Pacemaker

‘Always have a place in our hearts’

One thing to start: It was great to see so many of you at our Future of Asset Management North America event in New York last week. If you missed it, catch up on the video on demand here.

And one scoop: UK chancellor Rachel Reeves is considering dropping an inheritance tax element of her non-dom crackdown after warnings it would cause an exodus of wealthy people and bring in little revenue.

In today’s newsletter:

• How trading firms stole a march on big banks

• Vanguard plans fresh push into active fixed-income market

• Global egg price surges as avian flu hits supplies

How trading firms stole a march on big banks

After decades of investment banking dominance, a new breed of upstart firms now rule the roost in global markets. 

This must-read analysis by my colleagues Joshua Franklin and Costas Mourselas is the first in an FT series on the trading giants that have risen to challenge investment banks. 

It explores how non-bank trading firms such as Ken Griffin’s Citadel Securities, Jane Street and Susquehanna have seized market share from banks in a number of key markets, including equities, bonds, commodities and derivatives. They have garnered an edge through enormous investments in technology. 

This new breed of trading titans were generally set up around the turn of the millennium, just as the raucous trading pits in Chicago, New York and London were losing influence and electronic trading was in the ascendant. Regulations after the 2008 financial crisis further hampered the big banks. 

These newer trading firms look very different to the banks they have usurped. They hire legions of PhDs and engineers to develop sophisticated trading algorithms, which buy and sell securities in microseconds.

“The banks just didn’t appreciate how electronic markets and the efficiency of these firms would ultimately make them the dominant force in trading,” said Rob Creamer, president of Chicago-based firm Geneva Trading.

“Banks made big money quoting trades on the phone and didn’t care to prioritise a low-margin business like electronic market making — it was hardly going to pay for the new headquarters in Manhattan.”

Banks still retain an advantage, controlling the calendar for new issues of securities via stock offerings and debt deals. But non-bank firms are increasingly coming for market share in traditional areas of strength for banks, including foreign exchange and the debt markets, which have been more opaque and slower to electronify. 

Critics wonder if the increasing market share of these more lightly regulated firms may spell trouble for markets in future.

“Regulators need to look at the top 15 players in trading volume, and should be agnostic if it’s a bank or a hedge fund or proprietary trading group, because there is inherent risk when somebody has too big of a market share,” said the head of a proprietary trading firm. “If they go down, they could take liquidity and cause stress in the market.” 

Read the full story here

Vanguard CEO unveils fixed-income push

Vanguard famously revolutionised the equity market with its low-cost products that track an index, driving down prices and becoming the world’s second-largest money manager in the process. 

Now it is coming for the bond market. At the FT’s Future of Asset Management event in New York last week, Vanguard’s new chief executive Salim Ramji announced the $9.7tn asset manager was planning a push into fixed income investing. 

Fixed income “is going to be more important as people retire . . . it’s going to be more important in, at least our view is, the long term rate environment”, Ramji told my colleague Brooke Masters in a keynote interview.

“If you think of the fixed income market today . . . it’s far more antiquated, it’s far less transparent, far more expensive.” Around 10 per cent of the firm’s assets are already in active fixed income. “I think there’s an opportunity that Vanguard has to change that dynamic,” he added.

Ramji criticised the fixed-income market for high fees and lack of transparency, which he said benefited firms more than their clients. “The opportunity set is vast when you look at the fixed-income market. It’s twice the size of the equity market and the inefficiencies in fixed income are extraordinary.”

Ramji, the first outsider to lead Vanguard since its founding in 1975, also addressed the technical and service failures that have plagued the manager in recent years as the industry has rapidly modernised, and acknowledged that the firm had “let down” its customers. “We have some work to do,” said the former top executive at BlackRock, Vanguard’s main competitor. 

He also walked a fine line around the firm’s decision to support none of the environmental or social shareholder proposals that it considered in the 2024 proxy season.

Ramji said: “We don’t dictate to companies what their strategy should be, we don’t push a particular agenda.”

Chart of the week

Prices for eggs have soared as devastating bird flu outbreaks around the world and shifting consumer tastes put pressure on supplies, write Josephine Cumbo and Susannah Savage in London.

Global average prices are 60 per cent higher than in 2019, according to analysts at Rabobank, a rapid appreciation has led to political point-scoring by vice-presidential nominee JD Vance on the US election campaign trail. Egg shortages have also created temporary curbs to McDonald’s breakfast service in Australia.

A key factor in surging prices has been the devastating outbreaks of avian flu in North America and Europe, which have led to the culling of tens of millions of laying birds.

Roughly 33mn commercial laying hens and pullets were culled in the US between November 2023 and July this year, hard on the heels of another bird flu outbreak in 2022 that culled 40mn layers, Rabobank found.

“The lingering effects” of bird flu have been compounded by rising demand, said Karyn Rispoli, managing editor of eggs at Expana, a commodity trading data provider.

She said consumers were also switching to eggs as a more affordable source of protein than meat. Concerns about the carbon footprint of meat consumption was also driving demand for eggs, added Rabobank.

These factors had led to Americans paying more than three times as much for eggs today than five years ago, Rabobank said. In comparison, South African egg prices had only doubled in the same period while Russia, Japan, Brazil and Europe and India had experienced price rises of between 50 and 90 per cent, it added.

Five unmissable stories this week

David Hunt, the chief executive of $1.3tn asset manager PGIM said he was concerned about “layered leverage” that private equity firms are using to return cash to investors and urged regulators to insist on more transparency about complex forms of debt. 

Legal & General has appointed Eric Adler from US insurer Prudential Financial as chief executive for its newly created asset management division, picking a US executive with expertise in private assets in a signal of how it plans to grow the UK’s largest asset manager. 

The barbell tolls for fixed income investing, writes Huw van Steenis, vice-chair at Oliver Wyman. A trend long associated with equity investing is now playing out in the bond markets.

Nuveen, the wholly owned subsidiary of US teachers pension fund TIAA with $1.2tn in assets under management, is set to open its first Middle East office in Abu Dhabi, becoming the latest asset manager to bet on the fledgling financial hub.

Steven Fine, the chief executive of investment bank Peel Hunt, has warned of a looming “cliff edge” for UK small cap stocks if the government scraps inheritance tax relief on Aim-listed companies.

And finally

Last weekend I attended the Wigtown Book Festival in south-west Scotland, now in its 26th year. I heard William Dalrymple talk about why India was Ancient Asia’s intellectual and technological superpower; Buddhist monk Gelong Thubten on finding strength in adversity; Pip Thornton speak about how Google sells your words; and a delightful performance by poet and comedian Pam Ayres, which had us all in stitches and rapturous applause. Highlights at Wigtown this week include a series of culinary events hosted by guest curator Coinneach MacLeod, aka the Hebridean Baker. There will also be appearances from National Chef of Scotland Gary MacLean; MasterChef finalist Sarah Rankin; and Sanjana Modha Sanjana, creator of amazing modern Indian cookery. Until October 6. 

Meanwhile the Josephine Hart Poetry Hour returns to the British Library in London on Thursday. The likes of Brian Cox, Nicole Ansari-Cox, Tim McInnerny and Joely Richardson will read aloud the poetry of the natural world. Tickets available here 

Despite a drop in assets under advice in its UK business, Kingswood’s UK and Ireland division reported a £200m uptick in the first half of 2024 thanks to the completion of its BasePlan acquisition and “positive market movements”.

In its unaudited interim financial results for the half year ended 30 June 2024, the group said it had experienced AUA outflows in its UK business following the departure of some wealth advisers.

A “swift, diligent recruitment process” has replenished its wealth advisory team, it said.

This includes the addition of a fourth regional manager to support growth across the London and Southeast region.

Kingswood completed the acquisition of Dublin-based advice firm BasePlan in February this year. The acquisition added €130m (£108m) AUA to the group.

UK and Ireland AUA at the period end stood at £6bn and assets under management were £3.7bn. Meanwhile, US AUA was £3.2bn.

Group revenue from continuing operations in the period was £40.6m, an increase of 14% on the restated prior-year figure of £35.6m.

UK&I revenue increased by £300,000 to £23.4m, or 1%, compared to the restated period last year, of which 81% is recurring in nature.

US revenue increased by £4.8m to £17.2m, a 38% rise compared to the restated period last year, driven by growth in authorised representatives.

Kingswood said further progress had been made across the UK&I in “driving organic growth”.

This included onboarding six new IFA firms to IBOSS, in line with 2023 levels over the comparable period.

The group also flagged three new appointments made to the executive team in H1.

In the period, it brought in Bryan Parkinson as managing director of wealth planning, Vinoy Nursiah as chief financial officer and Peter Coleman as chief executive.

“The combination of the new joiners with the incumbents of Rachel Bailey, chief people officer, Paul Hammick, chief risk officer and Lucy Whitehead, chief commercial officer, has already demonstrated its effectiveness and capability,” the report said.

The executive team has delivered in-person presentations of the next strategic phase at all UK locations and overseen the delivery of a major project to enhance regulatory performance and efficiency.

It has also run the design and implementation of a new service operating model to improve client and adviser experience and created five fundamental focus areas to align efforts across the group.

Additionally a major finance transformation project commenced in July and is on track to complete as scheduled in Q4.

Coleman said he is “particularly pleased” with the firm’s strong revenue growth and in particular the growth in recurring revenues.

This, he said, demonstrates that the group’s acquisitions are “beginning to mature”.

“Quite rightly our focus is on providing a first-class experience to all of our clients, with the use of our excellent advice community, technology and range of award investment propositions,” he added.

“In particular, I am pleased with the ongoing development of our IBOSS range of model portfolios and our in-house DFM, both of which continue to flourish within the group.

“Our operating profit continues to grow, enabling our continued investment in people, propositions and processes all focused on delivering a market-leading proposition for our clients.

“In UK&I we continue to be acquisitive with the addition of BasePlan, and we will continue to identify opportunities that enhance our growing business in this market.

“In the US, we continue to expand with the momentum of adviser recruitment and banking growing exponentially.”

We write about watches on our finance blog for several reasons. The first is that watches measure consumer confidence. Hardly anyone needs a watch, and the few that do would be best with a Casio F91w, so there’s a lot to read into regional changes in demand for more tricksy and showy stuff.

The second is that Swatch and Richemont are listed, as is Watches of Switzerland, so it’s markets-adjacent content. Third, the privately owned watchmakers expect us to reproduce their hoopla while respecting their secrecy around business practices and frankly, we’d rather not. Fourth, our readers click a lot on stories about watches.

That’s why, when a new horological microbrand appears, we take notice. For example:

The Victory Tourbillon is the limited edition flagship of a range of watches sold by Trump, a multi-faceted leisure and lifestyle brand. The ticket price is $100,000, which made FTAV wonder about the mark-ups.

Tourbillon means there’s a rotating cage around a tick-tock bit. The idea is to make the watch mechanism more accurate by minimising the effects of gravity and, though it probably does nothing, people appreciate the extra engineering required.

Tourbillons have become a lot less special in recent years though, with Chinese factories churning out decent reproductions and simulacra of Swiss workmanship, and the Swatch-owned ETA movement maker able to supply the most fiddly bits in kit form. Only a few makers design their own movements from scratch and, at the super high-end, the arms race has moved to making everything as thin as possible.

Or, to put it as an old meme:

The Trump Victory Tourbillon isn’t particularly thin, but it does say “Swiss Made” on the dial, so it can’t be using a Chinese-made movement. (There are a lot of rules governing adverts of Swiss origin, including that a watch movement has to be assembled in Switzerland.) ETA only really makes movements for Swatch brands these days, which narrows things down further.

The website says:

The Trump Victory Tourbillon comes equipped with a Swiss-made TX07 Tourbillon. Each watch is composed of over 200 individual parts, all working in perfect harmony for outstanding performance.

. . . which means nothing. However, the page also includes a video of a movement in close-up with a distinctive symmetrical plate over the balance wheel:

That’s one tell-tale sign of a BCP T02. Designed by Olivier Mory, the T02 is a movement sold to small-batch watchmakers including Yema, Aventi and Louis Erard. Time & Tide says Mory discovered “the cheat code” for making Swiss tourbillons affordable.

Mory confirmed by email that he was supplying the Trump Victory Tourbillon movement to a third-party watch assembly company, adding:

We use the standard price list of our Tourbillon range which is around 4700 USD / movement for batches in the 100-200 size. We are usually very competitive in this batch size for a movement which is 100% Swiss Made. 

(Mory also sent us a schematic of the movement that lists suppliers for every cog, spring and pin. The information doesn’t add anything to this post, but in an industry addicted to secrecy and bullshit, such transparency is like a breath of fresh air.)

So anyway, we’re off. Movement: $4,700.

Another Swiss watchmaker that avoids woo-woo is Code41, which is sort-of a horological BrewDog. Members of its online community vote on designs and get detailed spec sheets for each build, including for the tourbillon it developed in 2022/23 in partnership with Olivier Mory’s BCP Tourbillon.

Code41 has a fair bit of detail on its website that breaks down the wholesale cost of watch parts. Quality and intricacy move the dial a lot but for a basic build, watch faces start at about $10 and cases can be as cheap as $25. Better quality might mean $50 for the face and $80 for the body, Code41 says.

Watch retail prices are typically six to eight times the assembly price, but Code41 only sells direct so says it applies a mark-up of 3.5 times cost. Its tourbillons sell for about £12,500 ($16,700), implying a wholesale unit price of about $4,800. It’s therefore reasonable to assume that, even for something aiming at the high end, the cost of bits other than the movement probably doesn’t add up to more than $200.

This won’t be true of the Trump Victory Tourbillon, which according to the website features “approximately 200 grammes” of 18 carat gold “across the band, case and buckle,” and is “decorated with 122 VS1 diamonds”. All we need to cost up is the acrylic backplate, the face and some fixings. We’ve gone cautious and added $200 for these items but judging by the photos that’s highly likely to be an overestimation.

Nevertheless, two-hundred grammes of gold is a lot of gold. It’s approximately the weight of a hamster, which puts the Trump Victory Tourbillon on the same weight category as big units like the Rolex Deepsea, which in gold has a US list price of $52,100.

Gold spot is $2648 an ounce at pixel time so 200 grammes of 18 carat is approximately $19,000 of gold.

Then there are the diamonds. VS1 means a diamond that’s slightly imperfect. It’s five notches below flawless, so if diamonds were rated like bonds it’d be approximately a BBB+.

But there’s not much in the way of information at this end of the diamond market. Certifying the quality of any stone that weighs less than a quarter of a carat (meaning about 4mm in diameter) is a waste of money. The stones encrusting the Trump Victory look to be 2mm at most, so even with the VS1 clarity rating, any estimate of value has to be a guess.

A single pinhead-sized diamond might retail at $15 (or a fraction of that when lab grown). Again, we’ll go cautious. It’s not unreasonable to think that 122 pinhead VS1-clarity stones would cost approximately $2000, though it might be much less.

Here are the scores so far.

Movement: $4,800
Gold: $19,000
Diamonds: $2,000
Face, fittings, etc: $200

Square the cost off to $25,000 to take into account of purchase timings, assembly, third-party bulk discounts etc and we’re probably in the right sort of ballpark. As Dolly Parton said, it takes a lot of money to look this cheap.

The big thing in Swiss watchmaking at the moment is hyper-premiumisation. The bottom fell out of the watch resale market last year, causing some pain among speculators and meaning waiting lists are much less of a thing, but the big brands have been able to counter lower volumes with higher average selling prices.

Swiss watch exports data for August showed precious metal sales by value up 21 per cent and steel watch sales down 10 per cent. Watches priced at more than SFr3,000 wholesale ($3500) were the only category growing, thanks probably to gold and platinum watches that cost on average 25 times more than their steel equivalents.

That still only means about 30,000 precious-metal Swiss watches sold per month though, with most of those sales happening in Asia or to Asian consumers. Morgan Stanley estimates that bling only makes up 2.6 per cent of the market by volume.

The top tier of Swiss watches (meaning Rolex, followed not particularly closely by Vacheron Constantin, Patek Philippe, Audemars Piguet and Richard Mille) accounts for three-quarters of the Switch exports by value. That’s the market the Trump Victory Tourbillon is competing in.

And the profit pool is even more unevenly distributed than those figures suggest. Privately owned Rolex, Patek and AP are raking it in, with estimated operating margins of about 40 per cent. But publicly owned watchmakers report operating margins of about 20 per cent for their watch divisions, which in part reflects portfolios that include halo brands. Richemont-owned Lange & Söhne probably can’t turn a profit, for example, in spite of routinely costing $50k+ per unit.

Morgan Stanley estimates that below the big sellers like Omega (Swatch) and Cartier (Richemont), “a large number of other brands in the listed groups’ portfolios were not covering their cost of capital.”

But of course, the Trump Victory Tourbillon is a built-to-order watch that’s being sold direct to consumers from one website that has a marketing budget of zero, because articles like this are all the publicity it needs.

There are very few operational costs to add to the $25,000 materials cost, so the operating margin is probably not much worse the ~75 per cent gross margin. If Trump sells all 147 Tourbillons that’s an estimated $11mm operating profit. That’s decent.

Nor are 75 per cent margins exceptional. Morgan Stanley estimates that Moonswatch, Swatch’s co-branded fashion disposable range that has sold more than 3mn units in the past two years, has a gross margin of about 80 per cent.

The difference is that Trump’s watch is in a market segment that’s dominated by a big five plus several hundred loss-leaders and vanity projects. These manufacturers have big fixed costs, as they are mostly vertically integrated, and run very high inventory levels. They are increasingly exposed to a very small segment of an Asia-reliant market that’s highly sensitive to FX, policy stimulus and capital controls. This makes them more fragile to any sustained downturn, in which operational degearing will be brutal.

Does that make Trump’s asset-light, demographically targeted approach to hyper-premiumisation a potential way forward for the Swiss watch industry and the wider luxury goods sector? No. Of course not.

Further reading:
— Is that the sound of a luxe watch bubble popping? (FTAV)
— What the Watches of Switzerland warning says about Rolex demand (FTAV)
— Watches have stopped (FTAV)