved in a potential transaction, often through her firm, Sarasota-based CDB Advisory, the people say. Yeah see that's the job, that's what investment bankers do, they build close relationships with people who have a lot of money to invest, and then they help companies get that money, and then they take a cut of it. There are any number of investment banking "kiosks" in the news, tiny one- or two-man firms started by senior bankers who leave big banks to do deals on their own. These kiosks mostly don't employ armies of analysts to build spreadsheets, because it turns out that the spreadsheets are not the most important part of the job; they trade on the networks of relationships that they built up over their years of doing deals. Of course DiBello did not train at an investment bank, though she did train with two of the leading dealmakers and business visionaries of our time: Ms. DiBello moved to Los Angeles where she worked for an entertainment producer. When she was about 21, she got a job as an assistant to casino magnate Steve Wynn, she wrote in her column, "A Modern Role Model," in Harper's Bazaar Arabia in 2016. "I still refer to the years I spent working with Steve Wynn as my 'free Harvard tuition.' It was the best business education I could have received," she wrote. A lawyer for Mr. Wynn didn't respond to requests for comment. In Los Angeles, she worked for a movie producer and later helped produce "Keeping Up with the Kardashians." Ms. DiBello has spoken publicly about her friendship with Kim Kardashian and work on the show, and in Harper's Bazaar Arabia wrote that Ms. Kardashian is one of her "best friends." A person close to the Kardashians says Ms. Kardashian and Ms. DiBello are no longer in regular contact. If you want to learn how to make deals, and you have a choice of apprenticing under the two best investment bankers in the world or Steve Wynn and Kim Kardashian, that just seems like a no-brainer. How's she doing? During talks on the Newcastle deal, Ms. DiBello was confident and engaging, says one person who met her then. In Saudi Arabia, where deals are usually made by powerful men with entourages, the person says, it took courage for her to come to PIF on her own. Ms. DiBello proved adept at making contacts in the Gulf business world. In a region where it is rare to see a woman in a position of power, she built a name and a public profile for herself, getting to know another successful Western businesswoman working in the region, Ms. Staveley. But she gave perfunctory explanations of the deal terms and couldn't answer follow-up questions about returns and leverage, this person says. Yeah, look, I dunno, you have to be a little technical. You can have someone back at the office to do the math for you, but you've got to at least look through it and be able to think on your feet a little. It's not rocket science, but the years of building spreadsheets do provide useful training for senior bankers. The other problem is that nakedly paying for relationships is still frowned upon: One company hoping to do business with PIF sought legal advice on whether paying Ms. DiBello for an introduction would violate U.S. antibribery law, says a person familiar with the interactions. The company's executives, this person says, were concerned about the appearance of paying someone with no clear financial expertise for setting up meetings. The investment hasn't happened. "Setting up meetings" is a crucial and valuable form of expertise, and it's a lot of what companies hire financial advisers for, but in those cases the bill does say "financial adviser." If you can't write that with a straight face, then just handing money to a friend of a sovereign-wealth-fund manager to introduce you to that manager seems kind of weird. I am just saying that it is a fuzzy distinction. Robot analysts Speaking of people skills vs. technical skills: Our study provides the first comprehensive analysis of the properties of investment recommendations generated by "Robo-Analysts," which are human-analyst-assisted computer programs conducting automated research analysis. Our results indicate that Robo-Analysts differ from traditional "human" research analysts across several dimensions. First, Robo-Analysts collectively produce a more balanced distribution of buy, hold, and sell recommendations than do human analysts, which suggests that they are less subject to behavioral biases and conflicts of interest. Second, consistent with automation facilitating a greater scale of research production, Robo-Analysts revise their reports more frequently than human analysts and also adopt different production processes. Their revisions rely less on earnings announcements, and more on the large, volumes of data released in firms' annual reports. Third, Robo-Analysts' reports exhibit weaker short-window return reactions, suggesting that investors do not trade on their signals. Importantly, portfolios formed based on the buy recommendations of Robo-Analysts appear to outperform those of human analysts, suggesting that their buy calls are more profitable. That is from the abstract of "Man versus Machine: A Comparison of Robo-Analyst and Traditional Research Analyst Investment Recommendations," by Braiden Coleman, Kenneth Merkley and Joseph Pacelli of Indiana University. Here is Bloomberg's Vildana Hajric with more on the study; she adds: Whereas traditional analysts actively work on maintaining relationships with company management, robots aren't beholden to the same conventions. Their calls may not get the same pop as humans' at first, but the recommendations can generate "substantial returns for individual investors," they said. ... Out of the total pool of outstanding robo-analyst recommendations, more than 30% represented buy ratings compared with 47% from traditional analysts (the overall number of outstanding recommendations from traditional analysts was five times the robots'). About a quarter of recommendations from the machines fell into the sell category, compared with 6% from humans. If what you are looking for in an investment analyst is someone to tell you which stocks to buy because they have sound fundamentals and will go up in the medium term, the robots seem to be better than the humans. Obviously some people want that. Amateur hobbyist investors who pick individual stocks might want some professional support for their decisions, for instance. On the other hand if you are a professional investor you might want that a little, but mostly you'll be looking for something a bit different. (It is, after all, your job to pick the stocks to buy.) If you are doing deep fundamental research, you will be less interested in the analyst's conclusions than in, say, what she says about her meetings with the company's management. Or you might just want the analyst to invite you to those meetings so you can meet management yourself. Robots don't (yet) meet with managers or provide corporate access. "Traditional analysts actively work on maintaining relationships with company management" not just because they are humans bound by social conventions and the strong desire to be liked, but also because it is what their investing clients want and reward them for. Of course not all professional investors are doing deep fundamental research or meeting with management. Some just want a trade. An analyst who can move the stock price by 5% in a day by announcing a new buy recommendation is ... interesting … to a professional investor. Sometimes in simple ways: You're a client; you see the recommendation as soon as it comes out; you buy immediately; other, slower, retail investors pile in and the stock goes up; you take a profit. Sometimes in more fraught and complicated ways: You're a client; you have regular conversations with the analyst in which you bounce ideas off each other; in the course of those conversations you make the case for a stock you own; she eventually comes around and publishes a buy recommendation; the stock goes up; you take a profit.[1] The robots are bad at that, both because their recommendations do not move stocks as much as the human analysts' recommendations do, and because they don't have regular phone conversations with investors. (Being robots.) All the helpful customer-service-y things that human equity research analysts do, things that are key parts of their jobs, things that are the main value they offer to their professional-investor clients, the robots just skip. "Robot Analysts Outwit Humans on Investment Picks, Study Shows," is the Bloomberg headline, and that is true as far as it goes, but the authors of the paper are a bit less enthusiastic: Overall, our evidence paints a textured picture of the role of Robo-Analysts in modern capital markets. On the one hand, their reports appear to offer some value to traditional investors, as they are less biased and revised more frequently. In addition, our portfolio analyses suggest that their buy recommendations generate abnormal returns that are higher than those issued by traditional analysts. On the other hand, their sell recommendations do not appear to be profitable. In addition, we expect that traditional analysts still likely add significant value through their softer product offerings, which are unavailable to common investors. In sum, automation appears to lead to an improvement in the aggregate quality of research available to individual investors, but it is unlikely that this approach to research can meet all of the objectives of traditional brokerage house services. Oh right: "Their sell recommendations do not appear to be profitable"! The robots' buy recommendations outperform, but the sell ones don't: For sell recommendations, however, we find no evidence to indicate that Robo-Analysts' recommendations are incrementally more profitable than human analysts. If anything, our results indicate that portfolios based on Robo-Analysts' sell recommendations generate positive, instead of negative, abnormal returns. This result is consistent with Robo-Analysts' focus on providing a more balanced distribution of recommendations potentially leading them to over-correct traditional analysts' bias by over-issuing sell-recommendations. Alternatively, Robo-Analysts' may simply invest fewer resources in generating profitable sell calls, given that their client base (i.e., individual investors) is less likely to take short positions. Regardless, our evidence suggests that individual investors can benefit from following Robo-Analysts' buy recommendations, which is likely the most relevant signal for this class of investors. It is often considered a scandal, a fraud, an indication of conflicts of interest, that only 6% of human analysts' recommendations are sells. Surely, the assumption goes, you should sell as many stocks as you buy. But … why? Most stocks go up most of the time. Most investors are long-biased. It is not at all obvious that there should be as many sells as buys.[2] And in fact the robots correct the humans' biases—they don't care about being liked, about buttering up companies in order to get more access, etc.—and it makes them do a worse job. Hedge fund manager pay Every year people publish lists of the best-paid hedge fund managers, and every year I make fun of them for two things. One, they tend to include a lot of people who are not hedge fund managers: People who retired years ago, or closed to outside investors and run only their own money, keep showing up on these lists. Two, they tend to include the managers' own investment gains in their funds as "pay," which is not how pay is measured in any other industry. Here's Bloomberg's list of the 15 best-paid hedge fund managers in 2019, and I am pleased to say that they seem to have headed off my complaints. For one thing, almost everyone on the list is a hedge fund manager: "The list excludes those who no longer manage external capital, such as Michael Platt and Stanley Druckenmiller," and there are only two retirees (Jim Simons at number 2 and the "semi-retired" David Shaw at 14), both of whom are so associated with their firms that I'll allow them.[3] For another thing, they break everyone's income down into "return on investments in fund" and "hedge fund fees," so if you don't believe that the former counts as compensation you can concentrate on the latter. At the high end the returns mostly outweigh the fees, with Steve Cohen in particular making the vast majority of his $1.3 billion (good for number 4 on the list) from investment returns. Lower down it's more of a mixed bag. My criticism of counting investment returns as "pay," by the way, is mostly about conventions. For public-company chief executive officers we just don't do it, so it seems like a mistake to do it with hedge-fund managers; it inflates the managers' wealth and importance to treat them asymmetrically. But of course we could do it for public-company CEOs. Jamie Dimon's total compensation for 2019 was $31.5 million, in conventional terms, but he also owned about 10 million shares of the company's stock, and the stock went up by $41.78 during the year, so his "total pay," in hedge-fund-manager-comparable terms, was about $450 million. People talk a lot about Elon Musk's pay package, which could be worth tens of billions of dollars if he hits certain ambitious milestones over a long time, but on the other hand he owns about 34 million Tesla Inc. shares and the stock was up $85.53 in 2019, for $2.9 billion in "income" right there. Also the stock is up more than $350 so far this year, making his, uh, "pay" for the first 42 days of 2020 about $12 billion, or about as much as all of those top 15 hedge fund managers "made" in 2019 combined. Things happen T-Mobile Wins Court Approval for $26.5 Billion Sprint Deal. Schick Owner Abandons Takeover of Harry's Following FTC Suit to Block It. Mall Operators Simon and Taubman Pair Up. Stockpickers turn to big data to arrest decline. Elliott Push at SoftBank Reflects Rise of Shareholder Activism in Japan. BlackRock Fails to Assuage Climate Critics With Fink's Promises. Do Judgements Trump CACs? KKR Undercuts Wall Street With a Last Minute $1 Billion Loan. JPMorgan in talks to merge blockchain unit Quorum with startup ConsenSys. Disabled Workers Sue Oscars Swag Bag Company for Wage Theft. Dog's villainous birthmark is raising some eyebrows. 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] Sometimes even more fraught! You have regular conversations with the analyst in which you bounce ideas off each other; in the course of those conversations you realize that she is beginning to come around on some stock that you *don't* own; you buy it; she publishes a buy recommendation; the stock goes up; you take a profit. Various shades of that get analysts in trouble. [2] Separately there is a sort of selection effect in which banks don't usually cover *every* company, and it might make sense for them to spend more time covering sectors and companies where people should invest than ones where they shouldn't. So if there are 100 stocks in the world and you should buy 30 and sell 20 and hold 50, or whatever, but a bank can only cover 20 of them, it might make sense to mostly cover the buys and leave the other ones alone. This will look like a bias toward buy recommendations but might only really be a bias toward covering stocks that you can recommend. [3] Stephen Mandel stepped down as portfolio manager at Lone Pine at the start of 2019, but he still seems to be pretty involved. | 
Post a Comment