Amundi sounds the alarm on hidden leverage

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Could ‘something break’ in 2023?

Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world. — WB Yeats, 1919 (and fund managers, 2022)

As the dust has settled on the wild gyrations in the gilts markets, investors are starting to think about what else can go wrong.

Vincent Mortier, chief investment officer at Amundi, Europe’s largest asset manager has warned that the tremors in the UK pensions market should be a “wake-up call” to investors and regulators about the dangers of hidden leverage in the financial system.

He reckons that the recent turmoil unleashed by the UK government’s “mini” Budget was “a reminder that shadow banking is a reality. I don’t believe that anyone before the crisis had any idea of the magnitude of this shadow banking in the pension fund industry.”

Leverage in the overall financial system, says Mortier, “is in multiple places that are difficult to track”. 

Increased capital requirements imposed on banks to make them safer following the financial crisis. That made sense. The problem is, a lot of risk appears to have shifted to less regulated parts of the financial system, namely asset managers, insurance companies and pension funds.

Investors have fuelled the shift by pouring money into alternative strategies such as private credit as they searched for yield in a low interest rate environment. In 2000, non-banks held $51tn of financial assets, compared with banks’ $58tn, according to the Financial Stability Board. Its latest data showed non-banks hold $227tn in financial assets at the end of 2020, outstripping banks at $180tn. 

Mortier said that the shift in leverage from banks to non-banks has made it very difficult for regulators to get a true picture of the risks. “It’s much more difficult than in 2007, when leverage was predominantly in the banks,” he said. “The issue is that we don’t know exactly where it is. When you can’t measure something it’s difficult to act upon it.”

Meanwhile across the Atlantic, some nasty currents are swirling in the $23.5tn world of American government bonds, writes my colleague Gillian Tett in New York.

A JPMorgan index of Treasury market liquidity has deteriorated to the lows seen in March 2020. A separate Bloomberg index suggests the situation could be even worse. Meanwhile the Ice-BofA Move index of implied Treasury market volatility is also hovering near March 2020 levels, while buyer demand at auctions is weakening. More striking still, these trends recently prompted Janet Yellen, US Treasury secretary, to take the rare step of admitting in public that she is “worried about a loss of adequate liquidity in the market”. 

These strains are not new. But now that interest rates are rising fast in response to sky-high inflation, investors fret that big moves in bonds could set off more landmines, writes markets editor Katie Martin.

Max Kettner, chief multi-asset strategist at HSBC, sums up why it is a mounting concern that “something breaks” in 2023:

“Given the record amount of tightening of financial conditions, the risk of an accident in financial markets has greatly increased. Whether it’s the recent turmoil in the UK, the relentless weakening of the yen, deteriorating liquidity on credit and even rates markets, defaults in emerging markets, or indeed something we’re completely missing — the list has become longer in recent months.”

Where do you see the risk of an accident in financial markets? Email me: [email protected]

Goldman Sachs’s Marc Nachmann emerges as big winner in reshuffle

When Goldman Sachs chief executive David Solomon this month unveiled his second major revamp of the bank since taking over four years ago, the biggest winner to emerge from the resulting corporate reshuffle was Marc Nachmann.

Having developed a reputation inside Goldman as one of Solomon’s most trusted fixers, Nachmann was rewarded with a job as head of a newly merged $2.4tn asset and wealth management division. Combining the two businesses in to one, scooping up more assets and squeezing out extra profits is a critical plank of Solomon’s plan to finally close Goldman’s stock market valuation gap with rivals such as Morgan Stanley and JPMorgan Chase.

Nachmann, 52, comes to the job with an unusual pedigree for a high-ranking Goldman executive. He is not particularly well known for his trading or investing expertise or his contacts book, but rather as a demanding behind-the-scenes operations manager who takes a tough approach to costs.

“He’s less a client guy and more a structural fixer,” said one Goldman banker. “It’ll hold him in good stead.” 

Goldman president John Waldron told the FT: “If we are to grow from $2tn-plus to $3tn to $4tn, it will require the platform to be more durable and more automated. We need someone who could really knit this together operationally.” 

Whether Nachmann succeeds is central to Solomon’s push to make Goldman less reliant on its two biggest engines, investment banking and trading. Although these businesses are lucrative, they are also volatile, and investors tend to bestow higher valuations on banks that generate more stable fee income by managing money for clients. Read the full story here

Chart of the week

The fund of funds industry is pretty much the only corner of the investment industry that has flatlined or shrunk over the past decade. This may be because for all of its promises of manager selection and diversification, in many cases it was simply another fat layer of fees over a compensation scheme masquerading as an asset class, which has ended up producing dismal results, writes FT Alphaville editor Robin Wigglesworth. He reckons that multi-strategy hedge funds — the likes of Izzy Englander’s Millennium Management, Ken Griffin’s Citadel and Steve Cohen’s Point72 — should essentially be seen as a souped-up, better version of the old-school fund of funds. They will eventually supplant them completely — and could ultimately dominate the hedge fund industry as a whole.

10 unmissable stories this week

China’s president Xi Jinping’s move to tighten his grip on power, combined with the late release of disappointing economic data, sparked record selling of Chinese stocks by foreign investors. Market participants say this impact is unlikely to fade quickly. Chinese stocks popular with big fund managers like Chase Coleman’s Tiger Global, Edinburgh-based Baillie Gifford and a group tied to Berkshire Hathaway vice-chair Charlie Munger have been hammered.

Credit Suisse has agreed to sell part of its securitised products unit to US investment groups Pimco and Apollo and outlined plans to spin off its capital markets and advisory business over the next three years under a rejuvenated CS First Boston brand.

Nearly $1tn was wiped off the value of the five biggest US tech companies — Amazon, Alphabet, Apple, Meta and Microsoft — last week before a partial rebound. Headlong growth stalled because of the slowing global economy and mounting cost pressures, ending a surge in growth during the coronavirus pandemic.

Financial market regulators in Europe’s main fund hubs have stepped up surveillance of derivative-linked funds used by UK pension schemes in an effort to prevent a repeat of the turmoil that roiled the gilt market last month.

US-based investment manager Nuveen is buying Arcmont Asset Management, one of the largest private lenders in Europe, for over $1bn as traditional asset managers acquire fast-growing private capital firms in order to grow their presence in unlisted markets.

Australia’s IFM Investors, one of the world’s largest pension fund managers, has said the UK needs stability and a “clear plan” for new infrastructure projects if it wants to attract more foreign investment following this month’s political and economic turmoil.

Investment managers are up in arms about the US Securities and Exchange Commission’s plans to revamp the rules around fund names, saying they will discourage stock picking and other active management and threaten to undermine financial stability.

After a spectacular crash earlier this year, the crypto industry’s most popular tokens have gone to sleep, suggesting amateur investors have fallen out of love with the once thrilling asset class and big funds have decided to keep their distance.

The UK’s Financial Conduct Authority has moved to clamp down on “greenwashing” with proposed restrictions on investment managers using terms such as “green” and “ESG” in fund marketing and a new set of consumer-friendly labels for sustainable investments.

A four-decade bull run in developed-market government bonds has come to an end — leaving traders to deal with the impact of huge planned bond sales by central banks into volatile markets.

And finally

“Always go a little further into the water than you feel you’re capable of being in. Go a little bit out of your depth. And when you don’t feel that your feet are quite touching the bottom, you’re just about in the right place to do something exciting.”

Moonage Daydream, director Brett Morgen’s documentary account of the singer and polymath David Bowie, is a “grand, kaleidoscopic scramble of freaky, un-narrated fragments,” writes our film critic Danny Leigh. I highly recommend it.

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