Asset Management: The Emerging Titans of Wall Street

To kick off: It was wonderful to see so many attendees at our Future of Asset Management North America event in New York last week. If you missed it, you can catch the video on demand here.

And here’s an exclusive update: UK chancellor Rachel Reeves is considering eliminating an aspect of the inheritance tax in her non-dom crackdown following warnings about a potential exodus of wealthy individuals with minimal revenue return.

This week’s newsletter highlights:

• How trading firms have gained ground on major banks

• Vanguard’s new initiative in the active fixed-income sector

• Global egg prices soar due to avian flu impacting supplies

How trading firms have gained ground on major banks

After years of investment banking leading the way, a new wave of emerging firms now dominates global markets.

This essential analysis by Joshua Franklin and Costas Mourselas is the first in an FT series examining the trading giants challenging traditional investment banks.

It investigates how non-bank trading firms like Ken Griffin’s Citadel Securities, Jane Street, and Susquehanna have acquired market share from banks across crucial sectors such as equities, bonds, commodities, and derivatives by heavily investing in technology.

These new trading powerhouses emerged around the turn of the millennium, coinciding with the decline of the bustling trading pits in Chicago, New York, and London, coupled with the rise of electronic trading. Additionally, regulations imposed after the 2008 financial crisis further restricted major banks.

The newer trading entities have a vastly different structure from the banks they have eclipsed. They employ numerous PhDs and engineers to create advanced trading algorithms capable of executing trades in microseconds.

“The banks underestimated the impact of electronic markets and the efficiency of these firms, which have become the dominant players in trading,” stated Rob Creamer, president of Chicago’s Geneva Trading.

“Traditional banks profited from quoting trades over the phone, prioritizing higher-margin businesses over electronic market making, which barely supported their Manhattan headquarters.”

Although banks maintain an upper hand by controlling the scheduling of new securities via stock offerings and debt arrangements, non-bank firms are increasingly occupying market share in areas traditionally strong for banks, including foreign exchange and debt markets, which have been slower to transition to electronic formats.

Concerns arise about whether the increasing dominance of these lightly regulated entities could pose future risks to markets.

“Regulators should scrutinize the top 15 players in trading volumes, regardless of whether they are banks, hedge funds, or proprietary trading groups, as there is potential danger when a single firm holds excessive market share,” remarked the head of a proprietary trading firm. “If they falter, they could affect liquidity and induce market stress.”

Read the complete article here

Vanguard CEO reveals fixed-income ambitions

Vanguard is known for transforming the equity market with its low-cost index tracking products, drastically reducing prices and becoming the world’s second-largest asset manager.

Now it is set to enter the bond market. At the FT’s Future of Asset Management event in New York last week, Vanguard’s new CEO Salim Ramji announced that the $9.7tn asset manager plans to focus on fixed income investing.

Ramji noted that fixed income would become increasingly vital as people reach retirement, stating, “In our view, the long-term rate environment will make this sector more critical.”

“The current fixed income market is outdated, opaque, and overpriced,” he added. “About 10% of our total assets are already in active fixed income, indicating we see a chance to shift that landscape.”

He also criticized the fixed-income market for its exorbitant fees and lack of transparency, which he believes favors firms over their clients. “The fixed-income market is immense—twice the size of the equity market—with extraordinary inefficiencies,” he explained.

As the first external CEO of Vanguard since its inception in 1975, Ramji also acknowledged the technological and service challenges the firm has encountered amidst the rapid modernization of the industry, admitting they have “failed” their clients. “There is improvement needed,” he added, having previously served in a senior role at BlackRock, Vanguard’s main competitor.

Ramji carefully navigated discussions surrounding the firm’s strategy regarding environmental and social shareholder proposals during the 2024 proxy season, stating: “We don’t dictate companies’ strategies or promote a specific agenda.”

Chart of the week

Egg prices have surged due to severe bird flu outbreaks and changing consumer preferences impacting supply, according to Josephine Cumbo and Susannah Savage in London.

According to analysts at Rabobank, global average prices are now 60% higher compared to 2019, leading to political debates, particularly from vice-presidential nominee JD Vance on the US campaign trail. These shortages have also caused temporary limitations to McDonald’s breakfast offerings in Australia.

The alarming rise in prices is primarily attributed to significant avian flu outbreaks in North America and Europe, which resulted in the culling of tens of millions of laying hens.

Between November 2023 and July this year, roughly 33 million commercial laying hens and pullets were culled in the US, following an earlier outbreak in 2022 that saw the culling of 40 million layers, as identified by Rabobank.

“The ongoing impacts of bird flu combined with increased demand have led to this situation,” noted Karyn Rispoli, managing editor of eggs at Expana, a commodity trading data provider.

She remarked that consumers are increasingly opting for eggs as a cost-effective source of protein compared to meat, with rising concerns regarding the carbon footprint associated with meat consumption further boosting egg demand, according to Rabobank.

These factors have resulted in Americans now paying over three times the cost of eggs compared to five years ago, according to Rabobank. In contrast, South Africa experienced only a doubling of prices during the same timeframe, while Russia, Japan, Brazil, and parts of Europe saw price increases ranging from 50% to 90%.

Five unmissable stories this week

David Hunt, CEO of $1.3 trillion asset manager PGIM, expressed concerns about the “layered leverage” that private equity firms are using to return cash to investors, urging regulators to enforce greater transparency regarding complex debt structures.

Legal & General appointed Eric Adler from US insurer Prudential Financial as the chief executive of its newly established asset management division, marking a clear intent to enhance growth for the UK’s largest asset manager.

The barbell strategy in fixed income investing is explored by Huw van Steenis, vice-chair at Oliver Wyman, highlighting an investment strategy traditionally associated with equities now making its way into bond markets.

Nuveen, a subsidiary of US teachers’ pension fund TIAA with $1.2 trillion in assets, will establish its first office in the Middle East in Abu Dhabi, joining the trend of asset managers investing in this emerging financial hub.

Steven Fine, CEO of investment bank Peel Hunt, cautioned about a looming “cliff edge” for UK small-cap stocks if the government eliminates inheritance tax relief specifically for Aim-listed firms.

And finally

This past weekend, I attended the Wigtown Book Festival in southwest Scotland, now celebrating its 26th anniversary. I listened to William Dalrymple explain why India was the intellectual and technological superpower of Ancient Asia; Buddhist monk Gelong Thubten on finding resilience in adversity; Pip Thornton on the implications of Google selling your words; and enjoyed a delightful performance by poet and comedian Pam Ayres, which had the audience erupting in laughter. This week’s highlights include culinary events hosted by guest curator Coinneach MacLeod, also known as the Hebridean Baker. Appearances this week will feature National Chef of Scotland Gary MacLean; MasterChef finalist Sarah Rankin; and Sanjana Modha Sanjana, creator of exquisite modern Indian cuisine. The festival runs until October 6.

Additionally, the Josephine Hart Poetry Hour returns to the British Library in London this Thursday. Esteemed figures like Brian Cox, Nicole Ansari-Cox, Tim McInnerny, and Joely Richardson will recite poetry celebrating the beauty of the natural world. Tickets are available here.