Category: business

The UK’s February inflation stats were a pleasant surprise for a couple of reasons.

Firstly, the year-on-year growth rate fell to 2.8 per cent, closer to target than economists had forecast. Secondly, and perhaps more importantly, the Office for National Statistics updated its price quote data sets with a new glossary (direct download link) and data structure.

We’ve already spent a lot of time dwelling on the price quotes tables, which all the prices ONS agents observed for certain items in the inflationary ‘basket’. So why not spend some more?

Until February 2020, the ONS tracked an item called “Computer game top 20 chart”. At that point, it was into three different categories, imaginatively named Computer Game 1, Computer Game 2 and Computer Game 3.

An ONS spokesperson told us:

Splitting into three categories allows us to obtain more price quotes on what is one of the most volatile areas of the consumer basket. This improves the overall estimate, reduces volatility and aids users to more easily interpret these data.  

According to the 2019 CPI manual, computer games — like certain other items, such as books and DVDs — are subject to special rules when it comes to price collection. For bestselling books, agents would get three price quotes, and computer games worked similarly.

Here’s how the price monitoring theoretically works: first up, a computer game is selected from a retailer’s bestsellers list. The price of that title is then tracked month-by-month based on shelf price. If the game falls out of the bestsellers list, an alternative game is collected.

So, say a new Call of Duty title is selected. An agent observes its price at £44.99 in a given shop. Eleven months later, the same game is still in the top 20, but is now £24.99. The next month, the Call of Duty title has dropped out of the top 20. The agent now picks a different game, and observes its price instead.

From an “inflation data should capture inflation” perspective, the ideal way for this to work is that perhaps:

1) The first game doesn’t drop in price as rapidly as in that example, and:
2) The game they replace it with is just a newer Call of Duty game.

In that way, you’re hopefully, roughly, measuring the rate of inflation in the price of an AAA game. And, because of smooth year-on-year replacement, there aren’t sudden jerky movements in the year-on-year growth rate (even if the actual cost resets to its high point each year).

There are several problems with this approach:

1) Month-on-month inflation with regards to this item reflects the price decay of a particular game relative to its price at launch, rather than offering good indication of the overall change in the price of video games as a whole.
2) Say the first Call of Duty game stays in the top 20 for seventeen months, and then drops out. If it is then replaced with a newer title that came out in the meantime, you would see lumpy shifts in the year-on-year rate.
3) Different games may experience price decay at significantly different rates — particularly ones like the Fifa titles, which are bought as much for the latest kits and player data as for actual game features.

Per the ONS’s detailed guidance, which we recently acquired, here’s what agents are being told to price:

The redactions are frustrating, and reflect the ONS’s general refusal to name specific brands and products. But permit us to go a little bit through the looking glass, and to reobserve the original file we based that data upon:

Those redacted sections, as you can clearly see…

…are of different lengths, because, duh, they’re telling agents to look for different things.

What those bars hide is indicated by the guidance: agents are told to “[c]heck correct platform”, because they’re being asked to observe games for three different platforms.

And, thanks to the new data structure mentioned above, it’s a bit clearer what those platforms are. In the new version of the price quotes, the item description (eg “Computer game 1”) is joined with a “consumption category” description:

So, we can surmise agents are asked to observe three games in the physical retailers they visit: one from the Nintendo Switch top 20, and one each from the PlayStation and Xbox top 20s.

And while the guidance suggests agents “[t]ry to price different titles for the 3 games” — an attempt to diversify the pool — it implies one could (doing their job badly) observe Fifa for all three consoles.

It might make sense for there to be some kind of central guidance in place, saying eg: “We’re currently trying to observe Call of Duty for Xbox, Fifa for PlayStation and Animal Crossing for Nintendo Switch”, but because bestseller charts vary by shop, so do the game choices. An ONS spokesperson told us:

The replacement is at the discretion of the collector and the guidance is to select a replacement that is representative of the stock in the shop. They will consider the stock on the shelves, and potentially use the type of game or the type of customer it’s aimed at to select a similar replacement. 

This means an agent in, say, Reading could track their Computer game 1 (Nintendo) in Currys as Fifa, while another observes Super Mario Party Jamboree in Currys Skegness. In a classic case of smallcagedmammalness, the average price could then end up reflecting this arbitrary compositional mix.

In terms of how inflation is calculated (based on “elementary aggregates” derived from the prices collected from one stratum, typically delineated by region and shop type), these things shouldn’t matter much as long as the Reading agent keeps checking Fifa during their Currys run, and the Skegness one keeps checking Super Mario Party Jamboree during theirs. Which, as we’ve already seen, they won’t.

Time for a chart:

Xbox, u OK hun? The apparent seismic drop in the price of a game for Microsoft’s console largely drove a decline in the “Games, toys & hobbies” subcomponent of CPI during February, according to Robert Wood from Pantheon Macroeconomics. The PlayStation game has also had some pretty wild moments, particularly in early 2021.

Wood told us:

The CPI is a bit like a sausage; the more you think about what goes into it the less appetising it looks. Computer games are one of many data collection problems that mean the CPI is more volatile than it should be, and in some months probably does not fully reflect the reality on the ground.

Notoriously volatile computer game prices drive unnecessarily erratic movements in inflation from month to month. By collecting the prices of only a limited number of computer games, and seemingly substituting game titles with hugely different prices when a game becomes unavailable, the ONS delivers wildly volatile price readings that almost certainly fail to reflect the underlying reality of game prices but move headline CPI.

In fairness to the statisticians, they are trying to improve the use of industry scanner data in the CPI, which will massively increase sample sizes. That is complex work. But it’s still a huge failing that the ONS currently has such a limited volatile sample of computer games and some other items. 

What, fundamentally, is going wrong here? As mentioned previously, the model of vibes-based title selection and sporadic replacement seems bound to create volatility, but this volatility seems alarmingly chronic. An ONS spokesperson told us:

Computer game prices are particularly volatile and do show wide price range fluctuations over both long and short-term time periods. The degree of volatility across the three games would depend on the speed with which products enter and leave the charts, and the price distribution of products within that particular item.

Nintendo games are, apparently, a relative beacon of stability. The ONS’s refusal to share specific information on item choices means we can only speculate why, but there’s a pretty obvious hypothesis: unlike its more powerful console cousins, with their constant game edition updates, the Nintendo Switch has a pool of popular titles that have been stable for the whole period captured here. For example, this could just be an index mainly of the price of Mario Kart 8, which launched at about £45 in 2017, and still retails at about £38.

It doesn’t seem that simple — though it’s hard to tell why. One possible clue is in the sheer number of agents who weren’t able to observe a price for the game they were seeking, and instead gave it an “M” code for “missing”. Here are those figures for February:

Yuck. So whatever it was they were looking for, fewer than a third of the ONS’s agents managed to find it.

But something more weird is happening here. Let’s repeat that exercise, but divide things up into simply accepted/rejected (technically it’s a measure of how many attempted prize observations resulted in a success/failure) and take in the long view since 2019 (when the general top 20 item was on its last legs):

¯\_(ツ)_/¯

This might be a product of some underlying change in the basket, or possibly a conscious drive to make more observations of these items. We asked the ONS for more details, and a spokesperson told us:

The collection in February was the same as January with some of the shops from which we attempt to collect price quotes not stocking computer games. It was not a case of quotes being “rejected”. The difference between January and February was that the records for these price quotes were not included in the microdataset in January but were included in February. We have introduced new systems from February and, to improve transparency, they pass this additional data into the published file. Clearly these records containing no quotes are not used in producing the indices.

Yay for transparency! Moving on…

What were they observing? As might be expected at this point, it seems inconsistent:

It’s not quite RROD version two, but something’s definitely going wrong with the Xbox — look at that spread, and the heavy reliance on comparable (plus symbol) rather than identical (circle symbol) item observations. Effectively, there were only two observations — out of 98 attempts — where an ONS’s agent found the product they were looking for. No wonder the series is being weird.

Let’s go shop-by-shop, focusing on Xbox. We know from previous coverage that once you filter down by region, shop code and shop type you can create a continuous price series for a shop.

Intuitively you’d expect the price series for a set game at a set shop to be fairly smooth, with occasional adjustments. What we absolutely don’t expect to see are a load of wild and wiggly lines:

Womp.

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The worst thing that can happen to an investment bank is losing money, closely followed by failing to make money. But it’s often surprisingly disruptive to find your franchise is making money, but not in the places where you expected it to. It’s early in the year, obviously, but if 2025 continues in its current direction, we can expect to see some of the bloodiest and most acrimonious compensation committees in living memory.

You can get something of a clue as to what’s going on by looking at the breakdown of revenues in Jefferies’ Q1 results — bearing in mind, of course, that unlike the rest of the Street it has a November year-end. These numbers capture December, which was a surprisingly good month for capital markets and advisory, and don’t contain March which . . . wasn’t.

Capital markets down a bit, FICC down a lot, advisory up and equities up. Swapping March for December seems likely to be bad news for both capital markets and advisory, but good for equities trading — BGC Expand is looking for 25 per cent growth in the industry revenue pool. It’s an ill wind that blows nobody any good, and the uncertainty and volatility of the last quarter has been great for trading volumes.

This means that one of the perennial Cinderellas of the investment banking industry is going to have a rare moment in the spotlight.

Equities trading (particularly cash equities) is usually quite a horrible business. Unlike bonds, equity shares are “fungible” — one share of Tesla is the same as any other, they don’t all have different coupons and maturities. This has always meant that trading is a commoditised business, in which commissions tend to be bid down to the marginal cost. And the marginal cost is very different from the average cost, because in a world of high-frequency trading and latency optimisation, equities trading needs a lot of very expensive IT infrastructure.

Why do banks keep doing it? Well, sometimes they don’t. Deutsche Bank, for example, cut the entire equities trading business line in its 2019 restructuring. But even then, they weren’t able to get rid of equity research, the most Cinderellaish function of all.

The trouble is that, although it’s not a good business to be in nine years out of ten, and barely covers the cost of capital in the tenth, equities have a lot of synergies with everything else. Corporate clients care a lot about their share prices, and the ability to have conservations with them about what investors are doing is often very valuable to the advisory and capital markets teams. Like the real Cinderella, equity sales and trading do a lot of dirty and thankless work in making forecasts, collecting feedback and being available for “colour of the market” updates.

It is going to be unnerving at best for bankers in other divisions to anticipate a bonus season later in the year in which they are reduced to asking Equities to share the wealth.

The maxim for bosses going into compensation committees has always been that if you’ve got revenue, bang on about revenue. If you’ve got a franchise, bang on about the franchise. If you’ve got neither, bang on the table. Given that many second-tier banks spent 2023 and 2024 building up their capital markets and advisory practices by hiring rainmaker Managing Directors who have so far failed to make it rain — and given that any promises or commitments made to the new hires will further drain the pool for the rest — there might be some percussive meetings later in the year.

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Monday was the end of the quarter, and you know what that means! That’s right: Trillions of dollars will be slightly rejigged because of an arbitrary date in an arbitrary calendar according to arbitrary rules of thumb.

Most big institutional investors and a lot of ordinary ones have some kind of asset allocation framework that divvies up their money into various markets. A common one is a 60/40 model, where 60 per cent goes into equities and 40 per cent into bonds, but they come in many different flavours.

Many investors regularly rebalance their portfolios to bring allocations back to the target. For example, if stocks have done phenomenally then you’ll end up overweight equities. So at the end of the month, quarter or year you might therefore sell some shares and buy bonds. Or vice versa if bonds have outperformed stocks. It’s a simple, rules-based buy-the-dip strategy.

However, there’s long been a suspicion that this is so predictable — and the resulting flows so gargantuan — that hedge funds and prop trading firms can profitably front-run these regular rebalancing flows.

A new NBER paper written by Campbell Harvey, Michele Mazzoleni and Allesandro Melone backs this up. They estimate that the “unintended consequences of rebalancing” costs US investors alone about $16bn a year.

A back-of-the-envelope calculation using our predictability results estimates that the rebalancing costs borne by institutional investors can exceed 8 bps per year. For a market potentially exceeding $20 trillion in size, rebalancing pressures could translate into an annual cost of $16 billion, or about $200 per U.S. household each year.

To put these numbers in perspective, these costs are higher than those institutional investors pay to invest passively across equity and bond markets. In other words, rebalancing a balanced equity/bond portfolio might cost more than the fees to access those markets in the first place. Further, since rebalancing costs recur annually, their true present value is substantially larger.

The economists modelled two of the most common rebalancing approaches, 1) a simpler, calendar-based approach of rebalancing on the final trading day of each month; and 2) a slightly more sophisticated one where investors allow some drift within a range, and only rebalance gradually once it crosses preset thresholds.

The paper found that the models were predictive of what actually happened around the end of quarters: When stocks had done well and bonds badly, rebalancing funds sold stocks and bought bonds, leading to a temporary decline in equity returns of 16 basis points and a 4 bps uplift in bond returns. When bonds had outperformed stocks the opposite effect happened.

Moreover, the impact faded in less than two weeks, “suggesting that rebalancing trades carry limited informational content about asset fundamentals”.

The economists constructed a sample portfolio that used these predictive signals, which generated average annualised returns of about 9.9 per cent across the 1997-2023 sample period. This equates to a pretty sharp Sharpe Ratio of more than 1, and the strategy performed “particularly well” when markets were especially turbulent, and rebalancing flows can be more meaningful.

However, the paper’s main point was that big, lumbering institutional investors are collectively letting traders scalp them for billions of dollars a year. Regular rebalancing remains important, but it just shouldn’t be so dang predictable, Harvey et al argued:

. . . Rebalancing remains a fundamental tool for ensuring portfolio diversification, managing liquidity, and generating utility gains for mean-variance investors compared to a non-rebalanced portfolio. Therefore, designing more effective rebalancing policies that preserve the benefits of rebalancing while minimizing its costs seems like a priority for future researchers and investors.

Alphaville’s understanding has long been that institutional investors ARE aware of the dangers, and there is as a result fairly little homogeneity when it comes to the hows and whens of rebalancing.

But these results suggest that collectively these efforts still amounts to a blob of capital moving in predictable fashion. And interestingly, Elm Research recently found that regular rebalancing doesn’t actually matter as much as you might think, at least for individual investors.

Jay Newman is a former senior portfolio manager at Elliott Management and an author. He has some, cough, ‘history’ with Argentina.

In a bizarre wrinkle of fate, three American judges hold the fate of a nation in their hands. The United States Court of Appeals for the Second Circuit will soon decide whether a $16bn judgment against the Republic of Argentina should stand.

For reference: Argentina is negotiating a $20bn lifeline from the IMF, $16bn is more than a quarter of the government’s 2024 budget — and reserves are negative $6bn. If upheld, the ruling would scuttle president Javier Milei’s efforts to remake his country’s political system.

Fortunately for the Argentine people, the Second Circuit has ample grounds to vacate the lower court decision in Petersen vs Argentina — a case that never belonged in a New York court in the first place.

The judgment arose from Argentina’s 2012 expropriation of shares in Yacimientos Petrolíferos Fiscales (YPF), an Argentina-based energy company. The Argentine government was a minority shareholder at the time, but then-president Cristina Fernández de Kirchner’s administration accused YPF’s majority shareholder—Repsol, a Spanish company — of prioritising distributions to shareholders instead of reinvesting capital to develop oil and gas production from the recently discovered Vaca Muerta shale formation. Exercising its public policy prerogative, president Kirchner’s government found that Repsol’s failures threatened Argentina’s energy security and its economic independence.

Takings of property — whether by the exercise of eminent domain or imposition of regulatory restrictions — are actually business as usual for governments. It’s the very definition of sovereignty: governments make the rules governing property rights, investment, and legal recourse for actions that take place within their territory. In the US, the Fifth Amendment of the Constitution governs takings: private property shall not “be taken for public use, without just compensation.” American victims of eminent domain can sue in Federal court for compensation.

Argentina has a comparable framework. Complaints pursuant to Argentina’s 1977 General Expropriation Law are the exclusive remedy, and Article 28 prohibits legal actions outside of that process. Once the Kirchner government exercised its prerogative, shareholders of YPF had the right to seek compensation — and some did, utilising the General Expropriation Law framework. They could also have pursued arbitration under the Spain-Argentina bilateral investment treaty. For their own reasons, the Petersen plaintiffs decided to forum shop — and gamble on the possibility of bamboozling an American judge. 

They’ve gotten lucky — until now.

Legal proceedings should have remained in Argentina, because the dispute is purely local — comprising a microcosm of Argentine society and politics. It touches on practically every facet of Argentine civic life, from its historical development, governmental powers, legal regime, substantive law, energy policy, and legislatively declared public interest. To wit:

• The Argentine legislature created YPF in 1922. It’s an Argentine corporation that operates in Argentina. It’s governed by Argentine law, and develops Argentina’s natural resources and supplies domestic energy;

• The claims arise under YPF bylaws and were brought by former YPF shareholders against other shareholders — a type of claim without precedent in Argentine law;

• Petersen — the company that owned the claims before the current plaintiffs acquired them in a secondary market transaction — was originally created, owned, and controlled by Argentine nationals;

• Argentine legislation and executive decrees authorised the expropriation, including express legislative findings of the public interest in ensuring a domestic supply of energy at reasonable cost;

• Victims of the expropriation have clear, viable remedies under the Argentine constitution, Argentina law, and treaty.

You’d do well to wonder how a senior US judge got sucked into the vortex of a dispute with a foreign nation having nothing to do with the US — and everything to do with Argentina. No matter: it’s now up to the Second Circuit to clean up the mess.

Litigation against governments sometimes involves tough judgment calls relating to jurisdiction and sovereign immunity. Not so here. It’s one thing for New York courts to judge a sovereign that agreed to be sued in New York: most dollar bond contracts for sovereign debt contain express waivers of immunity. Absent express agreement, the bar is high before American courts provide service to opportunistic litigants.

Whether American courts have legitimate basis for adjudicating disputes involving foreign sovereigns and foreign law is a matter of forum non conveniens and comity. Forum non conveniens invokes a court’s discretionary power to decline cases in which another jurisdiction or court has the right expertise. Baseline, cases involving novel questions of Argentina law relating to the government’s commercial obligations belong in Argentine courts.

More problematic, after finding Argentina to be an adequate “alternative forum for this litigation,” the judge ignored Argentina’s request that she reject the complaint as a matter of comity. According to the Second Circuit: “international comity takes into account the interests of the United States, the interests of the foreign state, and those mutual interests the family of nations have in just and efficiently functioning rules of international law.’’ A case in which the plaintiffs had multiple opportunities to seek redress — hinging entirely on the interpretation of Argentine law — only ever belonged where it began.

There’s more to this legal mischief.

Forum non conveniens and comity weren’t the only things the trial judge got wrong. New York law requires that when damages are measured in a foreign currency — like Argentine pesos — the judgment amount is converted into dollars by reference to the value of the local currency on the day judgment is entered (the judgment-day rule).

In a clear error, the judge calculated damages based on the value of the peso on the day of the breach (the breach-day rule). If the Second Circuit won’t tell a senior judge that she abused her discretion in getting forum non conveniens and comity wrong, it could obviate most of Argentina’s pain by correcting this purely legal error in calculating damages.

Because the peso has depreciated against the dollar over the 12 years since 2012, application of the judgement-day rule would produce an award vastly smaller than $16bn — closer, in fact, to $100mn. Calculating damages correctly is the low hanging fruit, since the Second Circuit will review the formula de novo. There’s no principled reason to coddle a judge who abused her discretion, but proper maths that produces a correct sum would be of considerable solace to Argentina and avoid fracturing Milei’s fragile peace.

It’s not only a matter of saddling Argentina with an unjust, crushing burden. As numerous — powerful — amicus briefs filed by the US government, four other sovereign nations, and legal scholars make clear, the credibility of US courts, and the US legal system is at issue.

Imagine the justifiable vitriol that would fill these pink pixels if Argentine courts — or those of other nations — opportunistically entertained lawsuits against the US based on events that took place here, governed by American law.

It can only end badly if the appellate court condones the profligate assertion of dominion over domestic disputes with foreign states — much less matters governed by a state’s own laws. The fate of one nation’s economic revitalisation project — and the probity of another’s judicial system — hang in the balance.

Last month the National Association of College and University Business Officers reported that the average American endowment returned 11.2 per cent last year. Huzzah! Trebles all round.

Unfortunately, this is slightly worse than what a passive global 70/30 equity/bond portfolio returned in 2024. OK, well maybe it was a weird year. Endowments and their racier asset mix must have done better in the long run, right? Nope.

Over the past decade, the $874bn worth of endowments that report to NACUBO have averaged annual gains of 6.8 per cent. A global 70/30 has gained 6.83 per cent. And this is a generous comparison for endowments, given their far heavier US asset mix in a phenomenal decade for almost anything American. Over the past decade the Norwegian sovereign wealth fund has returned 7.3 per cent, and now costs just 4 basis points a year in management.

Apropos of nothing, here is a paper by investment consulting pioneer Richard Ennis predicting “the demise of alternative investments”. Or to put it in a more nuanced way, the inevitable decline of the alternatives-heavy “Yale Model” of institutional investing pioneered by the late David Swensen.

The abstract pulls zero punches:

Alternative investments, or alts, cost too much to be a fixture of institutional investing. A diverse portfolio of alts costs at least 3% to 4% of asset value, annually. Institutional expense ratios are 1% to 3% of asset value, depending on the extent of their alts allocation.

Alts bring extraordinary costs but ordinary returns — namely, those of the underlying equity and fixed income assets. Alts have had a significantly adverse impact on the performance of institutional investors since the Global Financial Crisis of 2008 (GFC). Private market real estate and hedge funds have been standout under-performers.

Agency problems and weak governance have helped sustain alts investing. CIOs and consultant-advisors, who develop and implement investment strategy, have an incentive to favor complex investment programs. They also design the benchmarks used to evaluate performance. Compounding the incentive problem, trustees often pay bonuses based on performance relative to these benchmarks. This is an obvious governance failure.

The undoing of the alts-heavy style of investing will not happen overnight. Institutional investors will gravitate to low-cost portfolios of stocks and bonds over 10 to 20 years.

Ennis’s main concern has long been that about 35 per cent of US pension plans are currently invested in what he sees as illiquid, laughably expensive and, in reality, often mediocre alternative investments. The paper therefore primarily relies on the data he has for 50 large US public pension funds for the 16 years up to the end of June, 2024 as well as the less granular NACUBO reports.

But as he points out in the paper, a whopping 65 per cent of the average large US endowment fund is now invested in alternatives of some kind, as virtually all of them have sought to mimic Swensen’s model at Yale.

Unfortunately, most investors have not been able to replicate Swensen’s results, even when they copy his recipe of loadsa alts — primarily private equity and venture capital, with a few big dashes of hedge funds and real estate to top it off.

Ennis estimates that the average endowment has underperformed even the average pension fund by 143 basis points a year over the period studied, once you’ve accounted for the differences in market exposures and risks. Pension plans have in turn markedly underperform a comparable public market benchmark, by 96 basis points a year over the 16 years.

Over the years those basis points add up:

This is a new-ish phenomenon, according to Ennis. Between 1994 and 2008 large endowments produced excess returns of 410 basis points a year thanks largely to their alternative investments, he calculates.

Ennis argues the stark shift from good to woeful results happened simply because results led to popularity, and popularity led to crowding. The outcome has been poorer returns but the same eye-watering fees.

The very investor enthusiasm that helped propel alts’ returns pre-GFC began transforming the markets generating those returns. Many trillions of dollars poured into alts, which were relatively small, isolated areas of investment in the early days. Aggregate assets under management increased more than tenfold between 2000 and 2020. More than 10,000 managers now vie for a piece of the action and compete with one another for the best deals and trades. Market microstructure advanced accordingly. Private market investing is more competitive and efficient than it was way back when. Costs, though, remain high — far too high to support much value-added investing.

The most controversial suggestion is that this will inevitably end in the demise of the Yale model of alts-heavy endowment management, citing the famous law articulated by the economist Herbert Stein: “If something cannot go on forever, it will stop.” Here are 13 reasons proffered by Ennis for why the privates merry-go-round has to stop spinning.

1. Failing to meet stated investment goals. Since the GFC, public pensions have failed to meet their actuarial return requirement, which many say is their paramount goal. Endowments have not kept pace with typical stated inflation-based return objectives.

2. Realizing that their portfolio is worth half of what it would have been worth had they followed a simple indexing strategy. With underperformance of 2.4 percentage points per year since the GFC, large endowments are worth 70% of what they would have been worth had they followed an indexing strategy. If they continue to underperform at the same pace for the next 12 to 15 years, I estimate their value will be half that associated with a comparable index strategy. At some point the performance problem becomes too big to ignore.

3. Illiquidity: Universities, with tens of billions in endowment (e.g., Harvard), borrowing at unprecedented levels to support operations. Public pension plans (e.g., CalSTRS) borrowing against their portfolio to raise funds for the “flexibility” to rebalance their asset allocation. (It’s not leverage; it’s flexibility.) The heavy reliance on private assets is compromising institutions’ normal operation, while increasing risk.

4. Trustees recognizing the agency issues at work and acting to redress them. Some diligent trustees will stop paying CIOs bonuses for beating benchmarks created by the CIOs and/or consultant-advisors. They will find other ways to compensate truly excellent performance. Switching to index-based benchmarks would have a benign effect on practice.

5. Media reports of undergrad investment clubs with track records better than those of elite university investment offices.

6. The advent of an accounting requirement that public pension plans report their investment expenses fully and in detail, including carry. With that information, it would be easy to figure out what educational endowments are paying. This would come as news to most trustees, public and private, and make them uneasy.

7. CIOs acknowledging that leveraged private real estate equity and hedge funds have been really poor performers for a long time and dropping one or both.

8. With the advent of normal interest rates after years of the Fed’s zero-interest-rate policy, substantial leverage of buyout investments coming into play in a way we have not seen since the GFC. News of a thousand bankruptcies among zombie corporations, many of them in buyout funds, would not be lost on trustees.

9. Enlightened trustees leaving their successors notes that say, Put an end to this. I wish I had.

10. College and university boards discovering that, like Harvard, they are spending more on money managers — for no benefit — than they collect in tuition.

11. Trustees discovering that secondary market pricing of private assets can be much lower than reported NAVs. Real estate and venture capital interests, for example, have been transacting at discounts of 25% or more of NAV in recent years.

12. Being sued for breach of fiduciary duty. Trustees serve on behalf of others. Their duty is to be prudent and loyal to the beneficiary; there is no requirement to be clever or to attempt to maximize gain. Wasting assets is verboten. We live in a litigious world.

13. Taxpayer revolts. Taxpayers have about had it with public worker pensions as it is. Heightened awareness of investment waste might accelerate the transition to defined contribution plans for new employees.

Perhaps. Alphaville is a bit too cynical to think anything is going to change much, even in the decade that Ennis envisages. In finance, inertia can be a phenomenally powerful force.

For example, these days people get very excited about index funds eating up markets, but forget that we’re still talking about a penetration of 10-30 per cent, (depending on the market) over a half a century after the invention of the index fund and crushingly compelling data on active management underperformance. Anyway, alternatives have found a brand new mark market to woo.

Further reading:
— American endowments’ complicated love affair with private equity (FTAV)

​​Sam Lowe is a partner at Flint Global, where he advises clients on UK and EU trade policy. He is also a senior visiting fellow at King’s College London and runs Most Favoured Nation, a newsletter about trade.

The Tariff Man has tariffed, again.

This time, under the guise of reciprocity, he has moved beyond his passion for the number 25 and applied individualised “reciprocal” tariffs to countries, dependent on the extent to which they fall foul of a pretty arbitrary equation treat the US unfairly:

These individualised rates mean that where a product is from is increasingly important. Actually, I should rephrase that: where the US decides a product is from is increasingly important.

For example, under the terms of the new tariff action, if you export a product from Ireland to the US, it will be hit with an additional 20 per cent tariff. But if it is from the UK, the tariff will be 10 per cent.

When you take into account the cumulative impact of all the different tariff measures, the importance of origin becomes even more acute.

Let’s say you were making a hydraulic turbine (I’ve just picked a random bit of machinery from a list, don’t read too much into it) in the EU for export to the US, but it is primarily made of Chinese parts.

If the US decides the hydraulic turbine is of EU origin, the tariff would be 20 per cent plus the 3.8 per cent Most Favoured Nation tariff, making 23.8 per cent. Not ideal.

But if the US decides to treat the hydraulic turbine as Chinese, the tariff could be up to 82.8 per cent: 3.8 per cent MFN tariff + 20 per cent China-specific tariff + 34 per cent China reciprocal tariff + 25 per cent tariff because China buys oil from Venezuela. (Note: I’ve probably missed a product-specific tariff there, too and there might be extra duties relating to the steel content.) Existentially bad.

Indeed, this is what happened to Volvo back in 2019, when US customs decided their Swedish-made vehicles should be treated as Chinese and thus subject to a Trump 1.0-era 25 per cent tariff. (A useful, critical, summary of the decision by US customs lawyer Lawrence M. Friedman, here.)

But how exactly does the US determine the origin of an imported good?

Well, for exports not covered by a free trade agreement origin determinations are kinda … vibesy.

It’s not that there are no rules — the general focus is on whether a product is wholly obtained (eg a cow) in one jurisdiction or, if not wholly obtained, “the last country in which it has been substantially transformed into a new and different article of commerce with a name, character, and use distinct from that of the article or articles from which it was so transformed”. 

It’s just that, in practice, it can be difficult to predict which way US customs will go on a specific issue.

For free trade agreements, there are usually product-specific rules that determine whether an exported good is local enough to benefit from the agreement’s preferential tariff treatment.

So far, under Trump 2.0, these preferential rules are most significant for trade between the US, Canada and Mexico.

For example, the recent action on car tariffs stipulates that if a car exported to the US from Canada or Mexico qualifies for the US, Canada, Mexico free trade agreement (USMCA), then the new 25 per cent tariff will only apply to the non-USA value of the vehicle. Dataviz:

(More on that, with further hand-drawn pictures, here.)

In practice, this could mean an effective additional tariff of well below the headline 25 per cent, depending on how much US “value” is embedded in the vehicle.

To qualify for USMCA the rules of origin are… complicated. USTR has a helpful summary:

The USMCA ROOs for motor vehicles require a specific amount of North American content in the final vehicle in order to qualify for duty-free treatment under the USMCA. The USMCA raised regional value content (RVC) requirements to 75 percent for passenger vehicles and light trucks, compared to 62.5 percent under the NAFTA. In addition, certain “core parts” must also meet the higher RVC thresholds for the entire vehicle to qualify. The USMCA also requires that at least 70 percent of a vehicle producer’s steel and aluminum purchases originate in North America. Finally, the USMCA introduced a new LVC rule that requires that a certain percentage of each producer’s qualifying vehicles be produced by employees making an average of $16 per hour. Collectively, these new requirements are intended to incentivize increased investment in autos and automotive parts production within the United States and North America.

So, on the one hand, significant country-by-country tariff differentials create new incentives for supply chain … *ahem* … optimisation. But on the other, US determinations of origin are not always the easiest to predict and will (in my opinion) probably become increasingly weighted towards ensuring products are classified as being from whichever country delivers the highest tariff.

For example, see this caveat to the USMCA wheeze described above:

(3) If U.S. Customs and Border Protection (CBP) determines that the declared value of non-U.S. content of an automobile, as described in clause (2) of this proclamation, is inaccurate due to an overstatement of U.S. content, the 25 percent tariff shall apply to the full value of the automobile, regardless of the actual U.S. content of the automobile. In addition, the 25 percent tariff shall be applied retroactively (from April 3, 2025, to the date of the inaccurate overstatement) and prospectively (from the date of the inaccurate overstatement to the date the importer corrects the overstatement, as verified by CBP) to the full value of all automobiles of the same model imported by the same importer. This clause does not apply to or otherwise affect any other applicable fees or penalties.

But I do wonder if all of this means that, in the aggregate, the true impact becomes a question of capacity and enforcement. Or rather, how difficult does the US really want to make life for importers?

Because, as per the general argument about the global economy made in FTAV contributor Dan Davies’s book, Lying for Money, the secret ingredient of an efficient global trading system is [a tolerance of some] crime. By this, I mean that checking every single product that enters a country would be incredibly resource-intensive and bring trade to a grinding halt.

In this context, if US border enforcement continues as it always has, you would expect most companies to accurately declare origin to the greatest extent possible and while some will accidentally get it wrong, and some will commit crimes, only a few will get pulled up on it every now and then.

However, in his press conference Trump threatened to jail people for 10 years if they try to claim the wrong tariff rate. And if the US decides to crack down — which it will need to if it wants to enforce the tariff differentials and achieve the ultimate objective of forcing companies to make stuff in the US — then, well, let vibes and chaos reign.

Further reading:
— Reciprocal tariffs: you won’t believe how they came up with the numbers
— The stupidest chart you’ll see today
— Wall Street analysts anguish over ‘Liberation Day’