Your guide to what the 2024 US election means for Washington and the world
The intensity and hostility of the Oval Office clash between Donald Trump, JD Vance and Volodymyr Zelenskyy has left many observers taken aback. For those of us who have spent careers in investment banking, however, the scene had a familiar ring.
What unfolded in that meeting mirrored a strategy used by some leaders in finance: the use of rhetorical dominance as a substitute for substantive dialogue. It’s a tactic wielded in meeting rooms and on conference calls when actual arguments are in short supply. Designed to shut down opposition, it reinforces the pecking order, and remind the other parties of their place. The repeated demands for gratitude, the warning not to “litigate” the issues “in front of the American media,” the reminders of Ukraine’s weakness — these kinds of statements aren’t meant to foster real debate; they’re meant to stifle disagreement.
Every investment banker has seen this in action. And these tactics sometimes pay off. Most banking veterans can recall times when the bullies got the promotions while the collaborators were sidelined. These apex predators don’t climb the ranks by fostering fresh ideas or building consensus; they ascend by tightening their grip on their fiefdoms and wielding power with ruthless efficiency.
Early in my career, I proposed a carefully structured block trade, only to have it summarily shot down by senior managers who, as it later turned out, had incurred unrelated trading losses they didn’t care to disclose. Instead of a straightforward explanation, they deployed the standard arsenal: “We’ve beaten this issue into the ground and there’s nothing left to discuss”, “We’ve backed you so many times before”, “You’re not being a good partner.” The message was clear: Drop it or risk losing crucial allies for future deals. Shut up and take the L.
So I made the awkwardly mortifying call to the client, walking back the nonbinding price indication I had previously given (an indication I had cleared internally with the same senior leaders). Days later, a competitor executed the exact same trade at a sharper price, earning an eight-figure fee and lavish client praise. I could only seethe in silence. Internally, no one acknowledged the blunder. Even now, many years later, the memory stings. Could I have pushed harder? Maybe. But that would have been career seppuku.
On another occasion, a commitment committee call to approve a convertible bond underwriting took a turn when a senior banker — clearly set against the deal for no discernible reason — started peppering my colleague with rapid-fire questions. She handled each one with aplomb and precision, but his frustration only grew. Finally, he snapped, “Please stop lecturing me about this stuff. I was doing convertibles before you were even born.” A long, airless silence followed. That was the moment we all knew the deal was dead. The rationale didn’t matter. What mattered was that we had failed to pay homage to him early enough. He hadn’t just appointed himself gatekeeper — he had anointed himself high priest, and the temple doors were staying firmly shut.
Just about everyone I know across the City and Wall Street has similar stories, often much more lurid, yet only on rare occasions will the exchanges result in an HR complaint. There’s no profanity, no explicit misconduct — but just enough residual unpleasantness to leave the recipient feeling undermined and victimised, partly because there’s no clear avenue for redress. Similarly, while Trump and Vance may have been harsh towards Zelenskyy, they can plausibly argue they relied on forceful rhetoric rather than outright abuse.
Of course, many senior banking leaders don’t operate this way. In fact, most of the people I reported to over the years valued informed debate and constructive pushback. And it wasn’t always a black-and-white case of dominance or dialogue — some leaders would run roughshod over those they saw as weak or out-of-favour while showing respect, even deference, to others perceived as stronger or able to defend themselves. This is much like Trump’s contrasting treatment of Zelenskyy and Emmanuel Macron; the American president tolerated disagreement from the French president in their meeting far more than from his Ukrainian counterpart.
When rhetorical dominance prevails, it creates a self-perpetuating cycle. A leader surrounds himself (it’s usually, though not always, a man) with sycophants, discourages challenging perspectives, and creates an environment where subordinates spend more time deciphering his whims and wishes than developing sound strategies. The resulting atmosphere of confusion and obsequiousness undermines institutional effectiveness, and yet, paradoxically, the leader’s grip tightens.
This approach might deliver short-term wins — bigger compensation pool allocations, more headcount, internal victories — but the long-term consequences are steep. Morale withers. Market share erodes. Innovation dries up. Key considerations are overlooked. Meanwhile, the architects of this culture keep rising, leaving others to clean up the wreckage.
To be fair, there are moments in investment banking when decisiveness has to trump endless debate. When dealing with politically savvy colleagues (and most bankers excel at internal politics), excessive consultation can stall necessary reforms, derail change, or compromise strategy. As an erstwhile mentor once told me, “Sometimes you have to steamroll people to get things done.” I’d like to think that when I led teams, I relied on my powers of persuasion rather than naked appeals to my own authority — but at times my patience wore thin, and decisions had to be made, cutting off discussion and dialogue.
The White House dispute has, at least temporarily, scuppered the agreement between the US and Ukraine to develop Ukraine’s natural resources. While Trump and Vance may not have mastered the art of the deal, they have perfected the art of stifling dissent and ostracising anyone who defies their authority — an expertise still alive and well on Wall Street.
Only one reader got both hints (almost) for last week’s charts quiz, despite our attempts to hit you over the head with them.
Sure, even with lithium’s increased geopolitical importance, it might’ve been ambitious to think someone would know the CME launched a spodumene futures contract last year.
But 1) the post’s subhed was a line from Nirvana’s “Lithium”, 2) the picture was from Nirvana’s “Lithium”, and 3) we changed the beginning date on the chart so the line didn’t actually start until the futures contract launched.
More readers submitted correct guesses about the PNUT shitcoin, which is one of the dumbest lines to be used on an FTAV quiz.
Anyway, here are your chart answers to review:
This is the stock chart for Snap, which has been mentioned offhand as a potential acquisition target for AppLovin.
This is the CME’s new spodumene futures price (continuous, via FactSet).
And this is the market capitalisation of the Peanut the Squirrel shitcoin (PNUT).
Big congrats to Erik Johnsson, who has outquanted the rest of you. Unclear whether he got the Nirvana references, though. Better luck next week.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Yes, we’re going to write about portfolio trading, again. Our previous posts have mostly focused on how a big deal it has become in the US, but a new Barclays report shows it’s now a growing phenomenon in Europe as well.
Barclays has previously estimated that a big fat portfolio trade now hits the US fixed-income market every seven minutes, with volumes topping $1tn annually. Portfolio trading now accounts for as much as a quarter of investment-grade corporate bond trading, and a sixth of junk bond trading.
Calculating the same in Europe is tricky because of the lack of any consolidated tape of bond trades (though that’s about to change) so the UK’s bank’s analysts used an algorithmic approach to identify probable portfolio trades and get a rough estimate.
Barclays found that total annual volumes probably topped €250bn in 2024. In frequency, that equates to a portfolio trade happening every 20 minutes on average, down from every 33 minutes just two years ago.
It has become particularly prevalent in investment grade, euro-denominated corporate bond market, where portfolio trading now accounts for 11 per cent of all trading volume. In sterling bonds and euro high yield it has reached a 9 per cent and 7 per cent market share respectively.
Most portfolio trades identified by Barclays happened on electronic platforms like Tradeweb, and involved about 60 bonds worth a total of €40mn on average.
That’s lower than the $50-60mn average in the US, but this is maybe less than you you’d expect, given how much larger and more liquid the US corporate bond market is, and how developed portfolio trading is becoming there.
Zornitsa Todorova, head of thematic fixed income research at Barclays, reckons that portfolio trading volumes in Europe will roughly double to account for about 20 per cent of all dealer-to-client volumes within the next three years.
How big a deal is all this? Well, pretty big if you’re a bond fund manager.
Index-tracking fixed income vehicles often use portfolio trades to rejig their exposures, but it has become a hugely valuable tool for active managers as well, as Todorova highlights. Her emphases below:
Our analysis attributed the majority of portfolio trading volumes in Europe to active investors, though we found that passive investors do use PTs to rebalance portfolios at month-end and to manage inflows and outflows intra-month by buying or selling a ‘slice’ of their holdings that closely resembles the index they track. In addition to these use cases, active managers also frequently use PTs to adjust their portfolios towards specific credit risk dimensions, such as rating, sector or maturity, along with hedging and de-risking.
The fact that active investors are the marginal consumers of PT liquidity is significant for several reasons. Unlike passive investors, who track an index, active investors, in particular open-end mutual funds, frequently trade bonds and depend on liquidity to efficiently enter and exit positions. These investors set marginal prices when they trade, influencing bond spreads and market depth. Their activity also impacts liquidity risk premia, as bonds with lower liquidity command higher yields.
Portfolio trading has the potential to transform credit markets in several ways: by adding more volume to the market, it improves liquidity, lowers the barrier to entry for new investors, and enables new strategies, such as systematic credit.
Further reading: — ETFs are eating the bond market (FTAV)
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There are some things in global finance which you really shouldn’t look at too closely if you value your sanity. Repo and money markets would definitely be one. But even the banking system’s funding arrangements are benign compared to the Lovecraftian horror of their IT outsourcing, because there’s no central bank to guarantee a happy ending. As one senior bank supervisor put it a few years ago, there is no such thing as a database provider of last resort.
In other words, Hell is empty, and all the demons are in the ECB Outsourcing Register. The annual “horizontal review” from the ECB’s Banking Supervision committee was published last week. Do you want to know what proportion of “critical functions” are not compliant with basic regulatory guidelines? It’s just under 10 per cent. The average number of “critical” service providers per large bank? Fifty-eight per cent. What’s the average number of subcontractors on the average banking industry outsourcing contract? Four and a bit. What proportion of critical outsourcing providers would be “easy” to replace in the event of a problem? Just 17.7 per cent, although the good news is that the proportion which would be “impossible” to replace is now 8.6 per cent — the remainder are apparently “difficult”.
Whatever the opposite of “setting your mind at rest” might be, that’s what it does to consider the extent to which the European banking system (and it’s unlikely that the US or UK are any better) relies on a complicated web of supply chains for software-as-a-service, offsite data centres and other euphemisms for “other people’s computers”. It’s all driven by the growth of cloud computing, of course — cloud now makes up more than a fifth of the total, having grown 13.5 per cent in the last year (and the ECB’s report is based mainly on data as of the end of 2023, so it is likely to be even more important now).
The growing role of cloud contracts has meant that European banks are, more than ever, dependent not only on a small number of outsourcing providers (30 firms account for half the total spend), but on non-EU firms. Within these top-30 firms, slightly more than 50 per cent of contracts are with companies whose ultimate parent is a US corporation.
Which raises a bit of an issue for Europe, as it starts to worry about strategic independence in a world of heightened geopolitical tension. As Henry Farrell and Abe Newman pointed out in their book Underground Empire, the US controls a number of systems of “weaponised interdependence”, of which two of the most important are the global dollar banking system and the internet. However, it seems that the interaction of finance and distributed computing might have created a third; the Euro area banking system (including the payment rails over which any future central bank digital currency will have to run) is highly dependent on server farms which might be physically located in Europe, but whose owners might ultimately answer to a foreign power.
If you’re looking for a crumb of comfort, it might be that the regulatory definition of a “critical function” in this context is quite expansive; it doesn’t necessarily mean that an executive order could switch off the whole European financial system. But the trouble with the system as it’s currently set up is that it’s practically impossible to say anything about the true level of risk with any degree of confidence.
(* Editorial note to pedants: the FT style guide says data is singular.)
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FT Alphaville’s inaugural Art of the Chart show landed last week, with hundreds of enthusiasts turning up for some dataviz delight.
With the immeasurable support of the FT’s graphics desk, helmed by data supremo Alan Smith, we put 24 of the finest, freshest, fanciest charts on display at A1 size inside London’s stunning St Bartholomew the Great church. Finance dominated the chartfest, but there was also plenty of economics, business, demographics and other good stuff (plus some non-good stuff).
Almost all of the charts were bought at auction by exhibition-goers, raising around £3,500 — which will be donated the FT Financial Literacy and Inclusion Campaign as soon as we can find a big-enough duffel bag. Three are still up for auction — details on how you can get your hands on them can be found below.
As well as traditional paper charts, Alan and co. masterminded a multimedia corner, with visitors able to watch a version of the FT’s sonic yield curve set to church bells, and try out a virtual reality version of the Phillips machine via an Apple Vision Pro.
Alan Smith, possibly doing a T-Rex impression
Naturally, any attempt to show these charts here would be a pale imitation of the in-the-flesh experience, given how much smaller than A1 whatever screen you’re reading this is probably is (we can’t believe we’re getting to roll this graphic out again) . . .
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. . . but here goes anyway (with apologies to mobile users). Scroll sideways to see them all:
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As mentioned above, three of the charts haven’t set been sold. If you would like to bid for any of them (black wooden frame with glass front included), please submit a bid of at least £75 to [email protected] by this Friday 7 March.
Here are the ones that are still available:
How Trump triumphed:
The new guard:
Why chickens prefers log scales:
Personally we think the chicken one would be lovely in a paleo kitchen or a loo with an intimidating aura. Highest bid received by the deadline wins, and the money goes to charity, so don’t hold back.
Please note that you won’t receive the chart for a couple of weeks, as they’ll all temporarily be on display elsewhere, but we’ll get it/them to you as soon as possible.
The Art of the Chart will return. Until then, scratch that itch via our Friday charts quiz? We’re still accepting guesses until ca midday today.
A sell-off has taken more than $30bn in market cap off of AppLovin in the past week, a notable slide for a momentum-y stock that was (very briefly) talked about in the same breath as the Magnificent Seven.
That raises the question of what, exactly, AppLovin is and what it does. Here are a few things we know:
The firm was formerly backed by KKR, and was at one point a mobile-gaming company. This is perhaps the easiest-to-understand part of its business.
It’s now focusing on advertising, after this month announcing plans to sell its mobile-gaming division for $900mn to a private acquirer.
This advertising business involves serving pop-up ads to people who play mobile games. The ads themselves are for mobile games.
It also threw some ecommerce advertising into the mix late last year, but didn’t report exactly how much.
AppLovin was trading at 75 times next year’s earnings as of Feb 14, according to FactSet.
Its advertising sales growth is indeed compelling. Its advertising revenue grew 75 per cent in 2024 from the year before, according to the company’s latest quarterly report.
A bunch of short sellers are sceptical about the sustainability of that growth, and have recently published reports about it.
The company is now trading at just 45 times next year’s earnings. The Nasdaq Composite is trading at a 27 multiple.
After this, things get a little dicey to parse.
One of the short reports, from Culper Research, takes issue with the legitimacy of the app downloads that help power its revenue.
Here are Culper’s claims, if we’re understanding correctly: AppLovin sponsors an “AppHub” on some phones’ operating systems. And on those phones, at least some of AppLovin’s clients’ games can “bind” to the “AppHub” to download other games on to their phones, with just one click and no additional confirmation.
For the people playing the games developed by Applovin’s customers, it’s easy to see why all of this could be a bit frustrating, if Culper is correct. The gameplayer is already forced to look at an advertisement and interrupt their semi-meditative tapping. And mobile games necessarily involve touching a screen, so if this is indeed happening, an unintentional tap could prompt an immediate app download. It’s not exactly unauthorised, per se, but it’s certainly a departure from what smartphone users have come to expect.
This could certainly be grouped with other less-than-ideal experiences for mobile gamers — except that the company does “performance advertising”, which means that it’s paid when someone downloads a game, or spends money in the game.
The company’s CEO responded to the short sellers’ notes with a statement that says the reports are “littered with inaccuracies”, and seeks to assure investors that all of its platforms, and the games it promotes, comply with App Store policies.
AppLovin also had a call with sell-side stock analysts on Wednesday, according to a note from Bank of America. In that call, the CEO assured analysts that the direct-download business was “never a major growth revenue driver,” the analysts wrote. They summarised his comments as saying “AppLovin’s [direct download] revenues are de minimis”.
BofA analyst Omar Dessouky told Alphaville that the direct-download business are distinct and totally separate from in-game downloads, and that competitors Digital Turbine and Unity have a big head-start on that business. As for the App Store policies, there seem to be enough complaints about other companies doing it that the practice isn’t being censured (this one, for example, seems to be about Digital Turbine).
That doesn’t necessarily mean one-click downloading can’t be used within games, however, which seems to be one of Culper’s main arguments. And despite its moat, Digital Turbine is trading at, uh . . . 9 times next year’s estimated earnings, according to FactSet. As we mentioned above, AppLovin is trading at 45 times.
Another question raised by the short reports is the company’s relationship with members of the “Mag 7”, and especially Meta (née Facebook). But those questions seem to really stem from this interesting Business Insider piece from December.
According to BI, industry executives and competitors — who may have an axe to grind, to be fair — have raised eyebrows at AppLovin’s ecommerce expansion. From BI:
AppLovin is only inviting ecommerce advertisers that spend upward of $20,000 a day on Meta ads to try its product, and it’s incentivizing some of those buyers with $10,000 ad credits, multiple industry insiders told BI . . .
In his chat with Alphaville, Bank of America’s Dessouky said Meta is the destination for about 80 per cent of ecommerce ad spending, so that’s an easy way to ensure these ecommerce clients will be worth the expense of onboarding.
[Jeremy Sonne, founder of AI marketing tech co Simbiant] said he’d seen an “extremely high correlation” between when AppLovin sees a spike in conversions and when Meta sees an increase in ad spend. He said he hadn’t seen a similar trend when comparing Meta and Google or AppLovin and Google.
He said that made him wonder if AppLovin was driving real incremental value or whether its campaigns were just reaching the exact same audience as Meta in some way.
He said he’d also seen a “concerning overlap” where Shopify sales purportedly driven by AppLovin have a very high geographic overlap with where Meta ad website traffic was coming from.
Now, this is all interesting, but it sort of dodges the fact that AppLovin’s biggest business has been advertising mobile games within other mobile games.
And it is odd to see just how popular it is on the sell-side for a company that — lest we forget — is mostly the marketing equivalent of a Matryoshka doll. Digital Turbine, for all of its supposed moat, is thinly covered by analysts. Dessouky downgraded it to “underperform” last November citing “increased competition”.
AppLovin, on the other hand, has 19 buy-equivalent ratings out of 27 analysts covering the stock, according to FactSet.
Are mobile games really that popular? Like . . . $109bn market cap that used to be $170bn popular?
The BI article raises another interesting point that probably isn’t related to its Wall Street popularity, but maybe could be related to its Wall Street popularity, given the Times We Live In. BI’s reporter closed out the story quoting some speculation about whether AppLovin could eventually acquire a social network — Snap was the example cited — to increase its reach to non-gaming customers.
AppLovin did just do a deal, though. Here are the terms, with its 4Q earnings report. With our emphasis:
On February 12, 2025, the Company announced that it had entered into a term sheet for the sale of the Company’s mobile gaming business to a privately held company (the “Acquirer”) for total consideration of $900 million (the “Term Sheet”). The Term Sheet provides for the total consideration to consist of $400 million in shares of the Acquirer’s common equity and $500 million in cash, subject to customary purchase price adjustments.
The Term Sheet also provides that the Acquirer will borrow up to $250 million of the cash portion of the total consideration and that, if the Acquirer is unable to obtain such financing, the Company agrees to provide financing in such amount to the Acquirer through the issuance of a promissory note. The Term Sheet is non-binding, except with respect to an agreement by the parties to use commercially reasonable best efforts in good faith to negotiate and finalize definitive agreements for the proposed transaction, a prohibition on the Company engaging in discussions or negotiations with any third party other than the Acquirer regarding the sale of the Company’s mobile gaming business for a specified period, and customary terms such as fees and expenses, governing law, and termination.
So if we’re understanding this correctly, out of that $900mn sale . . . $250mn will be funded with cash that the undisclosed acquiring company has on hand. Fair enough.
And sure, it seems fine that $400mn will be funded with equity (ie AppLovin taking an equity stake in the acquirer). But it seems like, in that case, it could be important to know what company it is. And if the acquirer can’t secure the financing to complete its purchase, AppLovin will provide that funding itself, by issuing the acquirer a promissory note. Interesting stuff.
But hey, JPMorgan’s fixed-income analysts say that investors should buy AppLovin’s bonds, citing the company’s introduction of a 2x leverage target in 3Q of last year. Since then it been upgraded to investment-grade status by S&P Ratings and Fitch. On top of its roughly $3.5bn in outstanding paper, another $250mn won’t make a huge dent, right? Though presumably a giant Snap-style acquisition, if funded by cash/debt, would push its leverage up.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
One month ago, we acquired (via freedom of information request) the Office for National Statistics’ guidance on what its staff and agents should be looking for when observing the “basket” of items used to monitor inflation.
We wrote then:
We’ll try to make a tidier version of the ONS’s table soon
In the meantime, stuff has happened. But now we’re SO back, and we’ve got the mega spreadsheet to prove it.
If you’re from a hedge fund and are just here to scrape said spreadsheet, please scroll down. If you’re interested in a woeful tale, stick with us.
A woeful tale, pt.1
We mentioned last month that:
Because civil servants are cruel, the document’s formatting is horrible, half of its text isn’t actual text, and there are redactions. 🙃
Wah, wah, wah — yes, journalism really IS hard and don’t let anyone tell you otherwise.
The ONS’s response to our freedom of information request landed as a 70-page PDF file, which can be downloaded here.
The PDF is, basically, a spreadsheet, consisting of item names, and up to six “help line” columns detailing exactly what the ONS considers valid for that category.
So, for instance:
This is clearly odd. Why a continuous string of text is being written across six columns in this way, we have no idea.
Of course, not all of the items are this oddly separated, eg:
While others are much more condensed, such as:
There is no apparent rhyme nor reason to why the guidance is sometimes spread out across columns, nor is there anything resembling a consistent style to how things are written. It very much feels like the product of years of ad hoc tweaks and edits (presumably in response to requests for clarification), and gives us concrete poetry flashbacks.
Readers may have noticed references to codes such as N and C in those help lines above. N means a new product is non-comparable to a previously observed product, while C means it is. Simple!
A woeful tale, pt.2
We’re not exactly sure how the ONS managed this, but the PDF’s pagination per item loosely goes like this:
First pages (labelled 1–35, odd numbers in PDF)
Item description / Help line 1 / Help Line 2
page one
Second pages(labelled 36–70, even numbers in PDF)
Help line 3 / Help Line 4 / Help line 5 / Help line 6
page 36, the page after page one
Obviously this isn’t a big issue in and of itself, but we wanted to convert this into a more usable format and here (non-exhaustively), are some of the other issues the PDF has:
— Some pages, including the first, have not been saved as text — Some cells are full of random line breaks and other typographic artefacts — Nothing redacted ever pastes good — Text copied from cells came out as unbroken strings when pasted — In Acrobat and OS X preview, some pages copied sideways, natch. — Lom — Lom — Lom
We reached out to the ONS and asked if we could simply get the underlying spreadsheet, and in the meantime went to work doing things semi-manually (copying individual cells or typing them out by hand).
A woeful tale, pt.3
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Although [REDACTED] was actually extremely helpful — and there’s a twisted logic to how things were done here — so it was that we ended up primarily deriving our information from the optical-character-recognition generated .docx version of a PDF version of an Excel spreadsheet.
Behold, a basket
Some time later, we’d got everything into a single spreadsheet. Caveats:
— we have undoubtedly made some typos given the amount of manual copying of weirdly-written data we had to do — we’ve recreated the guidance in the exact style it was written, which is often massively inconsistent. — in some instances, the OCR process applied by the ONS means that letters with descenders that appears at the bottom of a page have scanned weirdly, or that some letters are borked (eg we had to fix “fluten” to “gluten”)
As mentioned, the column divisions made very little overall sense. So we concatenated them to make each set of guidance read as one paragraph.
For everyone else, enjoy (nb there’s a direct download link in the bottom right if you want the raw data):
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Observation notes on observation notes
Last time around, we mentioned some of the oddities in this document. The laborious process of preparing this spreadsheet caused us to note several more:
— a child’s soft toy/teddy bear CANNOT be a hand puppet — a child’s baby doll must have a plastic element — gold rings aren’t allowed to be rose gold (don’t be basic) — organic bread should only be priced if it’s “representative” of the shop it’s from, whatever that means — quiche crusts are optional — observers must specify whether popcorn is sweet/salary/both, but it doesn’t actually matter — the guidance on livery charges is… thorough — 2-in-1 shower gel products aren’t allowed, sorry Boris — chicken nuggets don’t count as chicken for the purposes of a chicken and chips takeaway
In particular, we found ourselves drawn to a number of items where there is little or no help provided, including…
— Digital Media Player — Computer Software — Mobile Phone Applications — Interchangeable Lens Digital Camera — Laptop Computers
…and dozens more, all of which have hugely variable product types and costs. ¯\_(ツ)_/¯
In fact, almost everything in here seems absurd if you look closely enough. Oh well.
Further reading: — small caged mammal (FTAV) — small caged mammal infinity (FTAV) — small caged mammal revelations (FTAV) — small caged mammal merchandise (Redbubble)
Last year, Norges Bank Investment Management’s dreams of adding private equity to its investment mandate once again got kicked into the long grass. This was probably the right call.
However, if Nicolai Tangen — the Norwegian sovereign wealth fund’s restless and ambitious head — is keen on a different titanic, legacy-making project, then here’s one that FTAV has been noodling on for a while: it should let other institutions and perhaps even ordinary people invest in the fund.
OK . . . we may need to backtrack a bit to explain what that would mean, how it would work, and why it’d be a big deal. It probably won’t happen, but it really should. As Espen Henriksen, a finance professor at BI Norwegian Business School, told Alphaville:
The recipe for managing the fund has been broad and systematic risk diversification and economies of scale in open public markets. Allowing other savers to participate in the fund and enjoying efficient and cost-effective risk-return exposure could enhance economies of scale and improve net returns for the Norwegian government.
This approach could generate a double win-win: supporting the broader public good while increasing the Norwegian government’s net financial returns.
To be clear, this is not actually something that is currently being discussed in Norway, even informally. It’s just a flight of fancy after reading NBIM’s latest annual report yesterday.
But after jotting down some half-baked thoughts we convinced ourselves that this is a tremendous idea, and we wanted to test out how ludicrous it is in the public arena. As Tangen is fond of saying: “Screwing up is allowed.”
Ker-CHING
Hydrocarbon heaven
First of all, here’s some background on what Norwegians usually just call “the oil fund”. If you already know all about it then feel free to skip to the next section.
The $1.82tn sovereign wealth fund is technically called the “Government Pension Fund Global”, but funding retirements is only a small part of its job. The money in the fund comes from surplus revenues generated by Norway’s oil and gas revenues, which is invested overseas by Norges Bank Investment Management — a division of the central bank — to avoid overheating the domestic economy.
The national government is only supposed to be allowed to spend roughly the annual real return of the fund across the budget. Initially this was set at 4 per cent but was subsequently lowered to 2.9 per cent. This is just a guideline, however. In times of plenty, governments have often spent much less, and in times of pain (eg after financial crisis and Covid-19) they are allowed to spend more.
By any reasonable standards, it has been a phenomenal success. The fund’s financial returns bankroll about 20 per cent of the Norwegian government’s entire budget — almost equal to its annual expenses on pensions and defence. And the model has mostly prevented the “Dutch disease” that has blighted many resource-rich countries. NBIM has become a model of transparency in an often murky world of sovereign wealth funds.
Here’s a snapshot of the first deposit cheque that seeded the fund back in 1996. From tiny acorns etc etc.
About 70 per cent of the fund is invested in equities and 30 per cent in bonds. Up to 7 per cent can be invested in real estate, and up to 2 per cent in renewable energy projects. The latter two are being gradually scaled up, but equities and fixed income are, and probably will remain, the dominant asset classes.
NBIM allocates some money to external and internal portfolio managers, but the vast majority of the money is managed passively, mimicking a benchmark handed to it by the Norwegian finance ministry (Excel snafus excepted). NBIM is allowed a tracking error of just 1.25 per cent from this index. Over the past 15 years it has only averaged 0.44 per cent.
This means that only 676 full-time people are needed to run the whole $1.8tn show, and the all-in cost of NBIM clocked in at just 0.041 per cent of assets last year. That is exceptionally low. It helps that even Tangen only takes home about $663,000 a year — roughly what a generic Wall Street MD might make.
And what of the performance? Well, NBIM has since 1998 generated annual average net returns of 6.34 per cent. Now, this may not sound enormously compelling at a time when US stocks post double-digit returns most years, but remember that only 40 per cent of the fund was initially in stocks. This was only raised to 60 per cent in 2007, and 70 per cent in 2017 (Moreover, corporate bonds weren’t added until 2002, until which it was all in lower-income, high-grade government debt).
Over the past decade it has averaged 7.3 per cent, and it has annualised about 8.9 per cent since it started scaling up in equities in 2008.
Its overall risk-adjusted returns therefore compare well with other sovereign wealth funds (at least the ones that report their results), with some allowances for the different investment strategies. NBIM has also outperformed the average US university endowment over the past 3, 10 and 25 years despite their often much racier asset mix.
NBIM’s returns have also outpaced its index by about 25 basis points a year since its inception, showing how you can still eke out some alpha even with a passive mandate. Last year it undershot its benchmark by 0.45 per cent, but over time, those small wins — from things like smarter trading, rebalancing strategies and securities lending — can really add up.
Indeed, of NBIM’s $1.8tn of assets today, only about $460bn come from oil and gas revenues. The rest has been generated by investment gains and currency movements. This is nice if you’re Norwegian, and full disclosure: the author of this post is Norwegian. [Ed: This will be shocking to readers, pls consider disclosing more often…]
This combination of good results, decent diversification, cheap costs and incredible transparency is why an open-ended, publicly available fund that replicates NBIM’s results could be a killer proposition.
After all, picking a smart selection of cheap funds that ensure a base level of diversification and performance is difficult for many people (even professional CIOs).
NBIM in practice resembles Bill Sharpe’s ultimate market portfolio. For a lot of people — both ordinary household savers and large institutional pools of money — it would therefore be a great investment choice.
A public investment utility
So how would this even work? Well, now we’re definitely entering spitball territory, but the technical difficulties don’t seem insurmountable.
NBIM would need set up some kind of separate open-ended mutual fund structure for to the public to avoid directly commingling its existing pool of public money with private money raised. This would require more lawyers and back-office staff, but on the investment side it would simply piggyback off the existing infrastructure to replicate NBIM’s returns.
This fund could probably have the same headline 4 basis point annual cost as NBIM. In fact, the more money this fund raises, the cheaper it might become over time, thanks to the economies of scale (NBIM’s current expenses are down from long-run average cost of 8 basis points).
This vehicle shouldn’t offer the same openness to constant inflows and outflows that a traditional mutual fund does. This would be an investment product designed for long-term saving, so quarterly or even annual withdrawal windows would be fine.
Sure, this would deter some people from investing. But that seems like an acceptable tradeoff to prevent haphazard and sometimes lumpy redemption requests from NBIM, which could spike in turbulent times.
At first, this public NBIM fund might just be open to other public pools of money in Norway, such as municipal pension plans. Frankly, these should already have been allowed to piggyback on the expertise built up at NBIM over the years, rather than doing it in-house.
Once the concept is proven it could be opened up to ordinary Norwegian savers, positioned as a kind of public utility for locals — a one-stop-shop for broad, cheap market exposure to encourage long-term savings, managed by one of the best custodians in the business.
Plenty of money is already invested in Norwegian asset managers, with $139bn in equity funds and another $29bn in bond funds. Most of these funds are laughably overpriced, and perform just about as well as you’d expect from primarily active funds.
Even the cheapest global equity index fund in Norway charges 15 basis points a year, triple NBIM’s costs. The all-in costs are usually much higher. There’s a reason why DNB Asset Management, the investment arm of Norway’s biggest bank, enjoyed a 63 per cent pre-tax profit margin last year.
And over time, there’s no reason why NBIM couldn’t open up this fund to investors elsewhere in Europe or even the world. As BI’s Henriksen said:
NBIM’s systematic strategy of efficient, broad diversification and economies of scale—so-called “enhanced indexing”—has, historically, delivered positive risk-adjusted returns relative to index even after costs. If the administrative fees are kept at a modest level, that could also be the case for outside savers if given access to the fund.
A natural starting point could be Norwegian public endowments, such as municipal funds created through the privatization of hydropower plants and other public utilities. These entities share the Norwegian government’s objectives and long-term savings and consumption-smoothing horizon. If successful, this model could be gradually expanded to include other savers.
Sure, we’re glossing over logistical challenges and legal issues — NBIM would need to hire a KYC team, for example — but none of them seem insurmountable. And an NBIM product would probably be very attractive to a lot of global institutional and retail money, which is often managed less well and more expensively than what NBIM can offer.
For comparison, the average asset-weighted cost of equity-focused active US mutual funds stood at 0.65 per cent in 2023, according to the Investment Company Institute. Even if you include passive index funds in the mix the average cost still only falls to 0.42 per cent. In the less competitive European market — where many people blithely plough their money into any fund recommended by the smooth salesman at their local bank — the average equity fund costs 1.18 per cent.
Institutional investors usually pay a lot less than retail investors, but an NBIM fund would probably be an extremely competitive product. Hell, even Vanguard funds cost an average at 0.08 per cent at the end of 2023 — almost twice as high as NBIM. 😱
Obviously, the asset management industry would despise it, much like how commercial publishers hate competing with taxpayer-funded public broadcasters who give away their content for free. Hardly anyone would have an interest in selling it. Distribution might therefore be a problem. It’s hard to envisage NBIM going on an advertising blitz or offering sales commissions either, so it would have to rely on word of mouth and media attention to gather customers.
But that’s pretty much how Vanguard operates, and it’s worked out pretty well for them. We’re pretty sure that broadly-available version of NBIM would get decent traction regardless.
Yes but . . .
We’ve flicked casually at some logistical issues — back office stuff etc — and dismissed them as completely manageable, but there are probably tons of small fiddly things that we’re oblivious about, forgetting or downplaying. And there are some broader issues that are worth highlighting.
For example, NBIM has ethical guardrails set by Norway’s parliament to ensure broad popular support in a country known for social-democratic politics.
A host of companies are completely excluded because of blanket prohibitions on investing in anything involved in the production of nuclear weapons, coal and tobacco, or any company that “contribute to violations of fundamental ethical norms”, mostly relating to human rights and environmental degradation.
These are assessed by an independent “Council on Ethics”, which can recommend putting individual companies under observation, recommend NBIM exclude them, and review previous exclusions.
This council has at times been controversial — for example, the optics of banning tobacco investments while tobacco remains legal in Norway are a bit iffy — and as the size of the fund has swelled and times have changed, the controversies have grown in magnitude.
For example, Israeli investments have become a major flashpoint lately. Some groups want to prohibit hydrocarbon investments entirely (despite the awkward fact that oil riches created the fund). The ban on investments in companies with any involvement in nuclear weapon production mean that European giants like Airbus and BAE are uninvestable, but NBIM still owns shares in more controversial US guns and ammo makers like Sturm Ruger and Vista Outdoor. That looks out of sync with the current zeitgeist.
Here’s a snapshot of some of the exclusions. You can find the full list here.
More generally, the kind of “responsible stewardship” and active ownership long advocated by NBIM has become less trendy these days.
It already became a minor scandal in Norway when Elon Musk clashed with Tangen after NBIM voted against his mammoth Tesla pay package. As the fund keeps growing, these conflicts will probably become larger and more frequent. For some investors, NBIM’s approach might be exactly what they want; others might prefer a more passive ownership approach to go with the passive investment strategy.
Moreover, if NBIM-Public were successful, it would transform an already huge fund into a behemoth, and dramatically increase NBIM’s already sizeable boardroom influence.
To some Norwegians this might be part of the attraction — leveraging already-existing investment infrastructure to subtly increase the country’s soft power projection — but as a rule of thumb it’s probably healthier for the financial system to have a diversity of distinct pools of capital with differing investment and governance styles, rather than a narrowing club of titanic ones.
For NBIM itself, adding a broader range of clients could also be a distraction from its core job. Tangen, a former hedge fund manager, has often joked about how nice it is to just have one client to care about (the Norwegian finance ministry). Adding a listed fund of some kind would add all sorts of diversions.
Moreover, the Norwegian parliament — which would need to bless the decision — is not prone to make big ambitious moves, and has a lot of other more pressing things to deal with. So it will probably never happen.
Still, Alphaville has now wrung more than 2,000 words out of this flight of fancy, so that’s something at least. And who knows what the future holds? A listed NBIM fund arguably makes more sense than venturing into private equity.
