Asset Management: Meeting Charlie Munger

One thing to start: Farewell Sir Win Bischoff, the former chief executive of Schroders and chair of Lloyds Banking Group and Citigroup, who has died aged 81 after a short illness. During a career lasting more than half a century, Bischoff led some of the City of London and Wall Street’s most prestigious financial institutions, helping guide them through the financial crisis. Our thoughts are with his family.

Munger warns of brewing storm in commercial property

They say never meet your heroes. On Friday my colleague Eric Platt and I ignored that advice and went for an audience with 99-year-old Charlie Munger in Los Angeles. And I am glad we did.

After arriving in LA the night before, Eric and I set off for Munger’s home in Greater Wilshire, a leafy neighbourhood. Architecture is one of his passions (among his more controversial designs is the windowless dorm at the University of California Santa Barbara) — and he designed the property himself some 60 years ago.

Munger, the longtime business partner of Warren Buffett and vice-chair of their sprawling conglomerate Berkshire Hathaway, was finishing up a meeting when we arrived. So we were taken around the side of the house and seated at a table outside on the veranda.

Through the glass sliding doors of the sitting room we could see the back of the arm chair where Munger was sitting. The travails of ailing California-based bank First Republic were playing out in real time on a television screen airing CNBC in the background.

He soon joined us. Dressed in a plaid shirt, he held court from his wheelchair.

In a wide-ranging discussion, we talked about topics including why Munger sees a brewing storm in the US commercial property market, why most asset managers are akin to “fortune tellers or astrologers who are dragging money out of their clients’ accounts”, and how he made his money from just four investments. (Berkshire, retailer Costco, his investment in a fund managed by Li Lu’s Himalaya Capital and Afton Properties, a real estate venture that owns apartment buildings in California and New Jersey).

For Buffett, Munger’s most important architectural feat is the design of today’s Berkshire, the industrials-to-insurance behemoth. He has credited Munger with encouraging him to move on from the “cigar-butt strategy” espoused by his mentor Benjamin Graham, which involved buying cheap stocks akin to a discarded cigar where just a single puff of value remained.

In 2015, Buffett wrote in Berkshire’s 50th annual letter: “The blueprint he [Munger] gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

Munger has devoted much of his adult life to trying to understand the cognitive biases that make us behave the way we do. His speech, The Psychology of Human Misjudgment, is a must-read for anyone who wants to understand why we are all predictably irrational. It was fitting then that when I asked Munger what he would like his own legacy to be, he was unequivocal:

“I would like my legacy to be a more relentless determination to develop and use what I call an uncommon sense.”

Read the full interview here

Asset management chiefs — changing of the guard

A new generation of asset management chief executives have called time on a “golden decade” for their industry, warning that it is becoming increasingly difficult to navigate the competing pressures of markets, regulators and politicians.

“The complexity of the demands on an asset manager are clearly increasing,” said Ali Dibadj, chief executive of Janus Henderson. “Clients are asking more of all of us, regulators are asking more from all of us, and our clients’ clients are asking more from us.”

Katie Koch, chief executive of Los Angeles-based TCW Group, said asset managers were “facing increasing complexity around evolving regulation, migration of investment opportunities from public to private markets, globalisation of the opportunity set and the more recent politically charged portfolio management environment”.

After a decade of zero rates and quantitative easing that pushed equity markets to record highs, investors are grappling with the challenge of a regime change towards both higher inflation and higher interest rates.

“Asset management used to be a rising tide that would lift all boats and that’s no longer true,” said Yie-Hsin Hung, chief executive of State Street Global Advisors.

The Financial Times identified at least 18 chief executives who have taken the reins of big asset managers since the start of 2022. This new guard is charged with stabilising their businesses following the worst year for the roughly $60tn industry since the financial crisis.

Big falls across markets have combined with investor outflows and spiralling costs to compound profitability pressure on active asset managers that have been fighting the march of passive investing.

Investors globally pulled $530bn from investment funds (excluding short-term money market funds) last year, the fund industry’s worst for new business since 2008, according to data provider Morningstar.

“The golden decade for asset management is over,” said Stefan Hoops, chief executive of DWS, adding that investors now faced a market environment where “not everything is going up and up and up”, but “costs are”.

Read the full list of new chief executives here

Chart of the week

In 2006 the London Stock Exchange scoffed at the overseas suitors casting eyes in its direction.

At the time, bourses in Europe were locked in a dizzying dance of potential marriages. Several of the biggest had already united to form Euronext. Germany was trying to position itself as a global leader. Supersized US rivals were circling, looking to snap up European markets and create transatlantic powerhouses for listings and trading.

Europe had a certain swagger, a confidence that its tie-ups could pose a serious challenge to Wall Street, which was still sitting in the shadow of the dotcom crash and a slew of corporate scandals. The LSE in particular, with its historic prestige, stood resolute, spiky and defensive. It had already deflected several potential partners, including Frankfurt’s Deutsche Börse, and would go on to rebuff more.

London had a “unique global position”, the LSE reasoned, built on the City’s deep investor base and top-notch financial services industry. That whole ecosystem, not merely scale, would be the foundation to keep attracting companies all over the world looking for a stock market home.

One financial crisis, a shock UK exit from the EU and a global pandemic later, and it is clear all sides got it wrong, write Katie Martin and Nikou Asgari in the second part of our series on the crisis in European equities.

US markets remain the undisputed home for listing and trading shares in the world’s most dynamic and fast-growing companies. London is failing to attract glitzy initial public offerings and is even losing some of its most reliable names. Other European markets are parochial and shallow and still bear a strong whiff of the old economy, dominated by banks and industrial companies.

Investors say the European dream of building an equity investment scene to rival the US remains distant and the path towards its creation is strewn with practical, political and cultural obstacles. Even if European exchanges tweak listing rules in an effort to draw in new companies, the US has a strong lead that could take decades to reel in as the world slowly adjusts to the end of the easy money era that pumped up America’s corporate champions. Read the full story here

Five unmissable stories this week

Hedge funds betting against US technology stocks have been battered by $18bn of losses after Big Tech’s robust earnings fuelled a sharp rebound in the sector.

Silicon Valley Bank: the multiple warnings that were missed. Ahead of the first official postmortem on its collapse, bankers, regulators and executives admit that it was a crisis hiding in plain sight.

Nicolai Tangen, chief executive of Norway’s $1.4tn oil fund, has called on governments to speed up the regulation of artificial intelligence as it revealed it would set guidelines for how the 9,000 companies it invests in should use AI “ethically”.

Billionaire investor Stanley Druckenmiller is betting against the US dollar as his only high-conviction trade in what he believes is the most uncertain environment for markets and the global economy in his 45-year career.

A group of investors including French telecoms billionaire Xavier Niel and Bruellan, a wealth management group, has bought a 7.5 per cent stake in Swiss asset manager GAM.

And finally

Once the jamboree of the Milken Conference is over this week, I plan on walking up to the Griffith Observatory on the slope of Mount Hollywood to take in the magnificent view over LA.

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