Posted inFSA Spy

The FSA Spy market buzz – 25 November 2022

UBS is hiring, JP Morgan on passives, China’s brutal ETF market, welcome to the crypto binge hangover, property melts down in rate heatwave, Goldman’s little green fine and much more.

It is the week of upsets. First Saudi Arabia beats Argentina and then Japan slays Germany in a football game for the ages. The World Cup is roaring in the Qatari heat with that glorious reminder that nothing is certain in life. Sporting metaphors are overused in finance, but Spy loves a minnow that outperforms a giant, with a plucky strategy and a lot of spirit. In active fund management, the evidence does seem overwhelming though: when funds get too big, or too complacent, they find it harder and harder to outperform. And, out of the blue, that little scrappy boutique is gobbling assets from the whales…

The appetite for private opportunities does not seem to slow down at all, despite volatility and hints of valuation concerns. UBS, the world largest wealth manager, is currently recruiting for a new head of private markets for southeast Asia. The role involves promoting “sales of global private equity funds, as single managers or portfolios, to our clients of UBS Wealth Management”. Only experienced people need apply. UBS is looking for candidates with at least 15 years under the belt and plenty of management experience. You can have a look at the full job description over here.

While Spy is not the least bit surprised that passive funds continue to gain market share from their active counterparts, JP Morgan reckons the pace is accelerating and stretching into different asset classes. In some new research out this week, the firm highlights the fact that passive bonds and multi-strategy funds are now steadily taking market share too, whereas previously all the action was in the equity sector. Spy hopes that better bond indices are designed because traditional bond indices used to favour the largest debtors, not always the most creditworthy. Bond markets have always suited fundamental research and active management. It could just be a phase because of recent bond losses and therefore Spy would not be surprised to see this trend be short-lived when rates peak.

China’s passive, or index, industry is now worth some $300bn in AUM. If a report in Caixin is anything to go by, not a lot of the providers are making much of a profit though. It is a cutthroat industry where prices are being slashed with alarming regularity. It is therefore, not much of a surprise that providers are going more and more niche to try and stand out. Every sector under the sun has been covered. Decarbonisation. Done. Semiconductors. Done. Vaccines. Done. National Security – yes, even that one is done. If a player is late to the ETF party, chocolate swirl with pistachios is not on the menu, let alone vanilla. Get creative or go home.

If you had $41bn to spare (enough to buy Manchester United five times over), would you have thrown it at the crypto sector? Venture Capital funds have done just that. In the last 18 months, like drunks drinking too much late-night tequila, they have been bingeing and dancing while the music played. Now the hangover is coming. At one point, not that long ago, the crypto block had a notional value of $3trn. Blockchain companies grabbed $25bn in VC investment in 2021 and then another, healthy, $16bn in the first six months of 2022 according to CB Insights. With the crypto autumn that has become a chilly winter, Spy does wonder want those mark-to-market values look like?

The property market, globally, is now flashing redder than a field of lanterns at Luna New Year, reckons Spy. Dinner party talk from Happy Valley to Discovery Bay, here in Hong Kong, is filled with miserable property chat. But that pales compared to market hot spots such as Vancouver, London, Los Angeles and Sydney, where the bubble is well and truly bursting at the top end of the market. Looking at the property investment sector here in Asia, the pain is spreading. Janus Henderson’s Asia Pacific Property Income is off 17%,  Morgan Stanley’s Asian Property Fund is down to 19% and Manulife’s Asia Pacific REIT is now down 22% – all over the last year. There has been nowhere to hide as rates rise.

Goldman Sachs adds its name to the list of firms that have had a rap over the knuckles over ESG issues. A $4m dollar fine was meted out in New York this week. Pocket change for Goldman but another warning shot that greenwashing is not going to be tolerated. Lest any excitable marketing executive had any ideas…

Heard of Price’s Law? Useful if you are running a business, reckons Spy. When Elon Musk bought Twitter they had 7,500 employees. He fired 50% of its workforce. Another 1,200 left after he told them he was going to make the social platform “Extremely Hardcore”. Less than 2,900 remain. How can 2,900 do the same job as 7,500? Derek Price, a British physicist, historian and scientist, discovered something interesting about his peers. There were always a handful of people who dominated the publications within a certain subject. Being a scientist, he investigated. He found out the following: 50% of the work is done by the square root of the total number of people who participate in the work. He tested it across different groups and audiences and it almost universally applied. Especially in business. The square root of the number of people in a company do 50% of the work. In a company of 10 employees, three of them do 50% the work. The remaining 50% of the work is done by the other seven people. This scales too. Competence grows linearly. Incompetence grows exponentially. 10 employees, three of them do 50% of the work. 100 employees, 10 of them do 50% of the work; the other 90 do the other 50%. 10,000 employees, 100 of them do 50% of the work; the other 9,900 do the other 50%. The survival of any business requires the execs to figure out who the most competent and necessary people are in the organisation and keep them happy and keep them around. If they don’t, Price’s law will kill their business. Mr. Musk just has to hope he chose the right people. (With thanks to Scott Clary.)

Spy’s quote of the week, “In football, the first 90 minutes are the most important”. – Bobby Robson

Until next week…

Part of the Mark Allen Group.