Joris talks to a strategist focusing on emerging markets at an investment bank, as part of his Voices of finance series
We are meeting one November morning in a Starbucks near Bank Station, in the heart of the City. In his late 20s, this investment strategist at an investment bank is of Asian descent, the son of immigrants of modest means. He is the sort of person to text you when running five minutes late. Dressed in a suit ("my only one") and a shirt he talks exhaustingly fast, while you suspect his thoughts go faster still. He will interrupt his speech and ask 'am I going too fast?', then resume firing off one observation after another. He says his superior maths skills got him a scholarship for one of the best private schools in the land, followed by a place at a top university ("I was very bored there"). He orders an Earl Grey tea and says, almost apologetically: "I am not lacking in confidence."
"There's no loyalty in this industry, either way. I was with another company when my son was born. He needed extra support that the NHS couldn't provide of £2-3,000 a month. I was on £70K back then, plus £20-40K in bonuses, so around £4,000 a month after tax. I went to my boss and offered to forgo my bonus for £10K extra on my salary and he said no. In my current job I can pay for my son."Back before I became a father, money was not an issue. One year I would be making under £100K while the guy to my right took home over a million – even though I was generating way more profits for the fund than he was. I didn't care back then. Now I do because of my son.
"I am an investment strategist focused on emerging markets. You learn to be humble. A while back a firm put out this very good report, and on page five they wrote: 'Whoever rips this page out and sends it to us gets £50.' I believe they ended up paying out only £250. Apparently few of their other clients had gotten as far as page 5 of the report as investors are deluged with information daily. I was late for our meeting because I had to send out this note to investors about a development in my region.
"As a strategist I go over a range of possible outcomes and see if they are appropriately priced. For example, in the US you could look at so-called median wage growth, roughly the average increase in salaries. You discover it's been essentially flat, people make the same year on year. Then you look at consumption, which was growing every year. You ask, how is that possible? Answer: debt. Is that sustainable? No, you cannot live beyond your means indefinitely. New question: has the market priced this in – meaning, do prices reflect that this can't go on? Answer: no, they haven't, even after the dramatic falls we've seen. You can then look at historical precedent, how does a country return to a sustainable course, and how painful is that going to be?
"Basically I am supposed to have a view on everything, and argue how confident I am about predictions. I provide views rather than news. I thoroughly enjoy my job as it is all about understanding how the world works and helping others understand it, too. What could be more fun?
"Clients read my 'notes to investors' and when they act on it, they direct trades to my company – and we take a commission. Larger clients also vote on the best research, and we get a proportionate share of a pool of money set aside for this purpose. In my case it's rare for a client to act directly on my advice, as I am not saying things like: buy Intel. I may say: it might be a good idea to buy consumer companies at current levels. Or: be careful on geopolitics in the Middle East.
"On a typical day I have a call at 7am with the other members of the research team, sales people and traders. We all provide our interpretation of recent news, and discuss potential short-term developments and thoughts. On an average day I spend 60% of my time reading and talking to my sources, 20% writing and analysing data and 20% talking to clients. Basically I work every waking hour, always reading stuff. It can drive my wife mad … but she still loves me.
"Sometimes I travel on what we call roadshows where I meet clients around the world to give them my input on my specialist areas. I also travel around the countries 'under my coverage' meeting companies, government officials and other experts to develop my own perspectives. This can be hard. If you are Goldman Sachs you can get a meeting with anyone. I am not with Goldman Sachs. I have to rely largely on my own reputation.
"In big banks and asset management companies it's very difficult to be negative about the future. The reason is simple: they make their money from optimism. If you are going to tell investors that the economy is going down, they will move their money somewhere safe and reliable such as cash. It is tricky to charge fees for trading or managing cash. It also becomes more difficult to convince investors to purchase riskier products.
"Pension funds have all this money on their hands. People working there want to outsource risks so they give the money to asset and hedge fund managers. If things go wrong, they have somebody to blame.
"Fund managers make their decisions in part on the basis of historical trends. But their data set doesn't go back further than 20 or 30 years. What if something is happening now that is literally unprecedented, meaning it never occurred during the period covered by the data set? If you have been socialised into mainstream fund manager thinking, it's very hard to conceive of developments outside that dataset. I like to think I am not hampered by this due to my irregular background, but it is an easy trap to fall into.
"Before I became strategist I was at a couple of hedge funds. I had read a lot about investment theory, in particular the efficient market hypothesis [the theory that markets are essentially rational and impossible to beat]. I decided that this hypothesis was hog. You need to look at markets from a behavioural perspective, its mass psychology.
A hedge fund is essentially a compensation scheme. When you set up a hedge fund you charge a management fee, typically 2% annually of the assets [money] you manage and a performance fee, historically around 20% of any profits you make above an agreed level. The strategy your hedge fund employs can be anything from investing in technology companies long [betting on the price increasing] and short [betting on prices declining] to investing in fine art. They also have a threshold, meaning that if the value of their investments goes below a certain number, they get a warning. If the value goes down even further, they're fired.
"If someone runs a billion dollar hedge fund they might get $20m a year in management fees and another $20m for every 10% the fund returned above its agreed level or 'benchmark'. The founders of the hedge fund usually take the lion's share of these fees and it's quite common to hear of less senior analysts coming up with trades that make millions of dollars for the fund and then receiving a miniscule fraction of this.
"The top calibre people in hedge funds set up their own. They have their own investment strategies, which we call 'religions'. Some hedge funds can be testosterone driven, you're always on. Others are cerebral. People go sit two weeks inside a company they consider investing in. By that time they may know it better than most people working there.
"Let me talk you through the hierarchy at larger investment banks [known as the bulge bracket], in broad strokes. Graduates come in with the rank of analyst. They make £40-45K, plus as a bonus about 20% of that – in good years, of course. You are an analyst for two to three years, then become an associate – sometimes after you do an MBA in between. Now you are making £70-80K plus 50-100% bonus. Again two to three years later, you move on to vice-president, with an income of a £100-130K plus a bonus that is 50-150% of that. Three to four years later you become director, taking home £150-200K plus anywhere up to 300% of that in bonuses. Finally there's the managing director, when you manage people, that's between £200-400K plus potentially a million (also known as a "bar") or more in bonuses. After MD there's head of region and then the C-positions [CEO etcetera] whose compensation you read about in the press. All of these numbers have increased by 30-100% since the new bonus rules. Smaller banks pay lower salaries, as do fund managers, and if you get a 0% bonus you're either out or the market is awful.
"I'm in the middle of the director-level pay I just mentioned. Some of my bonus (if I get one) is deferred, some of it is in company stock. It's become a lot more complicated than when they just paid cash.
"How people advance and skip a year as an analyst is by jumping back and forth between banks. Or they threaten to leave just when someone else on the team has left – it is expensive and laborious for a bank to hire someone new – recruitment agencies take as much as 30% of a year's salary. Much easier to give the job to the next guy.
"I'd say most recruiters are useless, 'fillers' we call them. The good ones don't advertise. You have to get to know them, put in the time. I'd say 75% of promotions come from networking, not how good you are at your work. I am a horrible networker. I can speak to big crowds but I feel very uncomfortable in one. I have mild Asperger's and though I am working on it, small talk is still very difficult for me. Plus, I don't drink alcohol.
"There's a great deal of fatalism in the industry these days. MF Global, the financial firm that collapsed recently … one guy brought it down. Everybody knows this can happen to you. I'm relatively young, I'll find something new should my firm go bust. But older people with very specialist skills, they may have a really hard time. Imagine you have four kids at Eton, at £30,000 each per year. They're stuck and will feel they have failed their kids.
"I am very optimistic about people, their ability to adapt. I am very pessimistic about the markets. Up until the crisis people in finance seemed to think they could hedge out risk, that you could design this risk-free environment. But when things went bad, they wouldn't let capitalism run its course. The banks were saved, because of systemic risk – failing banks could bring down the whole system. My view: a bank that is too big to fail is a bank that is too big to exist.
"Some of the emerging markets I have particular expertise in are quite small. If you run a really big fund, at some point your share in that total market becomes so large that you begin to 'move the market', as it's called – share prices are directly affected by your investment decisions, meaning that if you buy a share, this very action could raise the share price, creating its own dynamic. Obviously this creates room for mischief.
"There's another problem with this: the main purpose of financial markets is price discovery – transparent transactions between buyers and sellers setting a 'fair' market price. This allows companies to raise capital in equity markets, sell bonds in bond markets or buy commodities in commodity markets. But if you put enough money into any market it stops being an informational source and moves far away from 'fair' prices.
"If you take an honest look at the financial sector today, you see banks can borrow money almost for free on what is called the short-term market, then lend that money to governments for 2% or 3%. Now why would they lend to small businesses if they can make money so easily? This is what 'zero interest rates' are doing to our economy, as well as taxing savers with inflation at over 5%. You take on new debt to pay off your old debt. It's like drinking your hangover away with ever more drinks. You are destroying your liver. That's what's currently happening."
Source http://www.guardian.co.uk/
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