The Lex Newsletter: workplaces in Hell

Dear reader,

I have visited many investment banks. These blur into one after a while: the echoing atria, the sleek meeting rooms and the tech-heavy trading floors.

Only one location stands out because it lacked the carefully groomed facade of rivals. Back in the late ’80s, it brought together posh Europeans and street-fighting Americans in cramped, scruffy premises in the City of London.

These workers showed every sign of hating rival banks, their clients and hapless intruders such as me. The only people they appeared to hate more were each other.

One wondered what could possibly be keeping them all together in this strip-lit hellhole, making vast amounts of money syndicating eurobonds.

I think of this place when I read about burgeoning multi-manager hedge funds. The comparison may be unfair, as I have had no fly-on-the-wall view of multi-managers to provide confirmation. But the spiralling salaries paid to staff able to extract slivers of alpha from markets via leverage suggest these are fiercely competitive workplaces.

Defying satire, traditional hedge fund tycoon Sir Paul Marshall of Marshall Wace this week lambasted the steep signing-on salaries that multi-managers offer to lure recruits.

Multi-managers have returned 70 basis points more than traditional hedgies on average annually since 2012. But Lex reckons the law of diminishing returns must be cutting in as pay rises and trades become crowded.

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An elite background might help you get a job at a multi-manager. You would not stay there very long unless you boosted the P&L. Social class provides greater permanent advantage in professions where the link between personal performance and profitability is fuzzier.

Journalism, for example.

In the UK, children from poor families do worse in the workplace than women and ethnic minorities, according to a recent study by campaign group Progress Together.

I always struggle to explain the British class system to foreigners. “Semi-feudal” is one useful term. The description that fictional priest Father Ted applied to Catholicism also holds water: “Vague, and no one really knows what it’s about.”

The difficulty of negotiating social minefields is one reason many employees are boycotting office attendance or only showing up occasionally.

For this reason, Lex is sceptical about the bullish forecasts of the City of London Corporation. It believes office space in the Square Mile will increase by about 1mn square feet by 2030. About 11 new skyscrapers are planned.

Sauce for the goose

Home working is bad for WeWork as well as for conventional landlords. The US-based flexible office space company filed for Chapter 11 bankruptcy this week. This was embarrassing for backer SoftBank, the omnipresent Japanese tech investment company.

Lex thinks WeWork has always resembled a bank — “saddled with an existentially challenging asset-liability mismatch”. It accepts long lease obligations on properties it hopes to fill via short lets.

Smart bankers know how to manage such mismatches. WeWork founder Adam Neumann did not.

SoftBank boss Masayoshi Son was once fond of describing his own business as a goose that lays golden eggs. WeWork came out addled. Arm, the UK-based chip designer, resembles the apocryphal breakfast egg a polite curate guest described as “good in parts”.

Arm did well in energy-efficient chips for smartphones. It then waited vainly for a surge in demand for “internet of things” chips. These connect the smart toasters, fridges and dishwashers it turned out no one wanted.

Now Arm is pinning its hopes on artificial intelligence. US chipmaker Nvidia has that market sewn up for the moment. So far, there is little sign of a growth spurt for Arm.

SoftBank floated Arm on Nasdaq in September, where it is valued at $56bn. That is well ahead of Lex’s bearish forecasts earlier in the year, partly thanks to AI hype.

SoftBank itself missed analysts’ expectations that it would produce positive group net income in the latest quarter. It made a net loss of ¥931bn ($6.2bn). If it cannot turn a profit when it gets a boost as big as the Arm float, when can it?

SoftBank has sold down its stake in Chinese ecommerce group Alibaba, its one truly brilliant investment. Son was a no-show at the presentation and accounts were more than usually convoluted. Bad moon rising, Lex fears.

Omens are improving for Alibaba, however. Beijing spent several years bashing the company and its peers after founder Jack Ma griped about officialdom. The comments were so mild no one would have reported them prominently if a western chief executive had made them about their own government.

Sensitivity to criticism increases in proportion to power, it seems.

But China is discovering that cutting off your nose to spite your face is a bad look, particularly when you are locked in a tech sanctions battle with the US. It is, therefore, approving the rollout of products powered by generative AI created by Ant, Alibaba’s fintech affiliate.

If China wants innovation to thrive, it needs to stop yanking the chain of businesses and everyone else. One hopes that 2023 could mark a turning point for Alibaba and Ant.

Oldies but goodies

As a mature brand, Lex is always happy to welcome a newbie to the club. This week, we ushered in Ryanair, brewed it a nice cup of tea and invited it to make itself at home alongside fellow old-timers such as the Royal Mint (est. 886AD) and Aberdeen’s Shore Porters (founded 525 years ago).

The low-cost European airline is a mere stripling at just 39 years of age. But it is embracing financial responsibility with plans for regular dividends. It has committed to paying 25 per cent of the previous year’s profit after tax, a sum worth just under €500mn for 2025.

Ryanair may be settling down a bit. But Lex thinks it will remain a profitably disruptive presence in the travel industry.

We also remain bullish on Nintendo, which began trading in 1889. The tech prophets who talked up smart fridges got it wrong when they wrote off consoles. This mature technology remains popular with gamers. The Switch console is more than six years old but still sells well.

Nintendo’s intellectual property has plenty of shelf life. Following the success of the Super Mario movie, the company is planning a live-action film set in its Zelda fantasy universe.

We are warier of Marks and Spencer, which started as a stall on Leeds market in 1884. This has had more turnaround attempts than its customers have had succulent, jus-drizzled M&S hot dinners.

The retailer beat first-half forecasts and restored the dividend. But we still believe that M&S’s high-margin clothes division is in slow decline. The food division will simmer on, but profitability will be lower.

Things I have enjoyed this week

Talking of tough workplaces, few are quite as gruelling as Ray Dalio’s hedge fund business Bridgewater. The policy of “radical transparency” there seems to reduce everyone to tears except Dalio himself. FT Alphaville’s Robin Wigglesworth gave a good flavour of this in his review of The Fund by Rob Copeland. I cannot wait to read the book.

I also enjoyed Negro with a Hat, Colin Grant’s masterly biography of the black civil rights leader Marcus Garvey. He was a hopeless administrator. But his precarious conviction for securities fraud smacked of the US establishment squashing a critic.

Enjoy your weekend, whatever is on your reading list.

Top decile regards,

Jonathan Guthrie
Head of Lex