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Volume 28 / Issue 1 February / March 2019

Brazilians Go to Market Filthy Lucre Singapore Inc. Delists Towering Risk

XP changes the country’s The mounting cost of Does a shrinking A skyscraper rises
investing habits p 40 illicit money flows p 50 stock market matter? p 60 in Brexit Britain p 70

The
Wealth
Issue

Trillion-
Dollar
Man
Yngve Slyngstad,
CEO of Norway’s
sovereign wealth fund,
talks about investing
for his grandchildren’s
grandchildren
p 52
 From gender pay gaps
to international trade gaps.
What’s trending now.

24/7 news. Streaming LIVE on

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 Contents

B LO OMBERG MARK ETS

VOLUME 28
ISS UE 1
50
The Cost of Dirty Money
Fines have surged, but it’s unclear
whether global enforcement efforts
have made much of a dent in shady
transactions that continue to reach
as much as $2 trillion a year
By Alan Katz

60
Singapore’s Shrinking Exchange
For the last five years, delistings
have outnumbered listings on the island
nation’s stock market. But how
much does it really matter in an
otherwise vibrant economy?
By Livia Yap and Tom Redmond

66
Financing Hope
A fledgling political action committee,
the Black Economic Alliance, is adding
financial clout and corporate savvy
to the fight for better wages and wealth
for African Americans
By Jordyn Holman

70
Towering Ambition
One of Europe’s tallest office buildings,
backed by a consortium of international
investors, is rising in the City of
London amid all the uncertainty over
Brexit. How’s that going?
By Jack Sidders

52
Q&A With Yngve Slyngstad,
CEO of Norway’s Sovereign Wealth Fund
The philosopher-investor who oversees $1 trillion explains how he keeps up on China,
what worries him about the world’s tech giants, and why all investing is active
By Jonas Bergman and Sree Vidya Bhaktavatsalam

P H OTO G R A P H BY K A L P E S H L AT H I G R A / C OV E R A R T W O R K BY K E L S E Y H E N D E R S O N
Contents

8 24 74
Markets Almanac Jeff Tannenbaum’s Next Act The Billionaire Machine
A few key events for your calendar The founder of hedge fund Fir Tree is Collateralized loan obligations
in the coming months promoting sustainable capitalism are enriching business owners—
and Wall Street
11 28
Surveillance How to Win a Pension 78
What mistakes do wealthy families make? Mandate in Europe Backstage With
Hint: Show how responsible you are Christine Lagarde
15 The IMF chief reveals a few off-duty
Forward Guidance 30 habits and preferences

The Changing Faces of Wealth An App for ESG

As the ranks of the seriously rich swell, Test-drive this offering for insight into 79
some ask, “Who are these people?” companies’ performance Cheat Sheet
The most important functions
18 32 you should know about right now
<GO> Take a Page From the
Liquid Gold Rates Traders’ Playbooks 80
The Perth Mint’s public pour Use regression to gain new insights The FFM Quiz
has melted and cast the same bar more into markets Test your market smarts
than 65,000 times
34
20 XTX Is Bulking Up
Real-Time Rich Ranking The upstart FX market maker is looking
The Bloomberg Billionaires Index is the to expand in U.S. equities and Treasuries
first list to update each day using live data
38
22 ETNs Can Snare Even
Slice and Dice Buybacks the Sophisticated
Dig into the share repurchase trend Some still don’t appreciate differences
with these tools between ETFs and their wonky cousins

40
XP Is Changing the Way
Brazil Invests
And it’s making founder Guilherme
Benchimol a billionaire (in reais)

Corrections: In the “Year in Money” (December/January), Tencent should’ve been described
as the eighth-largest company a year ago, not the seventh-largest; Samsung, not GE,
was the company with the fifth-biggest market value decline, with a $69 billion drop; the
chart on monetary policy displayed the incorrect level and change in interest rates in In-
dia and Russia; Japan’s 2018 GDP estimate as of Q1 2018 should have been 549 trillion
yen, not 553 trillion yen; the starting date of the chart on South Africa’s business cycles
should’ve been January 1946 instead of 1945; the value of the IMF’s loan to Argentina
in USD as of Oct. 31 should’ve been $56.3 billion, not $57.4 billion. In the cover Q&A,
Margaret Collins should’ve been described as the U.S. investing team leader, not a U.S.
investing team leader. In “Raising the Stakes,” we incorrectly said former AllianceBernstein
CEO Peter Kraus spoke to the Trillions podcast in October; the interview took place in Sep-
tember. The story about Mario Draghi, “Whatever It Takes,” gave the wrong year for the end
of a court challenge to the ECB’s Outright Monetary Transactions: The case came to a close
in 2015, not 2014.
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Contributors

Guilherme Benchimol’s XP Money makes U.S. politics Editor

Investimentos is inescapable
in Brazil these days, says
Felipe Marques. “When
every interview you do, from
billionaire asset managers to
high-profile banking CEOs and
regulators, always seems
to end up on the same topic,
it’s usually a sign there’s
something to write about
there,” he says. So Marques
teamed up with fellow
São Paulo-based reporters
Cristiane Lucchesi and
Vinicius Andrade and New
York-based editor Steve
Dickson to report on the
fast-growing firm (page 40).
XP has done the seemingly
impossible, Marques says: It’s
persuaded Brazilians to leave
the safety—and low-yielding
savings products—offered by
their banks.
go ’round, and the start of the Christine Harper
2020 presidential election Art Director
Josef Reyes
campaign is a sharp reminder
Features Editor
of that. Given the history of Stryker McGuire
economic inequality that still <GO> Editor
afflicts their communities, Jon Asmundsson
black Americans have never Special Reports Editor
been fairly represented in Siobhan Wagner
politics. Now the Black Graphics Editor
Mark Glassman
Economic Alliance, a political
action committee founded Bloomberg Markets draws on the resources
of Bloomberg News, Bloomberg TV,
by executives who spent Bloomberg Businessweek, Bloomberg
a generation rising through Intelligence, Bloomberg Economics,
and Bloomberg LP.
the ranks of big corporations,
is raising funds for candidates Editor-in-Chief
dedicated to helping black John Micklethwait
Americans get work, wages, Deputy Editor-in-Chief
Reto Gregori
and wealth. For her article
Advisory Board
(page 66), Jordyn Holman Tracy Alloway, Chris Collins,
tracked the nascent group’s Caroline Gage, David Gillen,
efforts to elect politicians Madeleine Lim, Marty Schenker,
Joe Weisenthal
and to put in place policies
Creative Director
that stand the best chance Christopher Nosenzo
of achieving those goals. Photo Director
Donna Cohen
Managing Editor
Kristin Powers

Livia Yap covers the
Singapore stock market in
her role as the local equities
reporter. Over the past
two years she’s had
a close-up view of a market
in decline—a trend at odds
with the broader Singapore
story of phenomenal
economic success. To better
understand what’s happening,
Yap and markets editor
Tom Redmond, who recently
moved to Singapore from
Japan, interviewed more than
20 market participants—from
money managers and bankers
to individual investors. In
their article (page 60), they
analyze how Singapore’s
shrinking stock exchange
came to pass, what’s holding
it back, and whether, in the
end, this really means all that
much for the island nation.
For our cover Q&A (page 52),
Oslo bureau chief Jonas
Bergman and Sree Vidya
Bhaktavatsalam, London-
based managing editor for
finance and investing, landed
a rare interview with Yngve
Slyngstad, who’s steered
Norway’s $1 trillion sovereign
wealth fund for more than
a decade. Slyngstad, whose
diverse university degrees
range from philosophy and
politics to law and finance,
spoke about his keys to
understanding China, the
prospects for his fund’s
massive real estate portfolio,
and how he sees a way
into private equity. As for the
much-discussed shift to
passive investing, he says,
“From our point of view, there
is no way to do investment
that is not active.”
Copy Chief
Lourdes Valeriano
Copy Editors
David Purcell, Brennen Wysong
Production Manager
Susan Fingerhut
Map Manager
Ilse Walton
Production Associate
Loly Chan
Head of U.S. Financial Sales
Michael Craig /
646 324-4751
Head of Europe Sales
Damian Douglas / 44 20 3525 8974
Head of APAC Sales
Mike Jackson / 65 6499-2674
Production/Operations
Steven DiSalvo, Debra Foley,
Thomas Gambardella, Dan Leach,
Daniel W. Murphy, Carol Nelson,
Bernie Schraml
Global Chief Commercial Officer
Andrew Benett / 212 617-8225
Global Chief Revenue Officer
Keith A. Grossman / 212 617-3192
comments@bloombergmarkets.com
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A few key events for your calendar in the coming months.

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 Surveillance
By SIMONE FOXMAN

What mistakes
do wealthy
families make?

A FAMOUS LINE IN an F. Scott Fitzgerald short story declares that the very rich are different from
you and me. The obvious difference: While the 99.9 percent strive to make a living, the 0.1 percent
are working out what to do with the wealth they already have. Preserving and investing and
donating and spending wealth is more than a full-time job and requires multiple types of exper-
tise. Pitfalls abound, especially within families. Speak to a few family office experts, and you’ll
hear the phrase “When you’ve seen one family office, you’ve seen one family office.” In other
words, there’s no uniform method for handling great wealth. But press them on common errors,
and they have a lot to say about patterns that trip up even those with the best intentions. In
these pages a group of professionals from family offices, investment managers, estate planners,
art advisers, and other disciplines describe mistakes they’ve seen. Fitzgerald wrote that there
are “no types, no plurals.” But it turns out there are some lessons we can all learn.

11
 We see families
that, in an effort to
maintain cost control
or to decrease costs,
try to put an entity
together with a bare-
bones crew. In that
effort to contain costs,
they end up putting
in a lot of inefficiency.
In some cases they are
not setting themselves
up to be successful,
to achieve the goals
they set out as
a family.
We had one
client last year who
ultimately ended
up severing all their
relationships on the
Street and basically
replacing their entire
investment team from
scratch. We have
others that are a little
more thoughtful—
that have had
multiple generations,
that are constantly
monitoring or seeking
out guidance on best
practices, and that are
making more minor
adjustments. Then,
unfortunately, we
have some clients that
are very set in their
ways. They appreciate
getting guidance and
thoughts but continue
to operate with the
status quo, without
making any changes
even though it’s
detrimental to their
goals and objectives.
Stewart Kesmodel
H EA D O F GLO BAL
FA M I LY O F FI C E FO R TH E
A M ER ICAS
U BS GRO UP AG
12
The biggest mistake a wealthy I’ve seen a couple of family office
family can make is not having clients recently get blindsided
a family governance structure by a cybersecurity risk. More
in place [that provides] than one had a pretty significant
education, a clear mission, and exposure, even a potential
clear communication. If you ransom scenario, with a virus
don’t get that right, nothing you [accidentally] downloaded.
can do—taxes, wealth planning, It’s something that needs
you name it—is going to save to be incorporated more into
you. The percentage of families the family office setup structure.
that go from shirtsleeves to The entire purpose, generally,
shirtsleeves in three generations, of using a single family office
driven by failures in is the privacy, the anonymity,
communication and lack of the protection. So a successful
a mission, is incredible. cyberattack undermines the
family office structure at a
baseline level.
Avy Stein Elizabeth Glasgow
CO-FO UN DER PART NE R
CR ESSET CAP ITAL MA NAGE MEN T VENA BL E L LP
The biggest mistake that The most attractive investment
ultrahigh-net-worth individuals opportunities are often complex,
and families make is defining and realizing value requires
success based solely on how much patience, liquidity management,
their portfolio returns. and specialized advisers. The
Instead, wealthy families world’s most prominent families
should quantify success based on may have all of those in spades,
what they’re trying to accomplish but without a sophisticated
and do with their wealth. family office to orchestrate all
Success should be measured of those, they are likely to see
against how you achieve subpar results. The pitfall for
your goals and live your values, some families, therefore, is not
rather than just having devoting attention to building
a portfolio benchmarked to the family office, which enables it
an artificial number. to arrange the other components
to work together optimally.
Rich Henry Keith Bloomfield
S E NIO R VI CE PRESI DENT AND MANAGI N G DIRECTOR C EO
P NC FI NA NC IAL S ERV IC ES GROU P INC.’S H AWTH O RN FO R BES FAM I LY T RUST
BLOOMB ERG MA RKE TS
A common problem
among wealthy
families seeking to
be charitable is that
they come up with
the solution without
doing their homework
to understand the
true needs and the
best ways to meet
those needs.
Wealthy families
and individuals are
likely not in frequent
contact with the
people they are trying
to help and often
make assumptions
about what they
need. As a donor,
if you don’t take time
to understand what
the underlying
problems are, you
aren’t going to come
up with solutions to
solve them.
They start their
own nonprofit
to meet the need,
instead of identifying
the existing resources
in the community
and ways that their
funding could
strengthen and expand
those resources.
Kris Putnam-
Walkerly
PR ESIDE NT
P UT N AM CO NS ULTI NG
G ROU P
There’s almost a predisposition to falling in love I have seen some
investors so obsessed
with mission-driven impact investments like
with avoiding taxes
addressing climate change, or food deserts, or the that they made major
unbanked. You so want the entrepreneur to succeed mistakes. One family
that you’re unintentionally willing to ignore negative had sold their business
in a tax-free merger
variables in due diligence, for example. It’s easier
and had a very large,
to be dispassionate with investments that aren’t single-stock position
philosophically aligned with what you see as your in a major public
mission in the world. company with zero
tax basis. The plan
was to hold until the
owner died and get
the income tax basis
Matthew Weatherley-White
step-up. So they did
CO- FOU N DER AND IMPACT I N V EST I NG S PEC I ALI ST not sell to diversify,
CAPRO CK G RO U P
but instead borrowed
against the stock
to fund purchases
Generally, those buying art fall into one of two
that were both
camps: collectors or investors. When collections personal—homes,
become a significant portion of their net worth, plane, art—and
collectors may be unwilling to sell because they investment. Leverage
was not particularly
are emotionally attached to the pieces they have
high. However, in the
purchased and lived with for years. In the same financial crisis, the
situation, investors may consider divesting at least stock really melted
a portion of their collection. So we see investors down, much more
than the market,
making more informed decisions.
which caused margin
calls. They lost
virtually everything
because of this.
Von Sanborn I have seen
PARTN ER others that engaged
DAY P IT N E Y LL P
in questionable tax
shelter transactions.
There is a big
I really try to stay in my lane, in our fund and difference between
my personal investing. As for those businesses intelligent tax
where my colleagues and I have no particular planning and abusive
tax shelters, but some
expertise, we almost never get involved. I have a
people are so obsessed
friend who oversees investments for a very large with avoiding tax
multigenerational family office in California, and he that they cross the
tells me about the family members constantly jumping line. Ultimately, it
is very costly.
in with ideas in areas where they don’t have expertise.
I don’t know how he ever optimizes outcomes.
Leo Hindery D. Stephen Antion
MA NAGI N G PARTN ER PARTN ER
I NTE R M E DI A PARTN E RS W I NSTO N & ST RAW N L LP
Foxman covers wealth and family offices at Bloomberg News in New York.
VO LUME 28 / ISSUE 1 13
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 Forward Guidance

The Changing Faces

Of Wealth
By AMANDA GORDON
I L L U S T R AT I O N B Y M AT T C H A S E

A DENIZEN OF an elite charity ball in New

York found himself disoriented one night,
not by the rapid fire of flashbulbs around
Victoria Beckham or by the glittering night
sky projected on the walls, but by the
absence of his usual crowd.
“Who are these people?” he asked
with more curiosity than disdain as he
surveyed the room of more than a
thousand guests, eager for an introduction.
As the ranks of the rich swell,
moments such as these are increasingly
common. The culture of the wealthy is
disrupted once again.
The number of people with serious
wealth across the globe is awesome
at the moment, driven by the spread of
capitalism and advances in technology.
As norms are shattered, the rich gain new
power to define their roles and
responsibilities. In this competitive
cohort, a new benchmark remains elusive.
Shall 10,000 roses festoon a
ballroom? Perhaps, but the next night’s
gala will dazzle guests with a tower of
cereal boxes and a tornado of sneakers to
be donated to the needy. The Astor 400
has long since been replaced by the Robin
Hood 4,000: The New York-based
poverty-fighting foundation builds its own
ballroom within a cavernous convention
center each year to accommodate its
masses of untired affluent.
The trophy wife has been pushed
aside for the alpha partner, an
entrepreneur or best-selling author
who can banter about the stock market
or microbiology. A spouse or significant
other takes an equal role in

VOLUME 28 / ISSUE 1 15
philanthropy, not merely planning parties
but chairing prestigious nonprofit boards,
even co-founding the company. Single-
sex couples are part of the social fabric.
The wealthy no longer keep to
their own clubs or countries. They count
themselves members of a vast, global peer
group who connect by text, social media,
and even face-to-face at art fairs, Giving
Pledge learning sessions, and annual
conferences in Aspen, Beverly Hills, Sun
Valley, and Davos. In this way, billionaires
from developing countries quickly pick up
the habits and concerns of those who’ve
been steeped in wealth longer, though not
necessarily that long. The hit novel-turned-
movie Crazy Rich Asians depicts a newly
wealthy family in Singapore living in rooms
that imitate Versailles.
Old and new, tech and oil,
African and Iowan: Globally, more than
2,100 billionaires collectively were worth
$8.9 trillion in 2017—a jump of $1.4 trillion
in just one year, the UBS/PWC Billionaires
Report found. And that was just the
wealth that could be detected. China has
been minting them the fastest (recent
setbacks notwithstanding) and more than
half of new billionaires were from Asia-
Pacific in 2017. The U.S. still has the most
(for now)—about 585—plus lots of others
who are quite well-off. Some 17.3 million
Americans are millionaires, Credit Suisse
data show.
By contrast, nearly 2 billion people
worldwide lived on less than $3.20 a day
as of 2015, according to the World Bank.
About 736 million—close to one in 10
humans—lived on less than $1.90 a day.
In the U.S. in 2017, nearly 40 million people
lived in poverty, defined by the Census
Bureau as income of less than $12,488
a year, or $34.21 a day.
Income inequality is just one force
suppressing the materialistic proclivities
of the wealthy in the richest nations.
The financial crisis, climate change,
and populist political movements have
produced an aversion to the conspicuous
consumption of the 1980s. The dripping
jewels and puffed egos displayed on
Dynasty or Dallas have been replaced
by the moody hedge fund chief on
Billions, wearing jeans and a hoodie,
who grabs a slice at his old neighborhood
pizza joint. (Of course, he also delivers
the kids to their little league baseball
game in a helicopter.)
16
Today in New York, the mindful
display of one’s position has been honed
to an art form. The wealthiest women
take pride in wearing the same dress a few
times. The chicest apartments are
decorated minimally—the furniture and
objects cost a great deal, but do not draw
attention to themselves like a 17th-
century gilded armoire.
A proper household once required
the right silverware and china; now taking
the children to an animal sanctuary in
Tanzania is the priority. Instead of taking
months for vacations and pulling the
children out of school on a whim, today’s
rich are busier than anyone else and their
children more heavily scheduled.
Like many others, the rich are
obsessed with their health, only more so.
They’re as likely to spend $1,000 on a
guru or juice cleanse as on a Gucci shirt.
The banquet will be nut- and gluten-free
with lots of sustainably and locally
sourced veggies and protein.
The car must be electric. The
diamonds must not have blood on them.
The cashmere sweaters carry socially
conscious messages embroidered across
the chest, such as the brand Lingua
Franca’s tribute to Ruth Bader Ginsburg
that reads, “all rise.” At $350, the
cashmere is soft, with an enlightened
edge: It includes a $100 donation to the
American Civil Liberties Union. Suddenly,
Loro Piana seems frivolous.
Every now and then, a rare
indulgence is spotted: A $1,000 jeroboam
or a $500,000 necklace, but it’s discreet
(partly for security reasons), and there’s
always a story behind it to justify the
extravagance. As for the Picasso or
Cy Twombly, art may be one of the last
true trophies.
The social hierarchy has become
less evident as rich people break the
codes and expectations associated with
their fortunes. The daily Bible study of
John D. Rockefeller and the marriages in
Jane Austen’s Pride and Prejudice and
Edith Wharton’s House of Mirth might
serve as guides, but so can the Instagram
accounts of Lauren Santo Domingo, the
fashion entrepreneur who married into
a billionaire Colombian family, and of the
Jenner and Kardashian clan.
The world’s second-wealthiest
man, Bill Gates, devotes himself to
building a state-of-the-art toilet for the
BLOOMB ERG MA RKE TS
estimated 2.3 billion people who live
without modern plumbing. Donald Trump
rises to the presidency positioning
himself as a man-of-the-people
billionaire with a taste for pomp and
circumstance over charity.
Britain’s Prince Harry marries
a mixed-race American divorcée. Seven
months later, Beyoncé posts photographs
of the dresses she wore to the Ambani
family’s wedding festivities. The
ceremony takes place in the 27-story
Mumbai home of the father of the bride,
Mukesh Ambani, the 11th-wealthiest man
in the world.
History is filled of examples with
the indulgent and generous uses of
money. A caliph enamored of a homesick
Greek slave girl built an exact replica of
her hometown, populated with
thousands of his subjects. Hadrian
rebuilt the Pantheon. Nero, upon seeing
a 120-foot statue of himself he’d had
built beside a private lake, declared,
“At last, I am beginning to live like a human
being.” At the height of the Gilded Age
in 1889, Andrew Carnegie, who built
libraries all over America and the world,
wrote, “The man who dies rich, dies
disgraced,” noting that large inheritances
are “most injudicious.”
Warren Buffett, the third-richest
person today, admits he hasn’t
contributed “the most precious asset”
to charity—his time. While he’s pledged
to give 99 percent of his wealth away,
he may be better known as the billionaire
who gets his breakfast at McDonald’s
every day.
In a communist-run country where
the first private foundation is less than
15 years old, a handful of billionaires are
rolling out their own agendas. These
new philanthropists include Charles Chen
Yidan who, in his 40s, left his job
at Tencent Holdings Ltd. to focus on
supporting education.
All of the capital accumulating
rapidly at the top is on target to make the
heirs of baby boomers the beneficiaries
of the largest intergenerational wealth
transfer in history.
An investment banker once showed
me a letter he wrote to his children as
they came of age, explaining the multiple
purposes of money.
The first is to provide for an
appropriate lifestyle. “What does this
A LITTLE LESS EXCLUSIVE
Total number of billionaires globally
1995
mean? It means to live like a successful
person of your age buying material
objects and spending money on daily
purchases appropriately. Some people
like Porsches but live in small apartments;
others smoke fancy cigars and wear
old clothes. It is the pattern that matters.”
The letter also emphasized
the freedom that wealth provides—
his own children have pursued careers
in education, not investment banking.
“Money allows you to set goals without
the first goal being monetary success.”
His closing point: “Money is to
better society.”
The ultrawealthy have been taken
to task lately for not doing enough on
that score. It’s the topic of books
including Winners Take All by Anand
Giridharadas, who argues for challenging
the systems that create inequities.
A recent report from Bridgespan Group,
a consulting and research firm that
works with billionaires on philanthropy,
contained the startling estimate that
the charitable spending of ultrawealthy
Americans in 2017 was just $45 billion,
or 1.2 percent of their holdings. Globally,
the number of people in need of life-
saving assistance is almost 136 million,
according to the United Nations;
69 million have been displaced by
conflict and natural disaster.
Cities in particular have benefited
from wealthy people committing time
and money to building and guiding
hospitals, museums, universities, and
nonprofits. Some have their names on
buildings. Some have served on boards
and investment committees for decades.
More recently, trailblazers have
emerged who are spending billions
of dollars in their lifetime on philanthropy.
Gates has his passion for toilets, for
preventing malaria, and for finding ways
to feed those most affected by climate
change. Facebook Inc. founder Mark
Zuckerberg and his wife are funding
research into cures for disease.
Bridgewater Associates founder Ray Dalio
is pouring his money into exploration of
the ocean. (Bloomberg LP’s founder and
owner, Michael Bloomberg, has a
foundation dedicated to causes including
gun control, tobacco reduction,
educational opportunity, and combating
climate change.)
Some billionaires are focusing
on the future. This is an exciting place
to be, because it isn’t about solving
problems that have hung around
for centuries. It’s about what’s next
for humans at all strata of society.
Jeff Bezos and Elon Musk are
spending on space travel. Blackstone
Group LP Chief Executive Officer Steve
Schwarzman gave $350 million to MIT
to open a college of computing. He’s
intrigued by how artificial intelligence
will transform the nature of work,
and he’s doing his part to get his friends
on board. At his Park Avenue home, he
VOLUME 28 / ISSUE 1
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2017 0
Source: UBS/PricewaterhouseCoopers Billionaires Insights
recently hosted an “AI cocktail party”
where guests went gaga over the
bartender robot who poured and
served Champagne.
Supercomputers and Big Data
can also flag today’s problems and
offer solutions. In concert with machine
learning and gobs of money,
philanthropy’s ambitions rise
exponentially.
The man at the gala asked,
“Who are these people?” The next
question for him and his peers is, “What
can we accomplish together?” Bridgespan
proposes that billionaires could increase
their giving by tens of billions a year if they
can be connected to new channels, such
as a national fund to help the poor—
or Blue Meridian Partners, which pools
donations and seeks to scale up proven
solutions to problems faced by children
and youth in poverty.
In taking on the life of the
commons, the rich and the ultrarich can
cooperate and crowdsource in a way their
businesses and personal lives may never
have quite called for. Perhaps in the future
the wealthy will succeed in finding ways to
stand up, not stand out, and remove the
barriers that remain between themselves
and their fellow humans.
Gordon reports on wealth and philanthropy
for Bloomberg News in New York.
This column doesn’t necessarily reflect the
opinion of Bloomberg LP and its owners.
17
<GO> I NSI DE
T HE TE RMINAL
Liquid
Gold

SEVEN TIMES A DAY, the Perth Mint hosts a

public gold pour at its downtown location in
the Western Australian city. A 14-pound gold
bar is melted at 1,945F (1,063C) in a crucible
made of clay and graphite. The liquid is then
poured into a cast-iron mold, where it hardens
into a bar in about 90 seconds. It needs an
additional 15 seconds from the time it’s
placed in a quenching tank filled with tap
water until the bar is “cool to the touch,” Chief
Executive Officer Richard Hayes says.
The same gold bar has been melted
and cast more than 65,000 times since the
mint opened its doors to visitors in 1993,
Hayes says. In that time, it has been worth
as little as $51,000—in 1999—to as much
as $390,000—in 2011. At a price of $1,292
an ounce on Jan. 17, the bar was worth
about $263,000. At the end of each day,
it’s stored in one of the mint’s vaults.
Australia is the world’s second-
largest producer of gold (after China), and
the Perth Mint refines about 90 percent of
the country’s production at a separate
secured facility outside the city center. It
mints coins and bars from both Australian
gold and metal sourced from other coun-
tries, representing about 13 percent of
global production, Hayes says.
The Perth Mint opened in 1899 after
the discovery of rich mineral deposits
caused a gold rush in the region. Owned by
the government of Western Australia since
1970, the mint sold about A$18.9 billion
($13.3 billion) in pure gold, silver, and plat-
inum bullion bars and coins in 2018.
For more details on the supply and
demand of gold, run {BI PMET <GO>} for
the Bloomberg Intelligence dashboard on
precious metals. —Susanne Barton

P H OTO G R A P H BY TO M H U T TO N
Wealth
Who’s Up and Who’s Down Among
The World’s Richest People
By TOM MALONEY, TOM METCALF, and DEVON PENDLETON
THE BLOOMBERG BILLIONAIRES INDEX updates the concept of a
rich list by tapping live data to monitor the fortunes of the world’s
wealthiest people day to day.
To see the daily ranking of the top 500 billionaires around
the globe, run {RICH <GO>}. You can filter the list by country,
region, gender, age, source, and industry. Want to see Chinese
women billionaires? Tick the boxes next to China and Female and
click on the gray Results button at the bottom of the screen.
The Index updates the net-worth figure for each billionaire
every business day after the close of trading in New York, based
on share prices in public markets, economic data, and Bloomberg
News reporting. A team of reporters around the world maintains
the list and periodically adds and subtracts billionaires.
Every individual in the ranking has a profile featuring a net
worth analysis, biographical details, and significant relationships.
Let’s look at Elon Musk, for example.
Elon Musk
The Tesla Inc. chief executive officer was the 31st-richest person
on the planet as of Jan. 23. Run {RICH <GO>}, scroll down to his
name, and click. Musk’s net worth was $23.2 billion.
How does Bloomberg calculate that? First, the Index values
holdings in publicly traded companies based on their shares’ most
recent closing prices. Then it converts currencies to U.S. dollars
at current exchange rates.
20 <G O> IN SID E TH E T ER MINAL
It also captures, when available, material items such as
dividends, real estate, share transactions, salaries, and donations.
What Do the Stars Mean?
Each valuation is assigned a confidence rating from 1 to 5 stars. A
5-star confidence rating means the majority of the fortune is held
in publicly traded companies or personal assets with verifiable
value, and information was received from the billionaire or his or
her representatives. A 1-star rating indicates the fortune is tied
to assets on which limited information is available, and feedback
on our assumptions has not been received. In Musk’s case, the
confidence rating is 3 stars. To find out why, click on Net Worth
Analysis under Financial on the left side of the screen.
The summary explains how the Bloomberg Billionaires Index
values Musk’s holdings. The breakdown shows he derives slightly
less than half of his fortune from his Tesla holdings and options. The
white document icons allow you to see relevant public filings.
Almost all the rest comes from Musk’s stake in a closely held
company, Space Exploration Technologies Corp., or SpaceX.
Hover your cursor over a number in the Breakdown section,
and additional details appear. The note for SpaceX shows that Musk
is credited with a 51 percent stake in the company. That information
is derived from a 2016 filing with the U.S. Federal Communications
Commission. SpaceX is valued using the $31 billion appraisal the
company got in a December fundraising round. An illiquidity discount
 For a ranking of the world’s wealthiest people, go to {RICH <GO>}.

Click here for more

on the methodology Filters let you drill
used to calculate down by category,
net worth, which is so you can rank the
updated daily based richest people in
on publicly traded China, for example.
holdings, valuations
of closely held assets,
and reporting.

Billionaire Profile pages display information about a selected person.

More than half

of Musk’s net worth
derives from his stake
in closely held SpaceX.

A bull-case analysis
suggests our valuation
of the rocket
company is
conservative,
compared with
Click here for an a recent report that
overview of a selected valued it at as
billionaire’s wealth. much as $52 billion.

of 15 percent is applied. For an overview of information that argues
for assigning higher or lower estimates to the private assets, click
on Bull & Bear.
Mars Comparisons
For closely held assets, the Index typically bases valuations on
disclosed financials and extrapolations from publicly traded peers.
The ratios used to make such comparisons are generally
enterprise-value-to-sales and EV-to-earnings-before-interest-
taxes-depreciation-and-amortization multiples.
Consider, for example, Mars Inc. Six members of the Mars
family appear in the Index, thanks to their ownership of the candy
and snack-food behemoth based in McLean, Va. The Index values
closely held Mars by taking its annual revenue of $35 billion and
applying the average EV-to-sales and EV-to-Ebitda multiples of
Hershey, Nestlé, and Mondelēz International. Private company valu-
ations are updated at the end of each trading day to reflect the intraday
movement of peer companies’ prices and valuation ratios. As a result,
the net worth of billionaires with fortunes tied to privately held assets
will show daily movement, just like those tied to traded stocks.
For a description of how the Index values a particular private
company, hover your mouse over the name of the asset listed in
the Breakdown section of the Net Worth Summary page. Private
company valuations may include discounts because of liquidity,
key man, or country risks.
Maloney, Metcalf, and Pendleton report on wealth for
Bloomberg News in New York.

<G O> IN SIDE TH E T ERM INAL 21

Equities

Slice and Dice the Buyback Trend

With These Tools
By DEBBIE MASSIELLO

Run {EQS <GO>}, and you can build a search such as this one for U.S.-traded companies that have
bought back shares while increasing executive pay and keeping headcount flat or negative.

To build this criterion,

type “Total Salaries &
Bonuses Paid to CEO”
in the Add Criteria
field, select the match,
and click Growth.

U.S. COMPANIES SPENT more money than ever in 2018. What were
they buying? In many cases, they were buying back their own shares.
Companies that trade on U.S. exchanges announced more
than $900 billion in buybacks last year, according to data compiled
by Bloomberg. The total may reach $1 trillion, which would make
2018 the first year to surpass that level. The biggest buyback:
Apple Inc. announced in May that it would devote $100 billion to
repurchasing its shares. The average buyback size was $937 million;
the median was $100 million.
Buybacks occur when a company uses its available cash or
borrows money to purchase its own shares in the open market. Low
interest rates, which made borrowing cheap, helped drive the trend.
You can find data on buybacks with a simple search. Type
Buybacks on the command line of a Bloomberg screen and click
on the CACT BBK item in the matches. The Corporate Action Search
lets you track buybacks by companies in an index, portfolio, or
other list.
To find buybacks that match additional criteria, you can use
the Equity Screening (EQS) function. For example, to screen for
U.S.-listed companies that announced buybacks after Jan. 1, 2018,
run {EQS <GO>}. Enter United States in the Add Criteria field and
click the Exchanges item in the list of top matches. Next, type
Buyback in the field, and click Stock Buyback Latest Announce-
ment Date in the matches. In the dropdown menu that appears,
select >= After or on. Then in the date field, enter 01/01/2018 and
press <GO>. As of mid-January, those criteria whittled the list of
U.S.-traded companies that had announced buybacks to 968, or
7 percent of all U.S.-listed companies. To see the list of companies

22 <G O> IN SID E TH E T ER MINAL

 Here are the criteria in the Fixed Income Search (SRCH) function you can use
to screen for bonds issued to repurchase shares.
Click here and select
Equity Index to set
S&P 500 companies
as your universe.
in the Watchlist function, click the See Results | WATC button at
the lower right-hand corner of the screen.
LOOKING MORE CLOSELY at U.S. companies that did buybacks, one
thread emerges: executive pay. Of the 968 U.S.-traded companies
that announced stock buybacks since the start of 2018, 425 of
them increased pay to top executives. In addition, of those com-
panies, 133 decreased or held flat their number of employees. The
criteria for this EQS search are shown on the previous page. On
average over the past year, these companies have spent more
than $1 billion buying back their own shares but have reduced the
number of people they employ by 7.7 percent.
You can also use the Fixed Income Search (SRCH) to find
companies that have issued debt with the stated purpose of buying
<G O> IN SIDE TH E T ERM INAL
Since the beginning
of 2016, S&P 500
companies have
issued 144 bonds to
do stock buybacks.
back shares. A search for S&P 500 companies that have done that
since the beginning of 2016—the criteria for the search are shown
in the screen on this page—returns 144 active bonds issued by
32 companies. The total amount of debt issued was $141 billion. A
clear slowdown in issuance took place in 2018 as interest rates rose.
COMPANIES’ SHARE PURCHASES, and the subsequent decrease in
shares outstanding, help to prop up stock prices. Shareholders
typically favor buybacks because they inflate earnings per share
simply by reducing the number of shares. However, this increase
in earnings per share doesn’t signify underlying improvements to
the company or its future prospects for growth.
Massiello is an equity market specialist at Bloomberg in San Francisco.
23
24 <G O> IN SID E TH E T ER MINAL
 Sustainability

Jeff Tannenbaum’s
Next Act
Will Be Green
By BRIAN ECKHOUSE and CHRIS MARTIN
P H OTO G R A P H BY A D R I E N N E G RU N WA L D

JEFF TANNENBAUM MADE his fortune through investing; now he’s

investing that fortune.
He’s chairman emeritus at New York-based Fir Tree Capital
Management LP, the hedge fund he founded in 1994, though he
began handing over investment responsibilities in the early 2000s
and had ceased day-to-day portfolio management by the middle
of the decade. In recent years the firm has struggled with staff
departures, soured investments, and a drop in assets of more
than half from a peak of $13 billion in 2015.
Now, Tannenbaum, 56, is again managing a portfolio. This
time he’s running his own money at a new firm called Titan Grove.
After more than a decade of advocating for clean energy to address
climate change, he created Titan Grove to fund growing businesses
rooted in sustainability.

<G O> IN SIDE TH E T ERM INAL 25

 “I probably couldn’t do this at Fir Tree,” Tannenbaum says.
Fir Tree’s clients “sign up for classic value investing. Investments
have to be very large. Here I can do startups. I can do smaller invest-
ments and investments with longer time horizons.”
Then there’s sustainability. Fir Tree has taken stakes in energy
companies such as Ultra Petroleum Corp., a gas driller whose shares
plunged more than 90 percent in 2018. “The move into distressed oil
and gas investments occurred well after I relinquished portfolio
control,” Tannenbaum says. “I remain a large investor in Fir Tree’s
funds but am in a share class where I do not participate in any future
fossil-fuel-related investments.”
Titan Grove does share one common thread with Fir Tree:
Both blend finance vehicles. Fir Tree is a hedge fund with private
equity roots. It typically makes investments for one to three years
and sometimes plows more than $100 million into mature, cash-
generating businesses. Titan Grove, meanwhile, is like a family office
combined with an impact fund. It’s structured as a B corporation,
a company set up to create some kind of public benefit rather than
only maximizing shareholder value. The aim, Tannenbaum says, is
to build and own profitable businesses that promote sustainable,
healthy, and just capitalism.
Titan Grove, which is targeting investments of up to $50 million,
has done two deals. Both involve San Francisco-based NextEdge
Networks, a smart-cities business focused on wireless infra-
structure. NextEdge is also a B corporation. Titan Grove is nearing
an investment in a for-profit entity that will work with apparel fac-
tories around the world to reduce energy, water, and chemical use
and improve labor standards.
TANNENBAUM’S CLIMATE advocacy began in 2001. After the Sept. 11
terrorist attacks, he organized a conference on energy security with
an eye toward helping wean the U.S. off foreign oil. “I didn’t understand
why we weren’t financing energy improvements,” he says.
Seven years later, he hosted a gathering for candidate Barack
Obama’s energy advisers at his family’s summer home in Sagapo-
nack on Long Island. There he met Obama’s future director of the
Office of Science and Technology Policy, who later suggested that
Tannenbaum look into a home-improvement program being piloted
in Berkeley, Calif. Within the Sustainable Energy Financing District,
homeowners could finance sustainable and clean-energy upgrades
and pay back the costs over time via their property tax bills. “It’s
very important that we fix our buildings—that’s a third of carbon
emissions,” says Amory Lovins, co-founder of the Rocky Mountain
Institute, a Boulder, Colo., nonprofit focused on sustainability.
Tannenbaum liked the concept but not the name. He rebranded
it Property Assessed Clean Energy, or PACE, and founded an advocacy
group to market it and lobby for government support. The program
soon expanded beyond Berkeley. “It seemed revolutionary to me,”
Tannenbaum says. “People had spent 20 to 30 years trying to figure
this out. The problem was homeowners were reluctant to pay for
retrofits, and businesses weren’t interested in retrofitting.”
Disruptive and wonky, PACE operated at the intersection of
finance and policy. Although residential PACE boomed in Califor-
nia, it’s struggled to expand much further amid a yearslong fight
with a federal housing administrator and allegations that the
program is susceptible to abuse. It’s now being marketed in Cali-
fornia and Florida to create resilience to hurricanes and other
weather events. PACE for commercial properties, meanwhile, has
26 <G O> IN SID E TH E T ER MINAL
become a popular program in more than a dozen states—especially
for older buildings. Today, Tannenbaum is also working to support
Puerto Rico’s expansion of emission-free power in the wake of
Hurricane Maria.
He says his proudest climate-related accomplishment came
in 2017. Three years earlier, Tannenbaum had championed a move by
Fir Tree to save U.S. solar company Silverado Power from bankruptcy
by merging it with another company he thought could better manage
its growth. The new company, SPower, had about 50 megawatts of
projects under development. By the time Fir Tree sold the company
in mid-2017 for about $1.6 billion in cash and debt, it was one of the
biggest solar companies in the U.S., with 1,300MW of operating assets
and a pipeline of developments totaling 10,000MW, enough to power
about 1.8 million homes.
It was a rare solar-power success story from a financial point
of view. Many earlier stars of the industry created wealth by listing
their companies on stock exchanges, only to lose it when the shares
dropped. Shi Zhengrong, for instance, rose to become one of China’s
richest people through the rapid growth of Suntech Power Holdings
Co. Forbes estimated his wealth at $2.9 billion in 2008. The com-
pany’s 2013 bankruptcy erased most of that. Li Hejun’s rise and fall
was even more dramatic: His stake in Hanergy Thin Film Power
Group Ltd. was worth about $15.4 billion before a collapse in its
stock price in 2015.
Despite SPower’s rapid growth, Tannenbaum pushed for a
careful approach to its expansion. “We lost some auctions by 30 to
50 percent,” he says. “We didn’t rationalize acquisitions.” When
investment bankers armed with briefing books pitched an initial
public offering for SPower’s power plants, he ultimately said no.
He resisted doing residential solar because of the heavy cost to
acquire customers. While he tried to imbue Fir Tree with his climate
concerns in other ways—the firm’s Midtown Manhattan office, he
says, exceeds LEED Silver standards—“I ultimately concluded that
it wasn’t enough for me.”
At Titan Grove, he’s focused on young, principally private com-
panies that need guidance with strategy and business planning. “In
some ways, this is harder,” he says. “It’s different muscles than the
last 10 years at Fir Tree, when I was much more in a management role.
It’s more akin to the muscles I used building SPower and PACE.”
The firm is drawing on lessons Tannenbaum learned from his
mentor Jerry Kohlberg, a leveraged buyout pioneer who co-founded
KKR & Co. Kohlberg preached the importance of aligning corporate
ownership and management. (Tannenbaum says Kohlberg, who died
in 2015, in turn derived part of his thinking from Adolf Berle and Gar-
diner Means’s 1932 The Modern Corporation and Private Property,
which warned that managers who aren’t large shareholders might
not act in stockholders’ interests.) With Titan Grove, Tannenbaum
expands that principle to include other stakeholders. “It means when
making board decisions you have to consider four things: sharehold-
ers, employees, the community, and the environment,” he says.
That approach will be more appealing to the next generation
of wealthy investors, Tannenbaum says. The reason is simple:
They’re interested in social justice and the environment. “They’re
living the negative consequences of having unsustainable capi-
talism,” he says. “So they’re more on board with moving our nation
and globe towards sustainable capitalism.”
Eckhouse and Martin cover energy at Bloomberg News in New York.
 Call 877-707-1329 or go to
direxioninvestments.com

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Distributor: Foreside Funds Services, LLC
ESG
How to Win a Pension Mandate
In Europe (Hint: Show
How Responsible You Are)
By JUSTINA LEE
THESE DAYS, European asset managers’ websites all seem to have
a section devoted to ESG, providing their take on a range of envi-
ronmental, social, and governance topics including green energy
and women on boards. Every mutual fund company has an ESG
product, and every investment bank is rolling out ESG research.
Europe is the place to be if you want to do good while
becoming richer.
So what’s driving Europe’s responsible investing revolution?
One group at the heart of it is the region’s pension industry. Funds
aren’t only shunning tobacco or weapon stocks; they’re also integrat-
ing ESG standards into the investment processes. Indeed, the most
progressive funds seek to invest in companies that do good—a prac-
tice that some critics say edges dangerously close to philanthropy.
EUROPE HAD $12 TRILLION of assets committed to sustainable and
responsible strategies in 2016, the most among any region, accord-
ing to the Global Sustainable Investment Alliance. What’s more,
its 2016 total represented a 40 percent jump from 2012. And the
region’s pension funds—with their massive assets, long-term
horizons, and government backing—have been a major driver,
Bloomberg Intelligence says.
It’s unsurprising that pension funds have such sway: The
top 1,000 hold a total of €7.2 trillion ($8.2 trillion) in assets, IPE
Research data show. “They have billions under management. As
soon as they say something, all the asset managers listen,” says
Cedric Durant des Aulnois, chief executive officer at Montanaro
Asset Management Ltd. in London, who reckons his company’s
ESG capabilities have helped it amass about €1 billion in mandates
from pensions. “This is not a fad. It’s a structural change.”
There are a number of reasons for pension funds’ growing
focus on ESG. One is regulatory. Starting in January, changes in
the European Union’s so-called IORP II—the Institutions for
Occupational Retirement Provision directive—compel plans to
28 <G O> IN SID E TH E T ER MINAL
cover ESG in risk management. New U.K. laws will require pension
trustees starting in October to show how they account for ESG in
their financially material considerations. There’s also the sense
that pension beneficiaries increasingly expect their trustees to
help combat climate change or recycle waste.
The worry that adopting ESG will compromise returns has
also dissipated somewhat. That is to say, many asset managers
see it as risk mitigation. Investing in clean energy contributes—
however marginally—to reducing the risks of climate change. For
that matter, a company with better governance might be less
prone to a management scandal. One with better labor practices
might have lower staff turnover.
“These are not nonfinancial factors; they are not-yet financial
factors,” says Piet Klop, senior adviser for responsible investment
at PGGM, which manages Europe’s third-largest pension fund
from Zeist, the Netherlands. “Especially for long-term investors,
taking externalities into account actually makes a whole lot of
financial sense.”
There is some evidence supporting that. A 2015 meta-study
found that 90 percent of studies saw a non-negative relationship
between ESG and corporate financial performance, with a large
majority reporting positive results. The MSCI World ESG Leaders
Index outperformed the MSCI World in 2018, though it slightly
trails over the five- and 10-year periods.
To be clear, the ESG revolution in Europe isn’t complete. The
Scandinavian countries and the Netherlands are more progressive
than the rest of the continent. And while the giant funds are already
proselytizing about impact investing—which has the express
purpose of achieving a social good—the smaller ones are still
scrambling to assess their portfolios’ ESG risks.
Pension funds beyond Europe have started to prioritize ESG.
Japan’s 165.6 trillion yen ($1.5 trillion) Government Pension
Investment Fund, the world’s largest, has allocated billions of dollars
 For an overview of the environmental, social, and governance performance
of a selected company, run {ESG <GO>}.
to ESG through stock investments. The California Public Employees’
Retirement System, the biggest U.S. public pension fund, has pres-
sured companies on executive pay, harassment, gun control, and
climate change through voting and engagement.
IT’S NO WONDER asset managers are rushing to promote their ESG
credentials. But how do you win over a particularly conscientious
pension when anyone can download an ESG rating set from MSCI?
Here’s some advice from investors:
■ Integration is the baseline. Instead of having an ESG analyst
stashed in a corner of the office, consider ESG in every step of your
investment process. Engaging corporates to improve their practices
is important. That means, at bare minimum, voting at shareholder
meetings. But beyond that, Montanaro Asset, for example, has
mediated conflicts between unions and management. ATP Group,
Europe’s fourth-largest pension fund, conducts what it calls the-
matic engagement: It asks companies it invests in about big themes
such as climate change, says Ole Buhl, ATP’s head of ESG.
■ Pensions seek asset managers that can help analyze ESG
issues. They want “a partner for know-how,” says Lisa Beauvilain,
head of sustainability and ESG at Impax Asset Management Group
Plc in London. Masja Zandbergen, head of ESG integration at
Robeco, says the Dutch asset manager tailors investment solutions
around themes its clients focus on. It’s created benchmarks—
based on a factor, such as value, as well as an ESG theme—for
pension funds to passively follow.
■ Reporting on the impact of investments matters. Some
funds, such as Montanaro’s Better World Fund or Impax’s
Specialists or Leaders funds, tell you how many tons of waste your
investment has collected and the emissions avoided.
<G O> IN SIDE TH E T ERM INAL
This chart shows
how a company has
performed in
comparison to the
median of its peers
on metrics such
as water use per unit
of revenue.
■ Doing good can carry complications. Under U.K. rules,
trustees can take nonfinancial factors into account when investing,
provided that no financial detriment results and members generally
agree with these priorities—a condition that’s hard to prove. That’s
why it’s usually easier just to build a financial case for ESG con-
siderations, says Stuart O’Brien, a partner at Sackers & Partners
LLP, a law firm in London specializing in advising pensions. Trustees
need to be careful mixing ethical considerations with financial
ones, he adds.
■ Defining ESG and its investment implications isn’t a black-
and-white exercise. ABP, Europe’s second-largest pension, for
instance, doesn’t divest from companies in the coal business. The
reason: Those companies may be able to contribute to the tran-
sition toward renewable energy, says ABP chair Corien
Wortmann-Kool. ESG investors say they’re not interested in the
best companies; they like the improving ones.
■ Currently there is no one way to legally classify a fund as
“sustainable,” which creates opportunities for greenwashing—the
disparaging term for misleading sustainability claims. The EU is
trying to fix this and in May 2018 proposed a bloc-wide classifica-
tion system for sustainable economic activities, which it plans to
begin rolling out this year. For now, pension trustees need to do
their homework.
“Everyone’s falling over themselves to extol their own ESG
credentials, which is why trustees need to be very careful to actu-
ally understand the issues in more detail,” O’Brien says. “They need
to get into the weeds with their managers: You say ESG is important
to you—give me some concrete examples of how you actually
do this.”
Lee covers European equities at Bloomberg News in London.
29
Apps
Looking for Insight Into ESG
Performance? Here’s a Tool for That
By DEIRDRE FRETZ
For a test drive of the ESGHub app, run {APPS ESGH <GO>}.
ARE THE WORLD’S corporate giants as green as they say they are?
A new app on the Bloomberg terminal compares how com-
panies talk about their environmental, social, and governance prac-
tices with how third-party analysts rate performance on ESG metrics.
Transparency—measuring and reporting environmental impact—is
an important first step toward reducing hazards. But a company
that reports ESG data may still be producing a lot of greenhouse
gas emissions. If you use ESG criteria in your portfolio construction,
you may need to make a call on whether you want to invest in
such a company.
To that end, run {APPS ESGH <GO>}. For a free test drive of
the ESGHub app, which is available by subscription, click on the gray
button. When you first open it, the app loads the S&P Global 100
Index, plotting its members on a scatter graph. The horizontal axis
represents the percentage of ESG metrics that each company dis-
closes, as tracked by Bloomberg. The vertical axis shows performance
rankings from CSRHub, an aggregator of corporate- social-
responsibility analysis from more than 500 independent sources
covering 18,000 companies around the world.
The results show where transparency and performance ratings
diverge. If you believe an outlier has outsize risks that threaten per-
formance, that could be a shorting opportunity. If you believe improve-
ments will drive gains, tracking momentum from the bottom could
30 <G O> IN SID E TH E T ER MINAL
Click here to focus
on environmental
metrics.
Hover your cursor over
a dot for information
on that company.
reveal potential outperformers. To focus on environmental metrics,
click on the E in the upper right corner of the app. Hover your cursor
over a dot to see which company it represents. Chevron Corp. was
among the companies that fell in the lower-right quadrant of the grid
as of mid-January. That indicates a higher-than-midpoint score for
transparency and a lower-than-midpoint score for performance.
For details about a particular company, click on its dot. A break-
down of Bloomberg’s disclosure rating appears in the left-hand
column of the Company Dashboard. The CSRHub ratings appear in
the next column: Chevron’s overall environmental score was 56 on
a scale of 0 to 100, low relative to index companies.
For its part, Chevron says it doesn’t debate the scientific
consensus and invests in renewables. “Climate change is real, and
human activity contributes to it,” says Sean Comey, a spokesman
for the company. “Demand for oil and gas will require continued
investment even under aggressive low-carbon scenarios.”
To compare the scores of another energy company, enter its
ticker in the upper left and click on Search.
The ESGHub app enables you to upload your portfolios directly
from Bloomberg’s Portfolio & Risk Analytics (PORT) screen to review
your holdings. You can also use the app to screen a watchlist.
Fretz is a Functions for the Markets editor at Bloomberg in New York.
Fixed Income
Take a Page Out of the Rates Trader’s
Playbook to Spot Opportunities
By SUKETU K. KOTHARI
ARE U.S. TREASURY YIELDS too low? Is the curve too flat? Are
equities rich? While these are seemingly simple questions, there
are a lot of moving parts in there when you try to find answers.
One way to get some insight into such questions is to borrow
an old-school technique from the rates traders’ toolkit: Use regres-
sion analysis to look at where various instruments are trading
compared with how they usually behave. (Linear regression, of
course, is a statistical method for estimating the relationship
between an independent variable and a dependent one.)
Let’s start with a wide-angle view and look at what 10-year
rates are doing in relation to equities. Type “regression” into the
command line of a Bloomberg screen and click on the HRA item in
the list of matches. Use the generic 10-year Treasury as the depen-
dent variable and S&P 500 e-mini futures contract as the indepen-
dent. Enter “GT10 Govt” in the Dep field and click on the matching
item. Enter “ESA Index” in the Indep field and press <GO>. To run
the regression on the values of these data series, use the drop-
down next to Reg On to select Value.
What’s the intuition here? The basic idea in Fedspeak is data
dependency: The path of interest rates depends to some extent on
financial conditions, and we’re approximating that with the e-minis.
Last year the Federal Reserve was raising rates. Let’s say, for
example, you ran this regression on Nov. 20. At that point in 2018,
the Fed had hiked rates three times and was expected to increase
its benchmark federal funds rate once more at its December
meeting. At the beginning of 2018, the 10-year yield had been
2.41 percent. It bumped above 3 percent in April and May, dropped
back, and then began climbing again in August, reaching a high of
3.24 percent on Nov. 8. The U.S. stock market, meanwhile, wobbled.
On Nov. 20 the S&P 500 closed down almost 2 percent.
Regressing the 10-year yield against the e-mini futures using
one year of daily data through Nov. 20 illustrates a couple of inter-
esting things. First, the adjusted beta—a forward-looking estimate
of how much the 10-year yield would move in relation to a shift in
the equity futures—was 0.334. Second, the r2, or coefficient of
determination, was low: 0.052. In effect, equities explained only
5 percent of the move in the 10-year yield—almost nothing. OK.
32 <G O> IN SID E TH E T ER MINAL
Third, the data point on Nov. 20 was substantially off the line of best
fit: To move back toward it, yields would need to drop.
That’s what happened. Uncertainty started hitting markets,
and stocks plunged in December. The 10-year yield traded to a low
of 2.55 percent on Jan. 3 as investors sought safety. If you ran the
same regression on daily data from Nov. 20 to Jan. 16, the correla-
tion was much stronger: more than 50 percent.
THIS IS ALL QUITE MACRO compared with how a rates trader would
typically use regression. Let’s drill down some more.
With U.S. interest rates near zero for years, a lot of investors
moved out on the curve to try to pick up yield: The 5-year became
the new 2-year. Let’s run another regression to see if we can get
some insight into what’s going on with the curve now. This time
enter “USYC2Y10 Index” in the Dep field and click on the matching
spread between the 2- and 10-year yields. In the Indep field, enter
“GT5 Govt” and press <GO> for the generic 5-year.
What’s happening here? We’ve been in a tightening cycle,
so the beta was negative: When the 5-year yield rose, the curve
flattened—the front end rose more than the longer end. In addition,
the correlation here was much higher, more than 70 percent.
Is the curve too flat? Or are yields too low? The data point
for Jan. 16 was pretty far off the line of best fit. It’s clear the higher
the 5-year yield, the flatter the 2-10 spread. That suggests contin-
ued flattening of the curve with a tightening bias. The Fed’s dot
plot suggests two more quarter-point hikes in 2019. The market,
meanwhile, is pricing in zero hikes—even a bit of easing late in the
year. If you had a view on how the market would move, you could
make a short-term, tactical bet. A 2s10s steepener with a beta-
weighted delta short hedge in the 5-year, for example, would pay
off if the difference between short and long rates increases. Con-
versely, as a fundamental trader, you could put on a flattener with
a long hedge in the 5-year. That would pay off if dot-plot projections
come true—and protect you in a flight-to-quality rally fueled by a
trade war, Brexit, or other event.
How can you form such a fundamental view? One way is to
compare where we are now with previous periods. In HRA, click
 To run a regression on instruments you’re interested in, go to {HRA <GO>}.

Click here to compare

a second time period.

In the past two years,

adjusted beta was
negative—as the
5-year yield rose, the
2-10 spread flattened.
But in the two
previous years, beta
was positive.

A regression of the On this day, though,

yield of a Treasuries the yields diverged
ETF against the by more than 10 basis
generic 10-year shows points, which may
almost perfect have been a trading
correlation. opportunity.

on the check box next to the second date range and specify a time
frame. Let’s look at the preceding two years: 1/17/2015 to
1/16/2017. That period, it turns out, was very different. Beta was
positive: When the 5-year yield rose, the spread steepened.
This is still a bit abstract. How would a rates trader use regres-
sion? She might be looking to spot a bond trading 3 basis points
away from the line of best fit and try to put on a quick trade that
would profit from a move back. For that kind of trade, ideally, you’d
want a beta of more than 40 percent and a correlation of 0.75 or
more. There’s a certain degree of art in these kinds of analyses.
So how can you use HRA to identify trading opportunities?
Simple. Run regressions on the assets you’re interested in.
Exchange-traded funds, say? Compare the yield of the $11.7 billion
iShares 7-10 Year Treasury Bond ETF against the generic 10-year
yield, for example. Bloomberg calculates yields for fixed-income
ETFs from certain issuers, modeling all the cash flows of the fund’s
assets and in effect treating the ETF as a single giant bond. In HRA,
enter “IEF US Equity” in the Dep field and click on the matching
item. In the data field below the ticker, enter “YAS Bond Yield” and
select the match.
Running that regression on one year of daily data is pretty
striking. The correlation is almost perfect: 0.995. However, there
were outliers even here. On May 7 the yield of the ETF was more
than 10 basis points lower than the generic yield. That might have
been an opportunity to buy one and sell the other.
Kothari is an interest-rates derivatives and fixed-income
market specialist at Bloomberg in New York.

<G O> IN SIDE TH E T ERM INAL 33

Market Making

After Grabbing FX Market Share,

XTX Looks to Expand Its
Electronic Empire
By LANANH NGUYEN
P H OTO G R A P H BY F E L I C I T Y M CCA B E

Amrolia

34 <G O> IN SID E TH E T ER MINAL

THE BIGGEST TRADERS IN foreign exchange gathered last May in a
converted Victorian bathhouse in London. They drank Champagne
amid ornate tile mosaics, stained glass, and Oriental rugs. The
results of the 2018 Foreign-Exchange Survey by Euromoney
Institutional Investor Plc were being announced.
A gasp and clapping echoed through the room.
XTX Markets, a three-year-old startup, had been named the
third-largest market maker in the $5.1 trillion-a-day market, leap-
frogging some of the world’s biggest banks including Citigroup
Inc. and Deutsche Bank AG. For a company that ranked 12th the
previous year, it was a coup.
NOW THE LONDON-BASED COMPANY, which doesn’t have any human
traders, is setting its sights on U.S. markets.
XTX aims to expand in stocks and Treasuries, markets in which
it says customers aren’t getting a good deal. “We don’t believe that
all markets are fair and efficient,” says Zar Amrolia, XTX’s co-chief
executive officer. He points to U.S. equities in particular. “The speed
is so high, it’s really providing no benefit to the market at all—it’s
detrimental,” he says, adding that it raises costs for investors. Amrolia,
who has a doctorate in mathematics from Oxford University, was
<G O> IN SIDE TH E T ERM INAL
co-head of fixed income, currencies, and commodities at Deutsche
Bank AG before leaving in 2015 and starting XTX with fellow
Deutsche Bank alumnus Alex Gerko, who also has a Ph.D. in math.
They’re looking to change the rules of the game. In a letter to
the U.S. Securities and Exchange Commission in November, Amrolia
and co-CEO Gerko called for a “wholesale rollback” of Regulation
NMS—a landmark SEC rule approved in 2005 that accelerated a shift
to electronic trading in the U.S. stock market. “The race for speed
in trading has reached an inflection point where the marginal cost
of gaining an edge over other market participants, now measured in
microseconds and nanoseconds, is harming investors,” they wrote.
Their concerns echo those highlighted in Michael Lewis’s 2014
book, Flash Boys: A Wall Street Revolt. In it, Lewis describes how
high-frequency traders use complex algorithms to rapidly move in
and out of stock positions, making money by arbitraging small price
differences and front-running other investors’ trades.
XTX also criticized so-called latency arbitrage in its letter to
the SEC, arguing for the introduction of speed bumps to slow trading
and enable market makers to post better prices without getting
picked off by high-frequency traders. “It is ambitious, but it’s also
practical and timely,” says Eric Swanson, the company’s
35
SEEKING SPIKES
Forex, equities, and Treasuries volatility indexes, weekly
JPMorgan Global FX Volatility Cboe Volatility (VIX)
9 32
8 20
1/5/18 1/18/19 7 1/5/18
New York-based Americas CEO. He formerly served as general
counsel and corporate secretary at exchange operator Bats Global
Markets, which was bought by Cboe Global Markets Inc. in 2017.
Although it’s advocating for change, Swanson points out that
XTX’s growth plans aren’t contingent on shifting rules. “In U.S.
equities, we’re in this for the long haul,” he says. “We realize that
the regulatory changes are a long game.”
THIS ISN’T THE FIRST TIME the company has criticized market prac-
tices. In currencies, XTX advocated for changes to “last look,” a
controversial practice that allows dealers to back out of losing trades.
It’s “absurd” that some market makers still retain the option
to hold trades for as long as 200 milliseconds before striking a
deal or pulling out, Amrolia says. XTX hasn’t done away with last
look entirely, but it removed the holding time between a client’s
trade request and its acceptance or denial of the deal.
That change is critical for one of XTX’s clients. Neil McDonald,
head of trading and quantitative analytics at retail foreign exchange
platform Oanda Corp., says he gets consistently good prices from
XTX, which has the lowest rejection rate among the market makers
with whom he trades. “I’m very impressed,” he says. XTX is more
open about its operations and hungry to win business compared with
some banks, which aren’t always attentive to customers, he says.
XTX’s rise comes in the wake of a price-rigging scandal in FX
that prompted global banks to pay more than $10 billion in fines and
penalties. Three British traders were acquitted in October of fixing
prices in a chat room that was called the “Cartel.”
McDonald says XTX has also benefited from starting from
nothing to build its electronic trading systems. “They’ve had the
advantage of being able to build something from scratch and not try
36 <G O> IN SID E TH E T ER MINAL
Merrill Lynch Option Volatility Estimate
75
60
1/18/19 8 1/5/18 1/18/19 45
Sources: {JPMVXYGL Index}, {VIX Index}, {MOVE Index}
to fix the airplane while it’s flying, which is what the banks are trying
to do,” he says.
XTX has 118 staff globally, including 10 people at its New York
office in Hudson Yards, Amrolia says. Since he and Gerko founded
the company, it’s increased trading volume to an average of $150 billion
a day across stocks, currencies, fixed income, and commodities.
XTX’s office in the King’s Cross neighborhood of London is
like someone’s fantasy of a tech company headquarters. Bar?
Check. Sleeping quarters? Check. There’s also a replica Apollo 11
landing capsule, saunas, arcade games, and a self-playing piano.
Staff perks include yoga classes and massages, as well as regular
staff events such as a chess tournament in January.
The company made a profit of about £61 million ($80 million)
in 2017, little changed from a year earlier, according to the annual
report for that year, the latest for which data are available. More
recently, its global cash equities volumes jumped 74 percent in 2018
from a year earlier, while FX volumes were up 46 percent.
Now that it’s established in currencies and European stocks,
the company is focused on expanding its U.S. footprint. Recent
events may have helped. XTX said it benefited from a surge in
market activity at the end of 2018 as investors became cautious
about growth prospects in the U.S. and globally, driving a 9 percent
slump in the S&P 500 index in December.
“One of the great things about XTX is that it was built and
expanded and gained dominance in a period of lower volumes and
volatility,” Swanson says. “When we do have these volatility spikes,
volume increases.” —With Annie Massa, John Ainger, and
Anooja Debnath
Nguyen covers finance at Bloomberg News in New York.
Research.
In detail.
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the speed of the market. With 250 analysts
covering 1,800 companies in more than
135 industries, Bloomberg Intelligence
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to enhance your in-house research.

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©2018 Bloomberg L.P. 117945 0118

Investing
The ETF’s Wonky Cousin Can Snare
Even a Sophisticated Investor
By RACHEL EVANS and CAROLINA WILSON
NICK CHERNEY WAS STILL on the slopes when he realized something
was wrong. The outdoor enthusiast, who runs exchange-traded
products at Janus Henderson Investors, was just skiing back into
Aspen after spending eight hours on some of Colorado’s toughest
backcountry terrain. He’d been without a cell signal all day and,
as he looked at his phone, he started to fear this was no
ordinary Monday.
Almost 2,000 miles away in New York, traders were in an
uproar. It was Feb. 5, 2018, and stocks had tumbled more in a single
day than they had in six and a half years. The Cboe Volatility Index,
or VIX, had spiked 116 percent—its biggest jump ever.
Amid the tumult, Cherney focused on two ETPs. Both were
getting smoked in after-hours trading as their bets against market
volatility crashed. The day’s move had wiped out 90 percent of
the $3 billion-plus that institutions and retail buyers held in the
two ETPs the previous week.
One was painfully familiar to the then-37-year-old Cherney,
who’d helped structure the VelocityShares Daily Inverse VIX
Short-Term ETN for VelocityShares before Janus acquired the
company. “I pulled up to look at the markets, and I was like, that
can’t be right,” he says.
It was.
Soaring volatility had sent both short-VIX ETPs plunging as
Cherney had trained for a grueling 40-mile race through the Elk
Mountains. But the fates of the two ETPs were starkly different:
One would be shuttered, while the other survives to this day.
Why the difference? Cherney’s product was an exchange-
traded note, an unsecured debt obligation of the bank that created
it. It could be terminated at any time. The surviving product is, by
contrast, a type of fund. The differing outcomes came as a surprise
38 <G O> IN SID E TH E T ER MINAL
to many in the $3.6 trillion U.S. market for ETPs, inviting greater
scrutiny of this wonky corner of the industry. The U.S. Securities
and Exchange Commission is now considering a plan to more
clearly differentiate between types of ETPs.
For his part, Cherney says investors’ surprise about the
VelocityShares ETN wasn’t warranted. “Unfortunately, there are
a lot of people who aren’t as financially savvy as they could be,”
he says. “ETNs set out how they work in their prospectus. It’s up
to investors to go out and read that.”
ETNS HAD A PROMISING START. When accessing stocks in countries
such as India was all but impossible, these notes offered a way in.
They helped in the same way with commodities and currencies—
assets that had been unavailable to investors without a large bank
or trading shop to help them.
First used by Barclays Plc to describe two broad commod-
ity products in 2006, the exchange-traded note quickly caught
on. Some ETNs used derivatives to enable investors to bet against
securities or markets or to juice returns. Deutsche Bank, UBS,
Goldman Sachs, Lehman Brothers, and other banks joined the
fray, augmenting their structured-products businesses.
Lehman’s bankruptcy focused investor attention on the
risks of unsecured bank debt, while the rise of exchange-traded
funds offered an alternative. Notes now account for only about
0.6 percent of assets in the ETP market, down from a peak of
1.4 percent in 2010, data compiled by Bloomberg show. Still, as
the overall market has grown, ETNs house more assets than ever
and remain among the most-traded ETPs.
“There are a few pockets where ETNs can provide value that
exceeds an ETF,” says Greg King, chief executive officer of REX
 You can track data on ETNs, by running {ETF <GO>}.
Click here and
select Exchange
Traded Notes
as the Fund Type.
Shares LLC, which has run both types of product. “But it’s in 5 or
10 percent of exposures,” he says. King worked on Barclays’s first
ETNs and co-founded VelocityShares with Cherney.
THE G ENES THE NOTES SHARE with their fund cousins help the
190-odd ETNs trade on U.S. exchanges almost incognito alongside
more than 2,000 ETFs. Cherney’s ETN—issued by Credit Suisse
Group AG and known as XIV—was so beloved by ordinary investors
that it had its own thread on the discussion board Reddit.
Even in good times, though, ETNs can hurt the unsuspecting.
Take one that promises three times the daily return of a gas or oil
index. Hold it one day, and you’ll get close to triple the daily per-
formance of that gauge. But keep it longer, and your performance
will diverge as the strategy resets each day. The bigger the move,
the greater the gap. While not unique to ETNs, these risks—along
with the cost of rolling futures contracts—are prevalent. Regulators
won’t allow any new companies to sell leveraged ETFs, leaving just
two issuers of juiced-up funds and a bunch of geared ETNs. This
is one reason the offering documents say they’re intended for
sophisticated investors.
But even professionals can get snared. Despite multiple
warnings from Barclays, more than $550 million of investors’ money
remains in 32 notes that it delisted in April, making the notes far
harder to sell. Some issuers can redeem or accelerate their notes
at will, or even unexpectedly stop supplying them. JPMorgan Chase
& Co. hasn’t sold new securities for a $3 billion ETN it runs—the
U.S.’s biggest—since 2012, risking price dislocations.
ETNs even pose a risk to the banks that issue them. Barclays
replaced 15 commodity ETNs this year because the old versions
lacked a now-standard option to call the securities. Regulators
<G O> IN SIDE TH E T ERM INAL
are demanding banks set aside more capital to offset liabilities,
including ETNs. And the reputational damage suffered by Credit
Suisse over XIV has given banks pause.
Put simply, ETNs may be more trouble that they’re worth.
“ETNs wormed their way into the ETF industry, as they
offered exposure to things that you couldn’t get in an ETF, but in
retrospect it probably was a bad idea,” says Eric Balchunas, a
senior analyst at Bloomberg Intelligence. “I wouldn’t be surprised
if they slowly get weeded out of existence.”
DEUTSCHE BANK and Goldman Sachs—both early ETN adopters—
have refocused on ETFs, and UBS Group AG, which still manages
a bunch of notes, started two ETFs last year. REX’s King has mar-
keted a blockchain fund, alongside ETNs. Cherney now sells ETFs
for Janus, as well as notes.
Fisher Investments, which manages $93 billion from Camas,
Wash., is the single largest user of ETNs, accounting for about
$10 billion of the $28 billion in U.S. products, regulatory filings
show. It works with multiple banks to create bespoke leveraged
strategies that reset once a quarter, something not possible within
an ETF. A spokesperson for Fisher declined to comment. ETNs
can also have a narrower focus than ETFs and are generally taxed
more favorably—particularly for some energy companies.
Despite regulatory grumblings about better labeling in the
wake of XIV’s demise, notes lie next to funds in brokerage accounts
across the country. “The existing products are robust, they trade
a lot and are pretty well-loved by the people that use them,”
Cherney says. “I don’t think ETNs are going anywhere.”
Evans and Wilson cover ETFs for Bloomberg News in New York.
39
Asset Management

Guilherme Benchimol’s XP,

The Charles Schwab
Of South America, Is Changing
The Way Brazil Invests
By FELIPE MARQUES, CRISTIANE LUCCHESI, and VINICIUS ANDRADE
P H OTO G R A P H BY G A BO M O R A L ES

40 <G O> IN SID E TH E T ER MINAL

FOR ALMOST THREE DECADES, Wilson Feldberg kept his money in
low-risk investments at Brazil’s biggest bank. Then, three years ago,
he started moving almost all of it—the equivalent of about $1.5 million
now—to an upstart brokerage, XP Investimentos SA.
Why? Feldberg, who owns a construction company in
São Paulo with his brothers, wanted a chance at fatter returns and
more personalized advice. “They explained things to me better,
and I felt safer following their suggestions,” says Feldberg, a
47-year-old native of Recife. “Since I don’t have much time, I
embrace their suggestions.”
Lots of Brazilians are taking the same leap of faith.
XP, Brazil’s biggest retail broker, has been adding
50,000 accounts a month, luring clients like Feldberg away from
Brazil’s five big banks and changing the way the country’s middle
class saves and invests. With an open-architecture strategy
modeled on U.S. financial supermarket Charles Schwab Corp., XP
offers stocks, bonds, and funds as well as products previously
available only to the very rich, including hedge funds and deriva-
tives. Brazil’s banks, which offered only their own products, have
been forced to adapt.
Itaú Unibanco Holding SA, the country’s biggest bank by market
value, certainly took notice—especially after clients like Feldberg
started moving their money out of it. In 2017 it agreed to shell out
5.7 billion reais ($1.8 billion) for a 49.9 percent stake in XP.
The transaction made Guilherme Benchimol, XP’s chief
executive officer and largest holder of voting shares, a billionaire—
at least in Brazilian currency, with a net worth of 2.7 billion reais.
XP WASN’T an overnight success.
Benchimol, 41, grew up in a middle-class family in Rio de
Janeiro. His father was a doctor, his mother an artist. He played
tennis competitively, winning a Rio tournament intended for 11- to
14-year-olds when he was 10. Expected to become a doctor himself,
Benchimol tagged along with his father on rounds. But seeing a
patient die during a heart procedure turned him away from medicine
at age 15. He shifted to finance, starting in the back office of a bro-
kerage when he was 18 and attending college at the Federal Univer-
sity of Rio de Janeiro.
He was 24 when he founded XP with Marcelo Maisonnave
in 2001. Originally, they called the company XPTO, a generic place-
holder in Portuguese, somewhat like XYZ in English. “We had a
very heroic start—fighting banks, the system, getting creamed by
everybody,” Benchimol says in an interview at XP’s new offices in
Itaim Bibi, São Paulo’s financial center. “In the first year, I thought
we would go broke every day.”
As independent financial advisers, Benchimol and Maison-
nave realized that retail investors had access to very little infor-
mation about stocks. So XP started holding seminars. “We rented
a place, bought some used computers, juice, sandwiches—and
that was our event,” Benchimol says.
After a year he had to sell his car and borrow 5,000 reais from
his half-brother, Julio Capua, to keep things going. The number of
clients started to rise, however, and XP expanded to 30 offices
throughout Brazil. The firm rode a wave of economic growth and a
market boom, with Brazil’s benchmark Ibovespa almost doubling
in 2003 alone and racking up a total gain of 467 percent in the five
years through 2007. XP bought a brokerage firm, grew to 12,000
customers, and was generating 2 million reais a month in revenue.
<G O> IN SIDE TH E T ERM INAL
TITAN OF SAO PAULO
XP Investimentos assets under custody, in Brazilian reais
850k
200b
100
Number of clients
67k
2012 2018* 0
*Yearend target
Source: XP Investimentos
Then came the 2008 financial crisis. The Ibovespa lost more
than 41 percent of its value in one year. All of a sudden, stock
brokerage was the worst business in the world, Benchimol says.
“No new accounts were opened, everybody started to sell, and
we lost clients, one after the other,” he says.
With little to be done, Benchimol decided to take a breather.
His plan was to travel and look into what brokerages in Europe and
the U.S. were doing to weather the downturn. That was when Ben-
chimol attended a Charles Schwab event in San Francisco. “I was
very inspired,” he says. “We decided to follow their model, going
beyond just stocks and becoming the first real one-stop investment
shop in Brazil, offering everything from funds to bonds from multi-
ple asset management firms, banks, and companies.”
Recovering from the financial crisis was painful. But the firm
gained traction with its new approach. Benchimol isn’t coy about
XP’s impact. “We democratized the asset management industry
in Brazil,” he says. “For the first time, we let small investors talk
directly to asset management firms, to insurance companies, to
corporations, to banks of any size, anywhere in Brazil.”
XP now has about 2,000 employees, 850,000 customers,
and 3 billion reais in annual revenue. It plans to go public, probably
on the U.S. Nasdaq exchange, in the second quarter.
WHILE XP HAS BEEN making inroads, most middle-class investors
in Brazil still keep their money in traditional savings accounts. Such
accounts, guaranteed by the nation’s deposit insurance fund, are
tax-free and generate monthly returns. The government encour-
ages them as a way to support the real estate and agricultural
industries—banks are required to direct a percentage of the funds
to mortgage or farm lending.
41
 Yet for savers, the accounts are becoming less compelling.
In March last year, Brazil’s central bank cut its target Selic rate to
6.5 percent, the lowest level in the benchmark’s history. Savings
accounts now pay only about 70 percent of the benchmark rate.
That means returns are barely keeping ahead of inflation, which
was 3.86 percent in 2018. Even conservative investors are starting
to search for higher yields.
Rodolfo Riechert, CEO of boutique investment bank Brasil
Plural, says the huge pile of money in Brazilian savings accounts
is just waiting to be mined by XP and its copycats. About 779.8 billion
reais were parked in such accounts as of November, according to
the central bank. Banks still have the lion’s share of client assets
in Brazil, with about 95 percent of the total 5.5 trillion reais in assets
under management, including companies and individuals. And XP,
with roughly 225 billion reais in assets under custody, has
82 percent of the total outside of banks.
A “gold rush” for middle-class savings is coming, Riechert says.
ONE OF XP’S SUCCESSES was a huge marketing and education effort
to promote bonds issued by Brazil’s midsize banks. The campaign
highlighted the bonds’ guarantee from the country’s privately
owned deposit insurance fund. While the promotion raised XP’s
profile and revenue, it also introduced new sources of funding for
the banks and reduced liquidity pressures in Brazil’s finan-
cial system.
By distributing funds from independent firms, XP has helped
to develop Brazil’s asset management industry. Overall, investment
funds had a net inflow of 449 billion reais from the beginning of
2016 through November 2018, according to Anbima, the
capital-markets association.
One beneficiary was Adam Capital, a Rio-based hedge fund
that was founded in 2016 and is now among the largest in Brazil.
“We believed we would be able to cross the $5 billion in assets
threshold but never that we would do it in three years,” says found-
ing partner André Salgado. “Even in our most optimistic scenario,
we thought it would take 10 years to reach that.” One key reason
for the rapid growth, Salgado says, was that XP and other new
XP’S OWNERSHIP
Total Voting
capital shares
Guilherme Benchimol 7% 47%
Julio Capua 3% 10%
Others 20.12% 3.12%
XP partners and controlling holding 30.12% 60.12%
General Atlantic 17.32% 8.52%
Dynamo fund 2.66% 1.31%
Itaú Unibanco 49.9% 30.06%
Source: Bloomberg News
42 <GO > IN SID E TH E T ERM INAL
distribution platforms helped Adam Capital reach middle-class
investors. The Adam Macro Master FI Multimercado fund had a
total return of 54 percent from inception on April 29, 2016, through
Jan. 2, topping the benchmark interbank rate DI by 26 percentage
points, data compiled by Bloomberg show.
Private equity firms picked up on XP’s potential long before
banks such as Itaú. In 2010, London-based Actis LLC acquired
20 percent of XP for 100 million reais.
The Brazilian billionaire Carlos Alberto Sicupira followed
suit. A co-founder of 3G Capital Inc. and one of the owners of
Anheuser-Busch InBev SA, Sicupira took a stake in 2012 through
Rio-based Dynamo VC Administradora de Recursos Ltda. Along
with Greenwich, Conn.-based private equity firm General Atlantic
LLC, Dynamo paid 420 million reais for 31 percent of the company,
buying 10 percent from Actis. In April 2016, Dynamo and General
Atlantic acquired an additional 16 percent, increasing their holding
to 49.5 percent through a capital injection and the acquisition of
the remaining 10 percent stake held by Actis. After the Itaú deal,
Dynamo has a 2.66 percent stake and General Atlantic about
17 percent.
Using the cash from the investments, XP became a consoli-
dator, buying eight smaller brokerage firms. “Beto Sicupira helps us
with good advice on long-term strategy, macro discussions such
as raising capital, the IPO, the Itaú acquisition,” Benchimol says.
In addition, XP is using a capital injection of 600 million reais
that was part of the Itaú deal to build new businesses, including
an insurance company and a bank that will offer loans and no-fee
credit cards with below-average interest rates. XP is also opening
a cryptocurrency exchange, but without Itaú as a partner.
FELDB ERG , the construction company owner who moved his
savings to XP, says he’s pleased his new brokerage has become
more “solid” by joining forces with his old bank. He estimates that
his returns are about 40 percent better since moving his money
to XP. He’s added a few riskier investments, including hedge funds
and project bonds related to a hydroelectric power plant. “Some-
times I don’t have a deep understanding of what I’m getting into,”
Feldberg says
And that could be a problem.
Other clients whose experience wasn’t as positive as Feld-
berg’s have said they didn’t fully grasp what they were investing
in. Some rivals place blame on XP’s compensation policies, which
link pay to sales.
“We left the dinosaur age in Brazil only to advance to the
cave-man age,” says Tito Gusmão. Gusmão, a former XP partner,
is creating a competitor called Warren, in collaboration with Mai-
sonnave, XP’s co-founder. When your pay comes from the product
you sell to clients, you’ll push whatever is most remunerative,
Gusmão says.
Lelio Rodrigues Faria Sarreta, a former XP client, contends
that something like that happened to him, according to documents
from a complaint he filed with CVM, Brazil’s capital-markets secu-
rities regulator. A market novice, Sarreta had never put his money
in anything other than traditional savings accounts, according to
the complaint. On XP’s advice, he put 110,000 reais into a struc-
tured transaction called a “condor strangle,” a complicated options
strategy that bets on low price volatility during a period of time.
He wound up losing more than he invested—about 123,000 reais.
LIVE BOUNDLESS
T h e lo cat i on , t he sty l e, t h e fe e li n g yo u get wh en yo u wal k th ro u gh th e d o or –
every aspect of your home should be a reflection of who you are,
w here yo u’ve b een , a n d t he l i fe yo u as pi re to li ve.

Your best life begins with a home that inspires you.

British Columbia, Canada

sothebysrealty.com/id/HQPWYV

© MMXIX Sotheby’s International Realty Affiliates LLC. All Rights Reserved. Sotheby’s International Realty Affiliates LLC fully supports the principles
of the Fair Housing Act and the Equal Opportunity Act. Each Office is Independently Owned and Operated. Sotheby’s International Realty and the
Sotheby’s International Realty logo are registered (or unregistered) service marks licensed to Sotheby’s International Realty Affiliates LLC.

A L B A N Y, B A H A M A S
Fifth floor residence redefines luxury waterfront living. 4 bedrooms,
4.5 baths. Marina and ocean views, concierge services, Rental
Program, golf, pools, spa, restaurants. WEB ID: 4CXRYY.
$6,350,000 US. Nick.Damianos@SIRbahamas.com
Damianos Sotheby’s International Realty
+1 242.376.1841 | SIRbahamas.com
PA R A D I S E V A L L E Y, A R I Z O N A
Stunning engineer’s personal residence built with the highest level
of mechanical and engineering design for greater efficiency and
preservation of utility use. Remarkable interiors and grounds.
$4,365,000. Frank Aazami. Frank.Aazami@sir.com
Russ Lyon Sotheby’s International Realty
+1 480.266.0240 | ParadiseValleyListing.com
TIBURON, CALIFORNIA
A once-in-a-lifetime opportunity awaits with the sale of 110± acres of
Easton Point, AKA Martha Property, located on the southern tip of the
Tiburon Peninsula with panoramic views of the San Francisco skyline,
bridges, and beyond. $110,000,000. Bill Bullock and Lydia Sarkissian.
Golden Gate Sotheby’s International Realty
+1 415.517.7720 | globalestates.com
NEW YORK, NEW YORK
An amazing, open and light 5 room, 2 bedroom cond-op is an
impeccably renovated home on a high floor at 995 Fifth Avenue.
$6,995,000. Patricia A Wheatley, Sheila Ellis and Nikki Field.
Sotheby’s International Realty
East Side Manhattan Brokerage
+1 212.606.7613 | sothebyshomes.com/00112238
© MMXIX Sotheby’s International Realty Affiliates LLC. a Realogy Company. All Rights Reserved. Old Elm at Medfield, used with
permission. Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC.
An Equal Opportunity Company. Equal Housing Opportunity. Each Office is Independently Owned and Operated.
You r best l i fe be gi ns w it h a home t ha t i ns pi res you.
PA R A D I S E I S L A N D, BA H A M AS
Ocean Club Estates. Magnificent 12 bedroom beachfront estate with
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1.5 acres in gated community. Pool, tennis and elevator. WEB: ZMDK5L.
$29,900,000 US. George.Damianos@SIRbahamas.com
Damianos Sotheby’s International Realty
+1 242.424.9699 | SIRbahamas.com
PA R A D I S E V A L L E Y, A R I Z O N A
This estate exudes the perfect balance of true luxury living and
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with impressive interiors, magnificent views and tranquil
grounds.$3,695,000. Frank Aazami. Frank.Aazami@sir.com
Russ Lyon Sotheby’s International Realty
+1 480.266.0240 | PVBluebirdEstate.com
N Y E , M O N TA N A
Privacy, 360° views, understated luxury on 41+ acres on
Little Rocky Creek. Stunning design and superior construction.
Private fishing access on Stillwater River. Main house has 3 bedrooms,
3 baths. $1,575,000. Laura T. Sacchi. laura@bigskysir.com
Big Sky Sotheby’s International Realty
+1 406.570.9651 | bigskysir.com
NEW YORK, NEW YORK
The Woolworth Tower Residences. The top 30 floors of this iconic
building have been transformed into 33 luxury condos. Developed by
Alchemy Properties. Price upon request. Stan Ponte and Joshua Judge.
Sotheby’s International Realty
Downtown Manhattan Brokerage
+1 212.418.1222 | thewoolworthtower.com
TYPE SIRA <GO>
PROVIDENCIALES, TURKS & CAICOS
Coral Pavilion is a stunningly elegant, newly completed, coral stone
villa located on the most enviable stretch of world-renowned
Grace Bay Beach. 8,085 sq. ft. home with 6 bedrooms. WEB: ZB9D77.
$10,750,000 US. Nina.Siegenthaler@sothebysrealty.com
Turks & Caicos Sotheby’s International Realty
+1 649.231.0707 | turksandcaicosSIR.com
PA R A D I S E V A L L E Y, A R I Z O N A
Want privacy in one of the best areas in Paradise Valley? A tree-lined
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Rare opportunity to combine two fabulously renovated adjacent
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French Provincial 9,000+ sq. ft., stunning custom built property
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sothebys realty.com
 Go to {BAS <GO>} to track broker activity for an exchange such as Brazil’s B3.
XP says Sarreta was well-informed about the risks, pointing to
email exchanges and his signed authorization.
The case first made its way to B3 SA-Brasil Bolsa Balcao,
which registers derivatives in Brazil. The organization decided
against a refund, saying the investor was aware of the risks. But
Sarreta appealed to CVM, which concluded the transaction was
sold to him in a biased manner that didn’t properly outline the
risks. CVM determined that XP had to refund his losses. XP says
it’s studying legal measures to try to overturn the decision.
Gusmão says the system that Warren is adopting would help
avoid those problems: The broker-dealer will charge a fixed fee of
0.5 percent of assets under management, regardless of the products
purchased. “That’s the model that’s most typical in the U.S.,” he says.
XP says it sees no conflict and that its model allows clients
to avoid fees. Clients are offered an option of paying a fixed man-
agement fee and leaving asset purchase decisions to the firm.
XP ’S G ROW TH HAS created some hurdles. Brazil’s central bank
imposed restrictions on the Itaú deal to make sure the growing
company doesn’t stifle competition. Regulators extended the time
that must pass before Itaú could make additional investments in XP,
demanding new approvals for that, and said neither company can
buy other digital investment platforms. Itaú also is prohibited from
accessing information about XP’s clients and suppliers for 15 years.
Big banks, which can feel the ground shifting, are scrambling
to respond. Banco Santander SA’s Brazilian unit is launching a
digital investment platform, CEO Sergio Rial told reporters in 2018.
Named Pi, it will offer a range of third-party products. Banco do
Brasil SA, the nation’s largest by assets, has also started selling
funds from independent asset managers to higher-income clients.
<G O> IN SIDE TH E T ERM INAL
XP ranks as the
second-largest broker
by volume on the B3
exchange after UBS.
Both banks announced in September they won’t charge custody
fees to hold Treasury bonds for clients.
Banco Bradesco SA, according to Morgan Stanley analysts,
“seems to be a step behind peers in tuning their business model to
compete with fintech players.” CEO Octavio de Lazari said in an
interview in November that the bank, the second-biggest in Brazil
by market value, is addressing that issue. Integration of the bank’s
brokerage firms with its private-banking and high-net-worth Prime
businesses, which started last year, will help create a unique invest-
ment platform, Lazari says.
Banco BTG Pactual started a digital platform in 2016 and is
in court and antitrust battles with XP after recruiting some invest-
ment advisers from the firm. “Brazilian families’ wealth will be grad-
ually distributed between the traditional banks and the new digital
investment platforms, as it already is in the U.S.,” CEO Roberto
Sallouti said at a press conference.
Before buying into XP, Itaú created its own open digital plat-
form, which still operates and competes with XP.
XP, meanwhile, continues full steam ahead. The company’s
new São Paulo headquarters, which opened in 2018, is already
running short on space, Benchimol says. And XP’s goals are ambi-
tious: growing assets under custody to 1 trillion reais by 2020, a
fourfold increase, and raising its number of investment advisers
to 10,000 from 3,700.
“Brazil is starting to get hot again,” Benchimol says. “More
people will come to invest here, and we’ll need more brokers and
analysts,” he says. “Our structure could grow fast.”
Marques, Lucchesi, and Andrade are reporters at
Bloomberg News in São Paulo.
45
 Wealth

46
The world’s most expensive aquarium fish, the Asian arowana (or dragon fish), is believed
to bestow wealth and good fortune. This one was photographed at Paradise Arowana in
Singapore, one of several Asian countries where the fish are status symbols. But what
does it take to be wealthy today? In the pages that follow, we look at what it means to
be in the 1 Percent and also shed light on the cost of hiding money in the shadows.

P H OTO G R A P H BY O R E H U I Y I N G
Wealth

Defining the1 Percent

What They Make
Income standards vary wildly around the world. You might need the combined incomes of eleven 1 Percenters in India,
a developing market, to equal one in the oil-rich United Arab Emirates. The U.S. almost splits the difference.

Annual pretax income threshold to be in the top 1 percent of earners

India South Africa France Australia Bahrain

$81k $162k $215k $239k $473k

China Brazil Canada U.K. U.S.

$105k $169k $190k $290k $478k

What They Owe

In most of the developed world, 1 Percenters don’t keep everything they make. A significant share of their income is earmarked
for the government. In many countries, the highest income tax rate applies to only a portion of the 1 Percent.

Top marginal tax rate in 2018

0 10% 20% 30% 40% 50%

France

Australia

China

South Africa

U.K.

Switzerland

U.S.

India

Canada

Brazil

Singapore

Bahrain 0

UAE 0

48 BLOOMB ERG MA RKE TS

Since the financial crisis, income inequality has garnered increasing attention from
economists, politicians, and journalists, and perhaps no income level has been cited more
than the so-called 1 Percent. Yet that term can describe a wide variety of earners,
depending on where they live. ——Ben Steverman and Reade Pickert

Singapore United Arab Emirates

$694k $891k

What They Spend

The cost of luxuries and amenities is relative, too. What you pay for a Los Angeles mansion might get you merely a charming
apartment in Monaco. On the other hand, child-care costs in those cities aren’t nearly as far apart.

Housing: Entry point for the Education: Average annual tuition Child care: Average annual cost
top 1 percent of homes by value at a private day school* of experienced live-in nanny

Monaco $26.4m Los Angeles $60.4k Monaco $120k

Hong Kong 6.8 New York 54 Los Angeles 83.2
Singapore 5.3 Singapore 49 Sydney 63.5
Sydney 4.2 London 42 Dubai 60
London 4.1 Mumbai 36 Hong Kong 50.4
Los Angeles 3.8 Shanghai 35 Paris 48
New York 3.8 Paris 34.5 Miami 46.1
Dubai 3.1 Beijing 34 New York 41
Paris 2.9 Miami 27.9 Beijing 40
Berlin 2.5 Vancouver 26.5 London 40
Vancouver 1.9 Dubai 26 Vancouver 40
Beijing 1.9 Hong Kong 23.8 Berlin 36.6
Miami 1.9 São Paulo  23.6 Cape Town 36.4
Shanghai 1.7 Monaco 23.1 Shanghai 35
São Paulo 0.7 Sydney 19.5 Singapore 29.3
Cape Town 0.6 Berlin 19.2 São Paulo  7.8
Mumbai 0.6 Cape Town 5.8 Mumbai 6

VO LUME 28 / ISSUE 1 49
Wealth
The
Cost of
Dirty Money
Since the financial crisis, dozens
of crackdowns have targeted money
launderers who effectively rely
on banks, shell companies, and other
mechanisms to cover their tracks.
Fines have surged into the billions
of dollars, but it’s unclear whether
the enforcement efforts—some of
the more notable ones are described
here—have made much of a dent.
According to the United Nations
Office on Drugs and Crime, shady
transactions continue to reach as
much as $2 trillion a year. ——Alan Katz
50
Citigroup JPMorgan Chase
■
NEW YORK
FINE
■
NEW YORK
FINE
$237m
From about 2007 until 2012, Banamex USA,
a Citi subsidiary, processed more than
$2.05b
For 15 years or so, according to a U.S. court
settlement in 2014, JPMorgan ignored
$8.8 billion in transactions with almost no
oversight. Citi was fined by the Federal
Deposit Insurance Corp. and the California
Department of Business Oversight
in 2015. Two years later, it entered into
a nonprosecution agreement with the U.S.
red flags surrounding the dealings of
Wall Street financier Bernard Madoff, who
used his account at the bank to run a
$65 billion Ponzi scheme, the largest ever
uncovered in the U.S.
Department of Justice.
■ Wachovia
CHARLOTTE
FINE
$160m
Mexican drug cartels used accounts at
Wachovia to finance their operations and
launder money. From 2004 through 2007,
the bank, since acquired by Wells Fargo,
processed at least $373 billion in wire
transfers from Mexican currency houses,
according to a 2010 deferred prosecution
agreement with U.S. authorities.
■ Liberty Reserve
COSTA RICA
The digital currency platform was central
to an alleged $6 billion money laundering
operation. In 2016, U.S. authorities
sentenced its founder, Arthur Budovsky,
to 20 years in prison for running a
money laundering enterprise through
the Costa Rica-based platform.
■ PDVSA
CARACAS
Former Julius Baer banker Matthias Krull
was sentenced by a U.S. court to 10 years
in prison in October for his role in helping
to launder $1.2 billion embezzled from
Banks state-owned Petróleos de Venezuela SA.
(The bank wasn’t accused of any
Other wrongdoing.)
BLOOMB ERG MA RKE TS
■ Standard
Chartered
LONDON
FINE
$967m
In 2012 the bank paid $667 million in fines
for violating U.S. sanctions on doing
business with Iran. In 2014, New York state
fined it an additional $300 million for
weak anti-money-laundering controls.
■ HSBC
LONDON
FINE
$1.9b
The bank failed to monitor properly more
than $670 billion in wire transfers from
Mexico and more than $9.4 billion in
purchases of U.S. currency, according to
a 2012 deferred prosecution agreement
with U.S. authorities. An elaborate
system of deposits and money transfers
allowed Mexican and Colombian drug
cartels to launder their illicit proceeds.
■ Teodoro Nguema
Obiang Mangue
MALABO
The son of the president of Equatorial
Guinea (and now the country’s vice
president) made off with more than
$300 million from the country from 2004
to 2011, via bribery, kickbacks, and money
laundering, according to a 2014 U.S.
settlement he signed. The U.S. seized
about $30 million in assets, including
Michael Jackson memorabilia and a Malibu
mansion bought through a shell company.
■ Danske Bank
COPENHAGEN
FINE
? $900m
In September the bank said about
€200 billion ($230 billion) in potentially
illegal funds flowed through its tiny
Estonian unit over nine years—despite
warnings from a whistleblower and
regulators. Investigations are under way
in Denmark, Estonia, and the U.S.
■ Bangladesh
Hackers
DHAKA
Hackers stole $81 million from the central
bank of Bangladesh in 2016. The thieves
used Swift, the global interbank payment
system, to issue bogus instructions to
withdraw Bangladesh Bank funds from the
Federal Reserve Bank of New York—and
then laundered it through Asian casinos.
VOLUME 28 / ISSUE 1
■ ING
AMSTERDAM
FINE
In a 2018 agreement with Dutch
authorities, the bank acknowledged
“serious shortcomings” in failing to
prevent illicit payments by VimpelCom
to a company owned by an Uzbek
government official. VimpelCom, originally
a Russian telecommunications company,
is now called VEON.
■ 1MDB
KUALA LUMPUR
From 2009 through 2015, more than
$4.5 billion flowed from this government
fund into the hands of allegedly corrupt
officials and their associates, according
to a 2017 U.S. Department of Justice
complaint. Malaysia filed criminal charges
against Goldman Sachs, which arranged
bond sales for 1MDB; the bank said it
would “vigorously contest” the charges.
■ Deutsche Bank
FRANKFURT
FINE
$670m
In 2017, U.S. and U.K. authorities fined
the bank for a series of mirror trades
conducted through its Moscow office.
The trades allowed Russians to expatriate
billions of dollars by buying stocks with
rubles at home and selling the same
shares in London for dollars or euros.
■ Commerzbank
FRANKFURT
FINE
$1.45b
From about 2002 to 2008, the bank
processed more than $250 billion
in transactions on behalf of Iranian and
Sudanese entities. Because of ineffective
compliance controls, according to a 2015
consent order with the New York
Department of Financial Services,
it failed to share relevant information
with authorities about clients subject
to U.S. sanctions.
■ Commonwealth
Bank of Australia
SYDNEY
FINE
A$700m
In June, the bank paid the biggest civil
penalty in Australian corporate history after
admitting to more than 53,000 breaches
of money laundering laws. The laundering
allowed drug syndicates to funnel millions
of dollars offshore.
51
The Markets Q&A

Yngve Slyngstad:
“We have a higher risk tolerance”
By JONAS BERGMAN and SREE VIDYA BHAKTAVATSALAM
P H O T O G R A P H S B Y K A L P E S H L AT H I G R A

NORWAY’S CLOUT IN financial markets far outweighs its economy, which

is about a 10th the size of Germany’s. The central bank’s $1 trillion
investment fund plows the Nordic nation’s oil income into public
securities and has become the biggest of its kind, owning about
1.4 percent of global stocks. Yngve Slyngstad, who grew up in Asker
just outside Oslo and received multiple graduate degrees before devot-
ing himself to finance, has been chief executive officer of Norges Bank
Investment Management since 2008. The 56-year-old spoke to
Bloomberg Markets about what makes a good money manager, how
he learns about China’s economy, his concerns regarding information
monopolies, and why all investing is active. He also explains his strat-
egy for private equity and real estate and why his fund’s potential
divestment from oil company stocks has nothing to do with climate
change concerns. While the fund now aims to be 70 percent in equities,
he foresees that increasing in the future. “With the larger funds you
have a larger buffer,” he says. “We have a higher risk tolerance.”

52
BLOOMBERG MARKETS: When people look at your CV, one of the
things that pops out is that you have four degrees—in politics,
economics, law, and business. Why did you choose to take all those
degrees when normal people make do with one or two, or maybe
even none?
YNGVE SLYNGSTAD: Yes, and the best part of it is that most of my
studies were actually in philosophy, and I never put that on my
CV—that I have a degree in philosophy—at all. Why did I do all of
these degrees? I would simply say that’s just a reflection of curiosity,
a genuine desire to learn, and to read a lot of books. I don’t think
you necessarily need to narrow down your profession, definitely
not in investing. Investing is really something that is broad. It’s all
about the future, so having an open mind probably was the most
important thing for me.
BM: Was there a sense while you were getting all of these degrees
that you were working toward becoming an investor? Or were you
searching for something to do in life?
YS: I did law school first, and after finishing that I decided that
was not going to be my profession. After studying and taking an
MBA, I think finance was one of the options but not necessarily
the only one.
BM: What was more interesting to you about finance than law?
YS: Finance is a privileged area to work in because it’s a gravi-
tational field for everything that goes on in society—both that it’s
so much about looking forward to what is really happening next
and the fact that every dimension of how society is put together is
reflected in the very prices of these securities. It’s a clear link to the
underlying broad economy. So I always say you must never lose the
real vision as you’re investing. It is not about paper. You’re investing
in the actual real economic activity.
BM: As you think back on your career, was there one particular
investor or philosophy that influenced you or inspired you?
YS: Not really. I had the privilege quite early, before I started
working in the fund, to be assigned the Asian equity portfolio of
Storebrand’s life insurance company. Most of the money there was
sent out to external managers, and through that search process I
saw that there are so many ways to look at this job.
We also were always open to [allowing] the people working
here to pursue their own investment style, to use what is their best
ability, whether that’s getting direct information from company
management or whether that’s doing all the numbers.
BM: What do you think is different today in terms of managing
money vs. how it was when you started off at the fund in 1998 or
even earlier at Storebrand?
YS: It is still about information processing, but the amount of
information that is available is of course increasing every year, and
the frequency of that information is just getting faster and faster.
You have to cut through that and find what is essential. With this
kind of a skill set it is very difficult to see who has got it and who
hasn’t got that ability, but I think it’s one way of distinguishing.
BM: Do you have a list in your mind of the essential things you’re
looking for?
YS: We tend to shy away from the storytellers and look for those
who are numbers-focused. But [we] also [look for] those who are
very conscious about which decisions were made for which reasons
and why they were wrong in some aspects and right in maybe others.
It’s kind of an inquisitive process to be an investor, and that means
that you have to find someone who’s got an inquisitive mind.
54 BLOOMB ERG MA RKE TS
BM: How is the advance of technology and AI changing investing?
YS: My own guess is that it’s going to dramatically change quan-
titative investing and particularly risk-factor investing, probably
more so than traditional active management.
BM: You said you were looking at Big Tech and how its dominance
affects society. Is that something that you could shed some more
light on?
YS: Well, some of our largest investments are in the large [tech-
nology companies]—Facebook, Alphabet, Tencent, Alibaba,
etc.—and part of their business model is capturing information
and monetizing the value of that information. It is, at least for me,
reasonably obvious that, in a democratic society, who sits on infor-
mation and how it is used is something that the political process
needs to somehow have a close survey of. And probably, at one
stage, that will mean some type of regulation.
I don’t think we’ve found a balance for how this information
gathering should be regulated.
BM: Do you see that as an investment risk in these companies?
YS: The question is how much is already priced in. It isn’t viable
in most businesses to sit on a monopoly for a long time but certainly
not monopolies on information.
BM: What do you make of their share prices?
YS: The first thing to note is the size of these companies relative
to the market in general. When you see the market cap of Facebook
surpassing the combined market cap of Russia—and Amazon
actually crossed the combined market cap of Brazil—it just tells
you that it’s well worth spending more time thinking about how
these companies affect how the economy is working and about
their long-term profitability, rather than spending too much time
on geopolitical risk or the risk of a country having some difficulties
for the moment. It’s the development of how the economy is put
together rather than the simple political issues of the day that we
try to focus on.
BM: Are they fairly valued?
YS: There’s no doubt that companies that come up with new
technologies that are disrupting other industries and how we put
together our economy will see large fluctuations in market values.
There’s nothing to be surprised at that these internet giants are
swinging plus-minus 30 percent in market value. I wouldn’t spec-
ulate on what is a fair price for these companies.
BM: Some of these companies—Alibaba, Tencent—are operat-
ing in China. What is your view on the opportunity in the Chinese
market?
YS: Our starting point is that we want to capture the whole world
economy and the value creation that you see in that economy. Our
combined investment in China at this stage is less than 3 percent
of our portfolio. I think over time, given that the Chinese GDP is a
much higher percentage of [the world economy], it’s natural that we
will invest quite a lot more in the Chinese market. We’ve said that
for a while, and if you’d asked me 10 years ago I would have expected
that we would have a higher percentage of our fund’s investment in
China today than what we actually have. The development of the
market and our investment there have been less rapid than what I
thought, despite the fact that the trajectory of the Chinese economy
has been around 7 percent growth a year. The consequence of that
may of course be that it will take a longer time for us to get the
investments into the Chinese market to the scale that is relative to
the size of the economy. That depends more on how the Chinese
 “A small company in a small country may give you more insight
into how the world economy is developing”
authorities decide to develop their market than it depends on how
we are perceiving the growth of the economy.
BM: If the investing pace hasn’t been as rapid as you envisioned, is
it because of structural issues that limit foreign holdings in China?
Or because the opportunity set isn’t what you thought it would be?
YS: There are so many decisions that are in the political area, like
the role of state-owned enterprises, that have to be carefully consid-
ered by investors. But I think one quite obvious question that most
foreign investors are asking about the Chinese market and Chinese
companies is: How much will they actually pay in dividends? So far
the payout ratio has been quite restrictive relative to the companies
in other parts of the world. This is one of the things that probably
foreign investors will be looking at more carefully in regard to their
investments in China. The second issue with regard to the Chinese
market is corporate governance. Which is of course a key concern
for us in all markets but especially in new markets.
BM: What corporate governance issues concern you?
YS: That differs from one company to another. Our whole work on
corporate governance goes from the equal treatment of shareholders
to how boards are run and managed, so it’s a whole range of issues.
BM: How much time have you spent in China?
YS: The first time I went there was back in ’87, for a whole week
traveling around the country. The last time I went was two weeks
ago, and the next time I go there is two weeks from now. So yes, I’ve
spent some time in China, and I think it’s necessary. What moves
the markets today is to a large extent either events in the U.S. or
events in China. So these are two markets that you just have to pay
very close attention to.
BM: What is your typical itinerary like when you visit China?
YS: Actually there are typically two different ones: basically four
days in Beijing of just meetings, or five days of traveling and trying
to see as many companies as possible—and definitely not going
to the large cities like Beijing, Shanghai, Shenzhen. You stay away
from those and go to the rest of the country. It’s an enormously
large country, which I think most people ignore when they go.
BM: Is it really necessary for you, the CEO, to go and visit small
companies on the ground?
VOLUME 28 / ISSUE 1
YS: In my view, absolutely. It doesn’t necessarily matter which
exact ones you’re meeting, but you have to always remind your-
self that you’re investing in actual businesses with production
facilities that make things, products and services. You really
have to put all of the bits and pieces together and see if you
can somehow make a combined picture from these smaller
parts, rather than trying to take a top-down view. I think that’s
reflected in the way that I put together the fund management
organization. It’s around 100 external and nearly 150 internal
portfolio managers, and each makes their individual investment
decisions. There are very few top-down views with regard to
how they see the world. A small company in a small country may
give you more insight into how the world economy is developing
than spending some time in the latest production data from a
larger company.
BM: What has been the most amazing insight that you’ve come
back with?
YS: Every time I go, I get our people in the China office to set up
an itinerary based on a specific theme. [In 2017] it was automation
and [in 2018] global production chains.
The insight from automation was from a reasonably small
town in China—reasonably small in this context is 3 million people.
According to the local government, [the town’s] 414 shoe producers
produce more than 1 billion shoes a year. Most of the better players
there intend to automate the production process.
I check the numbers and the statistics, and it shows that
China is taking a larger and larger share of shoe production. While
the common view has been that China will upgrade in the value
chain and let the production of shoes and textiles go to Bangladesh,
Vietnam, etc., it may not actually be happening. And it’s only by
going there that you will reach that sort of conclusion about how
the world economy will develop.
That has huge consequences for both those emerging
markets and the way you then think about China. You wouldn’t
get that from production statistics or macroeconomic data. You
do get it just by showing up in a relatively small city that has the
largest shoe producers in the world.
55
“The big driver of the economy and of our
investment results is development in technology
more than political decisions”
BM: Then you look for the company that makes shoe automation
machines to invest in?
YS: So the people I travel with are analysts or China portfolio man-
agers. They will see which of these will be the winner and which are
fine to invest in. I will take in the other aspect: What does that actu-
ally mean for the rest of the portfolio? Is that going to be a challenge
for an emerging market if they do not get that extra production?
BM: A visit to China could make you more negative on Vietnam
or the prospects of India?
YS: Yes. That’s the point.
BM: One of the things we hear a lot about is leverage that’s built
up in China’s lending market—the banking system and then the
shadow banking system. How do you assess those types of risks in
an economy?
YS: Do we actually sit down and try to analyze what is happening
with the whole funding, with the Chinese economy, the shadow
banking, some people call it, unsecured lending? Yes, of course. But
again, our view on the market is rarely top-down to that extent. We
try to find someone who’s actually working in that area, a company
in that area, and see what is really going on there. We have found
it’s very useful to have a Shanghai office, a person who’s looking at
that operation and the banking sector, spending at least half his time
on the other types of financing that have been going on in China
for the last few years. Of course it’s a big issue. We don’t have a full
overview of that. I wouldn’t make any statements as to where we
are in the credit cycle in China.
BM: The other risk is obviously what’s going on with the trade
disputes with the U.S. You have said that you see a potential risk of
two global supply chains emerging from this dispute. Who do you
think would be the biggest losers or winners from a disruption of
the system that we’ve had?
YS: Currently, the Chinese economy and the U.S. economy are
very intertwined. It is hard to see how it can be unwound, which I
think is a very positive thing in the bigger scheme of things. But if
even on a smaller scale companies start to diversify their produc-
tion—which already is happening—and that is combined with
the move toward more automation, that will mean quite a lot of
56 BLOOMB ERG MA RKE TS
new investments for all of the companies. Which, of course, will
affect their profitability. It’s not necessarily easy to see what is the
short-term and the long-term effect of all those things.
BM: What are you anticipating?
YS: In November I had a trip to China to look into the specific
issue with regards to the production chain. We visited compa-
nies such as Foxconn and many other semiconductor producers.
There’s a division of labor between the U.S. and China and ben-
efits from the global production chain in key components that
I think will lead, more or less by economic logic and necessity,
to a mutually beneficial relationship between those two large
economies. The thought of disintegration to regional production
chains I think is less likely.
From our perspective, as a long-term-oriented fund, the big
driver of the economy and of our investment results is development
in technology more than political decisions. Most of the people in
the market will now typically say the biggest risks will be trade dis-
putes between China and the U.S., the status of the EU and Brexit,
and the fiscal strength of some of the countries. But in a longer-term
perspective, I don’t think any of those risks are high on our agenda.
BM: You have large investments in the U.K., so how concerned
are you about the uncertainty surrounding the Brexit deadline at
the end of March?
YS: We should have expected two years ago that the peak of this
uncertainty would be in March 2019. The longer perspective in
our view is still that we are invested in the U.K. with a long-term
horizon. How much we will invest will not be changed depending
on the result of this development. If we look past this—10, 20,
30 years—the U.K. will be an important economy in Europe, and
it will remain in Europe. We expect business on that timeline to
develop positively no matter the outcome.
BM: When you have $1 trillion in assets, how does it work on a
practical basis?
YS: The most important decision for us is really the split between
fixed income and equities. We’re operating for all practical pur-
poses in the public markets. Yes, we have some real estate, but in
the big scheme of things it’s equities and fixed income. And we
VOLUME 28 / ISSUE 1 57
“Yes, the stock exchanges have got a problem,
but we as investors in the public markets
have also got a problem”
have got from the owners of the fund—the Norwegian people and
through their representatives in the parliament and the execution
of the mandate—a risk preference which basically says 70 percent
equities and 30 percent government bonds. But we have quite a lot
of leeway in how we put that together. So the first real decision in
regard to all this macro information is: Are we comfortable with
the equity market as of today, with regard to all these trends that
we see coming in the next 5, 10, 15 years?
It’s not like we’re not looking at anything that is top-down,
it’s just that we have to see how confident we are. And some of these
decisions are quite large, like not only how much do you have in
equities vs. bonds, but what kind of regional division do you have
more or less in emerging markets, etc.? That is not for any kind of
trading view to implement for the next three months, but it may be
for how we think about the fund in the three- or even the 30-year
context. Thirty years, of course, is very difficult to do—in principle
you should look at it—but you can take a three-year view.
BM: Is that your horizon now, three years?
YS: We’re trying to force ourselves to, once in a while, have a
30-year perspective in the way we look at risk, even in our strategy
plans. From a practical point of view, I think most of the things we’re
trying to do are on a three- to five-year horizon.
BM: In your 2017 proposal to the Ministry of Finance, you said
the portfolio’s 23 currencies should be cut back to mainly three:
pounds, euros, and dollars. The point was that, one, there’s so
much currency risk in the stock portfolio already, why duplicate
that in the bond portfolio? And two, the correlation between, say,
South Korean bonds and German bunds is fairly similar already, so
there’s no reason to really hold South Korean bonds, for example,
or yen bonds.
YS: The letter actually talked about how, in reality, we’re
a delevered equity-only investor. Because although we have
70 percent in equities, not 100 percent, the way we look at fixed
income today is very different from when we had the 40 percent
equity, 60 percent fixed income. So it’s right then to say, “We’re
not going to invest in these currencies for the diversification.” If you
really want to diversify in a combined portfolio that’s 70 percent
58 BLOOMB ERG MA RKE TS
in equities, what actually diversifies your equity is to a large extent
U.S. Treasuries—that is, in most scenarios, where you get the most
diversification in a market correction, and you will see that that is
a safe asset.
But it didn’t mean that we would therefore go out and con-
struct the fixed-income portfolio without other currencies. It just
said that if your main purpose of the 30 percent is not to look at it
as a standalone fixed-income portfolio that is diversified, but to use
it as a diversifier for the whole portfolio, then you want to narrow
the number of currencies. But we didn’t say that would mean in
practice that we would invest in fewer currencies. So it still would
mean that our fixed-income managers would probably be investing
in roughly the same number of currencies around that.
BM: This hits at the heart of the big issue that people talk about.
Your main critics are saying, “This is just a way for them to sneak
more active management into the system.”
YS: We have completely removed the vocabulary internally about
active management. After 2008 we didn’t see that as an interesting
concept anymore. From our point of view there is no way to do
investment that is not active. You can be more active in tailoring
your reference index, or you can be more active in selecting specific
securities in the portfolio, but you’re equally active whatever you’re
doing. As soon as you start to say, “I want to have X in a specific asset
class,” you already have active management.
BM: Where are you right now in terms of assessing the role of real
estate in your portfolio?
YS: We have been investing less in real estate the last two years,
hardly anything net-net. We have been selling some and buying
some. There are two reasons for that. One reason is we don’t find
the real estate market very attractive at this stage in the cycle. But
the second thing is more long-term structural. It’s hard to scale up
real estate for a fund of our size.
It would require a very large real estate organization, and I
think one of the most important things we are currently contemplat-
ing is the extent to which we are willing to build a real estate orga-
nization of that size. Structurally, we currently have 2.7 percent in
real estate. If you want to have an asset class that makes a difference,
obviously it would have to be at least 5, and preferably 10 percent,
and it’s a current discussion on whether we will go there.
BM: So you’re saying you could potentially never move up to the
7 percent limit that you have right now? It would be too much?
YS: It is one of the things that we’re discussing for the moment.
BM: What about private equity and infrastructure?
YS: We always said that private equity for us is not an asset class.
It would just be an extension of what we do in the equity portfolio.
We would have talked about it as nonlisted equities, buying into
those large companies that are not yet listed but still traded.
Some of these companies—we’re talking about Uber,
Airbnb, sort of that—wouldn’t be priced through the day on the
stock exchange, but that wouldn’t really hamper us with regard
to transparency. In the question posed [in 2017] about private
equity, if you read it quite carefully, the Ministry of Finance said
that we’re not proposing private equity, but we will be open more
for the nonlisted equities, which we already had in the mandate.
The [company’s] board [has to state] an intention to go to the stock
exchange. So the question that the Ministry of Finance therefore
has is, “Can you reformulate that to capture a broader part of the
nonlisted universe?” Because the essential question for us is if the
listing in itself actually gives us something that is different from
something that is still quite a transparent company, still traded,
but not necessarily through an exchange.
BM: But the idea is that the Norwegian people should be able to
see what you’re investing in, and a lot of these companies are sort
of black boxes.
YS: I don’t think they necessarily are. What if you have a develop-
ment like you had with Spotify [in April 2018] that was not actually
going to the stock exchange with the distributed sale of securities
but just started trading? You have to decide at which point you think
we should be buying the company.
How do we get stock exchanges to realize that an important
part of their role is to make it attractive to be a listed company? If
the market is continuing to go in the way that it has been going—
that the larger and larger part of the universe remains outside the
stock exchanges—yes, the stock exchanges have got a problem,
but we as investors in the public markets have also got a problem.
BM: A lot of companies that don’t go on to the public market,
or even companies like Tesla that are on the market, complain
about how there’s too much scrutiny on corporate governance
issues by investors like your fund. How do you balance those two
opposing forces?
YS: That is one of the key questions that we’re wrestling with. It’s
a question not only for people in the financial market, but it should
be important for politicians on a very high level. It’s in everyone’s
interest that we have a mechanism to have large companies, which
are some of the most important entities in society, being governed
and having ownership change between different participants, and
that process is put into a format that everyone is comfortable with.
So the question is how do you create incentives for companies to
be in the public sphere and not disincentives the way that it has,
to some extent, been developing in the last decade.
BM: Can a company develop better outside the market than on
the market?
YS: There are aspects that are positive both in the public and
private market. And some people are saying that it’s because the
investors in the public market are different from investors in the
VOLUME 28 / ISSUE 1
private market. But in reality it’s generally the same institutions,
so why should that necessarily be the case?
BM: We saw in 2016 that money started flowing out of the fund
for the first time. Would going higher than 70 percent in equities
be prudent?
YS: I think that’s quite possible. We’re looking at this every
10 years. So in ’97 the fund started to go to 40 percent in equities.
In 2007 it was decided to go to 60 percent in equities. In 2017 it was
decided to go 70 percent in equities. We’re still not at 70 percent.
But I’m quite sure that there will be a discussion in 2027 as well.
With the larger funds you have a larger buffer. So it is a func-
tion of the fund being larger that we have a higher risk tolerance. The
government has been taking money out for a few years—not [last]
year, we [had] net inflows—but we still have a fund that is probably
continuing to grow in the next few years. If the fund actually starts
to go down in value, I think our equity share may be reduced.
BM: It seems to have worked fairly well for the fund to be within
the central bank. Why is there a discussion that you should become
independent?
YS: If you want to have a really large amount of investment in real
estate and infrastructure, etc., it will require a lot more than the
500 people we have today, or 560. And if it’s just too many people,
it’s not natural to have it within a reasonably small central bank.
BM: How do you see the discussion on the oil divestments
shaping up?
YS: The question there is do you want to look at this as
combined—that is the petroleum wealth in the North Sea plus
the fund—or the fund in isolation. If you want to look at the fund
in isolation, there’s no reason to remove oil stocks. If you want to
look at it as a combined setting, it makes, of course, little investment
sense to reinvest in oil. That’s really the most important question.
It’s not a climate issue or any issue like that—it’s just a question of
being able to look at the fund in this context or in the larger context.
BM: Every sovereign wealth fund, every pension fund, has its own
set of stakeholders, its own set of obligations to its constituents. Is
there a model that you would like to emulate?
YS: We have a fund that has at least three purposes: The first
one is as a way to just transition the inflow of the oil money, and
to that extent it’s just a stabilizing mechanism, so we call it the
stabilization fund. Secondly, it is a reserve fund. What happens
if the oil price suddenly drops? Can we immediately have funds
available for stabilizing the economy? We do, so it’s actually used
in that context. In 2008-’09 no one asked a question about the
Norwegian banking sector. The funds were available even though
the Norwegian banks were very dependent on the U.S. dollar
money market. We had all the funds necessary available for the
dollar funding if need be. But the third thing is the generational
fund. That’s probably the most important part. We generally
believe—at least this is the construct—that there’s no one in
our generation who has any specific entitlement to the revenue
stream of the North Sea just because the revenue is coming in
our generation. It is wealth that was there a long time before this
generation existed, and it’s wealth that we should protect for our
grandchildren and their grandchildren.
Bergman is Bloomberg’s Oslo bureau chief and team leader for Nordic
economic and government news. Bhaktavatsalam is managing editor in
London for finance and investing in Europe, the Middle East, and Africa.
59
 The Eclipse of Singapore’s
Stock Market

For the last five years, delistings have

outnumbered listings. Does it matter?
Not as much as you might think
By LIVIA YAP and TOM REDMOND
P H O T O I L L U S T R AT I O N B Y G L U E K I T
ROBSON LEE HAD a decision to make. In his more than two-decade
career as a capital-markets lawyer in Singapore, he’d helped more
than 30 companies list on the country’s stock exchange, bringing
to market everything from a grocery store chain to a pawnbroker.
Business had been good, but it was starting to dry up. Lee decided
he had to get out. “I saw the decline,” he says. “That’s why I moved.”
That was in 2014, when more companies left the Singapore
Exchange than joined it, with S$8.4 billion ($6.43 billion) in value
disappearing from the public market. Lee, now 50, quit his job and
became a partner in the Singapore office of the U.S. law firm Gibson,
Dunn & Crutcher LLP. While he still works on SGX listings, he
spends more than three-quarters of his time helping companies
throughout Asia to restructure and make asset purchases.
The exchange’s fortunes have only gotten worse. For the
last five years, delistings have outnumbered listings in the market,
which had 741 companies at the end of December last year, down
from a peak of 782 in 2010. In 2018 the money raised from the
15 SGX initial public offerings, excluding depositary receipts,
fell to just S$710.6 million, while 19 companies departed—a net
outflow of S$19.2 billion in market value. While money has been
leaving the public markets, Singapore has strengthened its posi-
tion as a leading wealth hub in Asia, with private banks oversee-
ing more than $2 trillion in assets and providing alternative
investment opportunities in structured products, real estate,
and private equity.
Many of the businesses that have left the exchange in the
past few years are well-known in Singapore. They range from
GLP Pte., one of the world’s biggest warehouse owners, to Osim
International Pte., Asia’s largest maker of massage chairs. Some
chief executive officers who’ve taken their companies private,
lamenting what they see as low valuations in the city-state, are
seeking more liquid markets that can generate higher stock prices.
For example, Lee says, sofa maker Man Wah Holdings Ltd. was
taken private in September 2009. Within six months, it was
relisted in Hong Kong at about eight times its market value.
Chew Sutat, SGX’s head of equities and fixed-income busi-
nesses, says delisting is a global trend. What’s more, he says, it’s
62 BLOOMB ERG MA RKE TS
a healthy market function that weeds out weaker companies.
Unlike some exchanges, Chew says, SGX doesn’t refrain from
delisting zombie companies just to keep its numbers up.
But that doesn’t tell the whole story. As of the end of last
year, the market capitalization of companies with primary listings
in Singapore had fallen by S$97.5 billion, or 14 percent, from the
end of 2014, according to SGX data. The bourse’s average daily
turnover has been halved since 2007. “These trends are worrying,”
says Ngoh Yi Sin, an analyst at Singapore’s CGS-CIMB Securities
International Pte.
More worrisome, perhaps, some homegrown champions are
bypassing SGX altogether. Take gaming company Razer Inc., one
of the country’s few recent consumer-technology successes, led by
Singaporean-born CEO Tan Min-Liang and backed by sovereign
wealth fund GIC Pte. When it listed in November 2017, it opted
for Hong Kong, which has benefited markedly from its proximity
to China and its “stock connects”—authorized cross-boundary
investment channels—to mainland China exchanges.
While Singapore and Hong Kong vie for the mantle of Asia’s
premier financial hub, the Southeast Asian nation has always lagged
behind in terms of listings, because it has a smaller pool of domes-
tic companies and no hinterland to depend on. And the gap is
widening as Hong Kong cements its position as the venue of choice
for Chinese companies. Hong Kong raised $33.5 billion from IPOs
in 2018—more than any exchange anywhere—as big name after
big name came to market. China Tower Corp., a state-owned infra-
structure company, raised $7.5 billion in what was at the time the
world’s biggest IPO in two years. Smartphone maker Xiaomi Corp.
raised $5.4 billion, and Meituan Dianping, a food delivery giant
backed by Tencent Holdings Ltd., procured $4.2 billion.
PREVIOUS SPREAD: PHOTO: ALAMY
Hong Kong’s market is now so much larger and more vibrant
than Singapore’s, the two can’t even be compared, says Tham Tuck
Seng, PwC’s head of capital markets in Singapore. The imbalance
is practically impossible to right, because companies naturally
gravitate to bigger, more liquid markets. “They’re two different
fishes,” Tham says. And it’s not just Hong Kong that’s overshad-
owed Singapore. In 2018 even Southeast Asia’s regional exchanges
 “If you think about the center of gravity in Asia and where
it’s going, it’s all shifting to mainland China”
left Singapore in their wake: The Ho Chi Minh Stock Exchange in
Vietnam raised $2.9 billion; Thailand’s bourse, $2.6 billion.
All the while, markets in Shanghai and Shenzhen have
become much more accessible to overseas investors. James Thom,
an Asian equities fund manager at Aberdeen Standard Invest-
ments Ltd. in Singapore, says his firm has been selling its Singa-
pore holdings to buy Chinese A-shares over the last three years.
“It’s home to some good-quality companies,” he says of Singapore.
But, he says, “if you think about the center of gravity in Asia and
where it’s going, it’s all shifting to mainland China.”
Singapore once seemed on the verge of becoming the
public-market investor’s gateway to Asia’s emerging economies.
But in recent years it’s been increasingly cast aside as Southeast
Asian companies opt to list on their own exchanges, Hong Kong
scoops up much of China’s IPO pipeline, and markets such as
Shanghai and Shenzhen open up to foreign investors through
stock connects with Hong Kong.
The world still sees Singapore as a remarkable success story:
the island nation Lee Kuan Yew turned into the world’s third-
richest country in a single generation. A low-tax regime, trans-
parent legal structures, a highly educated workforce, and a wel-
coming attitude to multinational corporations all helped turn
the city-state into one of the world’s leading financial centers
despite its small size (it’s about half as large as Los Angeles) and
population (5.6 million). In some quarters, Singapore, with its
ability to attract foreign investment, has even been cited as a
model for post-Brexit Britain.
But the fate of the stock market—once the undisputed South-
east Asian powerhouse, broadening its reach into China—raises
questions. As China outpaces most of the world economically, largely
to the benefit of Hong Kong’s capital market, where does that leave
Singapore’s? And where does that, in turn, leave the country?
SINGAPORE’S STOCK EXCHANGE dates to 1973, when it split from
the Malaysian bourse. By the end of 1999, 335 companies were
VOLUME 28 / ISSUE 1
listed on the main board. Shortly thereafter, the exchange moved
into its iconic headquarters, the twin-towered SGX Centre on
Shenton Way, which then housed some of Singapore’s biggest
financial institutions.
In the 2000s, SGX brought in many Chinese companies.
With a population that’s more than 70 percent ethnically Chinese,
the city-state became a natural alternative venue for such busi-
nesses. The so-called S-chips, Singapore-listed Chinese companies,
continued to dominate the IPO market until a series of high-profile
scandals in the 2010s, similar to the frauds uncovered at Chinese
companies that listed via reverse takeovers in the U.S. Singapore,
eager to welcome foreign listings, had eased the requirements for
companies to join the bourse. Some of them were fraudulent, says
Mak Yuen Teen, an associate professor at the National University
of Singapore. Domestic investors got burned.
Then, in 2013, local punters experienced another crash. A
penny-stock rout wiped out S$8 billion, in what the authorities
called the “largest market manipulation case in Singapore’s
history.” Three individuals illegally pumped the shares of three
smaller companies, which surged at least 800 percent in nine
months before plunging over three trading days. Again, local
investors bore the brunt of the losses. The Catalist market, the
exchange’s venue for smaller, growth companies, never quite
recovered, says Gibson Dunn’s Lee: “It came to a grinding halt.”
These days, Mak says, retail investors account for an esti-
mated 30 percent of the market. The number of S-chips has
greatly diminished. What are left are the safe, steady companies
that form SGX’s backbone. These are mostly stocks favored not
for their growth prospects but for their dividends—backed by
state investment firm Temasek Holdings Pte. or a wealthy family
such as the Kweks (financial services and property) or the Wees
(banking and property). “They appeal to a certain kind of inves-
tor,” says Carmen Lee, head of investment research at
Oversea-Chinese Banking Corp. (OCBC). “A lot of private bank
money is now in Singapore, and they actually like the core, some-
what boring, defensive stocks,” she says.
Three big banks—DBS, OCBC, and United Overseas
63
Bank Ltd.—account for more than 40 percent of the benchmark
Straits Times Index (STI). Property and telecommunications
companies make up an additional 23 percent. The STI also
includes some big foreign listings, such as Thai Beverage PCL
and parts of the Jardine Matheson conglomerate, which moved
to Singapore three years before the British handed Hong Kong
over to China in 1997.
But when it comes to technology companies, there’s only
one in the STI: Venture Corp., a 34-year-old provider of elec-
tronics manufacturing services. “There is a real dearth of new
interesting companies,” says Kelvin Tay, regional chief investment
officer at UBS Wealth Management in Singapore. “Nothing that
I can think of.”
Even the neighborhood around Shenton Way is changing.
The Monetary Authority of Singapore is still there, but the Central
Provident Fund, the national pension fund, has sold its building
and relocated outside the central business district. DBS has moved
to the newer Marina Bay area, joining the Asian headquarters of
Facebook Inc. and LinkedIn Corp.
levels of homeownership in the world, about 90 percent. Its people
have a staggering $949 billion invested in real estate, accounting
for 44 percent of household assets. This is the “traditional path,”
says Jaime Pang, a 31-year-old lawyer. “You get a job, you get
married, you put all your money into a house, and there isn’t
much left over to invest in the stock market.”
As a result, stocks and securities account for just 9.6 percent
of household assets, according to government statistics. That
compares with 48 percent in the U.S. And Singaporeans who do
put money into equities increasingly turn to options beyond the
city-state, a diversification that’s facilitated by exchange-traded
funds, among other things. “Local investors are savvy and have
more international options,” CGS-CIMB’s Ngoh says.
SGX has taken steps to arrest the market’s decline. In 2018
it introduced dual-class shares that provide some company owners
with superior voting rights. It’s formed co- listing partnerships
with Nasdaq Inc. and the Tel Aviv Stock Exchange. It’s also
expanded an in-house research team dedicated to highlighting
the exchange’s small and mid-cap stocks, while the government
is launching a S$75 million grant to help companies go public.
But the slide continues.

RON TAN IS CHAIRMAN AND CEO of Cityneon Holdings Ltd., which

mounts exhibitions modeled on blockbuster movies such as
Marvel Entertainment LLC’s The Avengers and NBCUniversal
Media LLC’s Jurassic World. In 2018, even though Cityneon’s
SGX-listed stock had been surging since a low three years earlier, FALLING BEHIND
Tan decided to take the company private. He says he was dissat-
Change in Bloomberg equity market cap index* since Jan. 19, 2014, weekly
isfied with Cityneon’s valuation. Growth stocks such as his, which
China Thailand Hong Kong Japan Singapore
don’t pay dividends, are misunderstood in Singapore, he says,
because investors have become so accustomed to the steadier,
dividend-yielding companies that make up most of the market,
as is the case in Zurich and Dubai. 200%

It’s a stultifying mindset, he says, and it applies to everyone

involved. “It’s the ecosystem—the exchange, the fund managers,
the retail investors, even the way I’ve been brought up,” he says.
“I’m a Singaporean, so I myself am programmed this way, so I 150
cannot blame the rest of the people here when they look at my
own company.”
Beyond the concerns about low valuations and thin trading,
a closer look reveals that some of the factors often cited as driving
Singapore’s economic success are the very ones holding back the 100
stock market.
First, there’s the education system. Singapore has gained
international recognition for producing high-achieving students
in math and science, but it’s done so through an emphasis on fol-
50
lowing rules and rote learning. That, says UBS’s Tay, impinges on
creative thinking and leads to a lack of people starting businesses
that might eventually list on the exchange. “We ask ourselves why
we don’t create enough entrepreneurs and creative people,” he
says. “It’s not that we don’t have them. It’s just that the system 0
does not allow it. If you have to spend so much time becoming
exam-smart, you have very little time to be creative.”
Homeownership—revered in Singapore—is another drag
on the stock market. Former Prime Minister Lee reasoned that
1/19/14 1/13/19 - 50
if Singaporeans owned their own property, they’d be more
*Includes only actively traded, primary securities on the nation’s exchange
invested in the country and its economy, and he instituted poli- Sources: {WCAUCHIN Index}, {WCAUTHAI Index}, {WCAUHK Index},
cies to encourage just that. Today, Singapore has one of the highest {WCAUJAPA Index}, {WCAUSING Index}

64 BLOOMB ERG MA RKE TS

 “A lot of private bank money is
now in Singapore, and they actually like the core,
somewhat boring, defensive stocks”
In the end, says Chua Hak Bin, a senior economist at
Maybank Kim Eng Research Pte., Singapore “will just be a very
niche market.” And maybe that’s enough. Chua cites SGX’s
strengths: an established real estate investment trust market;
notably high valuations for medical-services companies; and a
good track record in listing consumer stocks. For his part, SGX’s
Chew points to the exchange’s success in helping companies raise
funds beyond their initial offerings, and he says that Singapore
is still the market of choice for firms looking to expand regionally
and tap international investors. About half of the companies
listed on SGX are foreign, and institutional money trusts the
Singapore market, he says.
Like many of its peers, SGX has diversified beyond equities
into derivatives, says Michael Wu, a senior equity analyst at
Morningstar Inc. in Hong Kong. According to his calculations,
SGX got 40 percent of its revenue from futures and options from
Sept. 30, 2017, to June 30, 2018, compared with just 26 percent
from cash equities.
DOES IT MATTER if the Singapore stock market shrinks?
The economy is thriving as Singapore prepares for its third
leadership transition in 53 years, with Minister for Finance Heng
Swee Keat set to take over by 2022 from the current prime min-
ister, Lee Kuan Yew’s son Lee Hsien Loong. The World Bank
ranked the nation second out of 190 countries for ease of doing
business in a 2018 report. Its gross domestic product per capita,
based on purchasing power parity, ranks third in the world:
$98,260 as of 2018, according to the International Monetary
Fund. GDP, which is driven by manufacturing, trade, finance,
and business services, has grown consistently—albeit at a mod-
erate pace—since the global financial crisis. And the country was
ranked Asia’s most competitive wealth management center—
ahead of Hong Kong and second only to Switzerland globally—
in a Deloitte report last year.
The government has invested billions in nurturing
VOLUME 28 / ISSUE 1
industries such as health care and biomedical sciences, and in
creating an attractive environment for technology startups. It’s
also pursuing its plans for a “Smart Nation” that runs its roads
and industries and everything in between on cutting-edge tech-
nology. Some of those bets have already paid off. Since the early
2000s, Singapore has doubled the number of jobs in the biophar-
maceutical industry, to more than 6,000, as GlaxoSmithKline,
Merck, Roche Holding, and other companies set up local bases.
None of this is particularly dependent on the health of the
stock market. A smaller pool of companies limits the choices
investors have even as the fund management industry continues
to grow, and Justin Tang, the head of Asian research at United
First Partners, says having a sleepy stock market does little to
burnish Singapore’s reputation as a financial hub. But in the
grander scheme of things, Chua of Maybank Kim Eng says, the
stock market isn’t as important as it used to be. “A vibrant capital
market is an added advantage or added benefit to the economy,”
he says. “It’s not the only thing.”
Indeed, the delisting trend could be a good sign, says Tamara
Henderson, who covers Southeast Asia, Australia, and New Zealand
for Bloomberg Economics in Singapore. It creates a situation in
which unlisted companies, free of the constraints of quarterly
reporting, are more able to focus on long-term growth, thereby
stabilizing the economy. “It’s probably a sign of wealth,” she says.
And in Singapore, wealth definitely matters: It’s one of the
cornerstones of the economy. As far as Aberdeen’s Thom is con-
cerned, the stock market has little bearing on the “tremendous
growth” in Singapore’s wealth management sector or the vibrancy
of the financial industry generally. What’s more important, he
says, is the perception that the country is a safe place to park money,
with access to good advice and good money managers. And a thriv-
ing stock market? “A nice-to-have rather than a need-to-have.”
—With Andrea Tan, Joyce Koh, Chanyaporn Chanjaroen, and
Jeffrey Hernandez
Yap covers equities in Singapore.
Redmond is a markets editor in Singapore.
65
Members of the board

Tony Coles Charles Phillips

The Black Economic Alliance, a fledgling political

action committee, is putting its money
behind candidates dedicated to righting economic
imbalances that affect African Americans
Bruce Gordon Karen Phillips
 Gerald Adolph Robyn Coles

“A Hope and
A Prayer Won’t
By JORDYN HOLMAN
I L L U S T R AT I O N S B Y N I G E L B U C H A N A N
Be Enough”

Marva Smalls Fred Terrell

MORE THAN A HALF-CENTURY after the Civil Rights Act of 1964 was
enacted and Shirley Chisholm became the first black woman elected
to Congress, African American households still have half the income
of white families. Sure, black unemployment is close to a record
low, as President Donald Trump points out. But it’s still almost
twice as high as the jobless rate for whites. The wealth gap is wide:
Black families with bachelor’s degrees or higher have a net worth
of about $68,000, about one-sixth that of white households with
similar educations.
So for one group of black executives, the message was clear:
The wealth we’ve accrued comes with the power—and
responsibility—to enact change.
It started small, as these things do: free tickets for black teens
to see the movies Selma or Hidden Figures; a personal donation to
assist disadvantaged students pursuing engineering degrees. Then
the 2016 election replaced Barack Obama with Trump, who spent
years spreading the false claim that the first black president wasn’t
a natural-born U.S. citizen.
Priorities changed in Washington. The group of executives
raised their sights. In 2017 they created the Black Economic Alli-
ance, which, by their reckoning, is the nation’s only political action
committee founded by black business leaders and specifically
dedicated to the economic issues—wealth, wages, work—that
affect black Americans.
That focus on business and economic issues differentiates
the BEA from other PACs led by or for African Americans. So does
the business experience, and wealth, of its leaders. “We got to the
point in our careers where we can take risks,” says co-Chair Charles
Phillips, who earned $43.3 million in 2017 after a subsidiary of
Koch Industries Inc. completed a more than $2 billion investment
in his software company, Infor Inc.
Phillips, a former president at Oracle Corp., has said the
BEA wants to learn from the political fundraising and influence
tactics used by Charles and David Koch, majority owners of Koch
Industries and among the most influential donors in conservative
politics. (In January, Infor said it was getting an additional
$1.5 billion, ahead of a potential initial public offering, from a Koch
fund and from Golden Gate Capital.)
While the BEA is nonpartisan, all 26 candidates it endorsed
in November’s elections were Democrats. They ranged from new-
comer Lauren Underwood in Illinois, who became the youngest-ever
black woman in Congress, to Tim Kaine, a white U.S. senator who
won reelection from Virginia and was Hillary Clinton’s running mate
in 2016. None of the Republican candidates the BEA contacted
before the election responded to the group’s 10-question survey.
The BEA is tiny in the world of PACs. As of Dec. 7 it had raised
$5.8 million, a fraction of the funds donated to groups such as the
National Rifle Association’s Political Victory Fund or the National
Association of Realtors’ PAC. And the BEA is still deciding where
it stands on controversial economic policies that are dividing the
Democratic Party, such as tax breaks for businesses.
Along with Phillips and his wife, Karen, co-founder of the
Phillips Charitable Organization, the eight-person board includes
co-Chair Tony Coles, a doctor who’s spent his career at drug and
biotech companies, and Fred Terrell, a former vice chairman of
the investment banking division at Credit Suisse Group AG. The
22-member advisory board features members of the Obama and
Bill Clinton administrations, such as Clinton’s U.S. Secretary of
68 BLOOMB ERG MA RKE TS
the Treasury Robert Rubin and Obama’s National Security Adviser
Susan Rice, as well as former Citigroup Inc. Chairman Richard
Parsons and Michael Steele, the first African American to serve
as chairman of the Republican National Committee.
The fledgling PAC is banking on this collective financial
power and business acumen to give it a voice on economic issues
that impinge on black Americans, leaving other important social
justice causes to groups including the 110-year-old National Asso-
ciation for the Advancement of Colored People, the NAACP.
“We’re just trying to bring to bear what we know best—which is
job growth and value creation for shareholders—in a way that will
make an important difference in the lives of people,” Coles says.
Race is a defining factor for black Americans in a country that
spent centuries systemically blocking them from the American
dream. Even for those that reach the highest echelons of wealth and
status, their fate remains precarious. African American boys from
the richest U.S. households earn less when they grow up than white
peers with similar pedigrees. Black men raised in the top one percent
of incomes are as likely to go to prison as white men from households
earning around $36,000, according to research from academics at
the U.S. Census Bureau and Harvard and Stanford universities.
“We’re at that point in time when you have a critical mass of
African Americans that have achieved a certain level of success in
business, in health care, in technology, you name the industry,” says
Carla Harris, vice chairman of Morgan Stanley’s Wealth Manage-
ment division, who also sits on the BEA’s advisory board. “We do
have a responsibility to lend whatever we have toward moving the
needle and more importantly bringing others on board with us.”
But how best to do that? The BEA’s entrance into politics
comes as economic solutions proposed by some Democratic
progressives—such as newly elected New York Representative
Alexandria Ocasio-Cortez’s call for a 70 percent top marginal tax
rate to finance a “Green New Deal”—conflict with those widely
embraced by the business community. (The BEA focused its
resources on helping candidates in the most competitive races. It
didn’t take a position in the overwhelmingly Democratic district
that Ocasio-Cortez won.)
THE POTENTIAL FOR TENSION between the private sector tilt of the
BEA’s leadership and activists in the trenches in black communities
surfaced during a post-election call with donors in December. One
donor wanted to know the Washington-based group’s stance on tax
breaks for investors in s “opportunity zones”—incentives designed
to fuel development of economically disadvantaged areas.
Akunna Cook, the BEA’s executive director, paused for a
few beats. She said she hadn’t closely studied the legislation,
included in the 2017 tax overhaul, and would circle back after
she looked into it.
The caller pushed further, starting to home in on what he
called the “catch” in a tax plan that allows investors to reduce or
defer taxes on capital gains.
Coles took a stab at a response, acknowledging that the issue
fell right into the BEA’s wheelhouse. He noted that the zones had
received bipartisan support from African American Senators Tim
Scott of South Carolina, a Republican, and Cory Booker of New
Jersey, a Democrat. Coles said the senators had told him they were
 “We’re just trying to bring to bear what we know best …
in a way that will make an important difference
in the lives of people”
looking for ways to “fill in the blanks” in the law. He believes that
if entrepreneurial opportunities can be part of the zones, African
Americans at least could benefit from that.
But the donor on the call said he was concerned that the rush
of investment wouldn’t include African Americans, few of whom
have large, taxable investment portfolios. And the investments
could lead to neighborhood gentrification, pushing out low-income
residents. Coles said there was still time before the plan was fully
implemented—then suggested taking the discussion offline and
moving on to the next question.
NAACP President Derrick Johnson, on the call, chimed in.
Johnson, a Detroit native who previously had led the NAACP in
Mississippi, said this wasn’t the first time in his life he’d seen a
program like this. They may appear to provide “extremely lucra-
tive entrepreneur opportunities,” but it’s important that residents
reap the benefits and aren’t “preyed upon,” he said. Otherwise,
we’ll “look at the project five years later and we’re displaced and
we can no longer be part of the opportunity.”
Phillips, interviewed two weeks later, says he sees policies
such as opportunity zones as a good start, albeit in need of modi-
fications to encourage companies to move to the neighborhoods
and employ black workers.
Similarly, Ocasio-Cortez and some other progressive poli-
ticians say that tax incentives to lure a corporate giant such as
Amazon.com Inc. to New York and Virginia deplete public funds
that could be put to better use helping the community. But Phillips
sees potential in bringing tech jobs to new neighborhoods. “One
of the reasons there is such a low percentage of people of color in
technology is the largest companies haven’t been located in places
where black people live,” he says. “In Seattle and the Bay Area,
there’s just not a high concentration. But if you go to New York or
outside of D.C., the labor pool changes dramatically.”
ON THE NIGHT of the November 2018 midterms, the BEA’s members
gathered to watch the results at a five-story loft in Manhattan’s
VOLUME 28 / ISSUE 1
trendy SoHo neighborhood. The group had endorsed candidates
in competitive congressional and gubernatorial races in places
where the population was at least 10 percent black. Of the
Democrats who were contacted, about 75 percent responded to
the BEA’s survey.
Almost half of the BEA-endorsed candidates won seats in
Congress or governors’ mansions that night. They included 32-year-
old Underwood, a nurse with two master’s degrees who served in
the Department of Health and Human Services under Obama, and
Colin Allred, a 35-year-old civil rights attorney and former National
Football League player who ran in an historically Republican district
in Texas. They joined the freshman class of 2019, the most racially
diverse ever in the U.S. House of Representatives.
Like the nation, the BEA is now setting its sights on the race
for U.S. president in 2020. To better define its policy agenda, Cook
says, the group plans to hire a research firm to learn more about
what black voters and workers want in the economy. “Our goal is
to make sure that every single candidate running for office has a
defined policy position and a strong stance on what they’re going
to do in office to help black communities economically,” says Cook,
who was an adviser to Eric Holder, a former attorney general in
the Obama administration, on the National Democratic
Redistricting Committee.
Both political parties, Cook adds, need to do more to make
sure they’re welcoming to black voters. Black voter turnout
declined in the 2016 presidential election for the first time in 20
years after reaching a record high in 2012 when Obama was
reelected. Democratic presidential aspirants understand the impor-
tance of black voters to their chances of winning the party’s nom-
ination, as well as the general election in 2020.
Sharply focusing on that electorate could increase the BEA’s
influence. “This is change from the ground up,” says Coles. “It’s
working to get officials elected and then working with them for
policy and legislative change. A hope and a prayer won’t
be enough.”
Holman covers retail in New York.
69
 Twentytwo was
billed as one
of the biggest office
towers in Europe.
Overlooking
the Bank of England,
it would be built
right in the heart
of London’s main
financial district—
and amid all the
uncertainty over
Brexit. So how’s that
working out?

By JACK SIDDERS
P H OTO G R A P H BY RO B BA L L

BUI LDING
BLOC KS
IT WAS A TRICKY TIME for the commercial real estate business in
London. Within days, Britons would be voting on whether to
remain in the European Union or leave. The French insurance
giant Axa SA was trying to figure out how the outcome would
affect its investments across the Channel. Paris-based executives
of Axa Investment Managers’ Real Assets unit held a series of
conference calls with their London colleagues to plan for what
to do in the event of a leave vote.
One executive on the line from London—Harry Badham,
Axa’s head of U.K. real estate development—had a lot at stake. He
was about to sign a construction contract that would launch
Twentytwo, a £1 billion ($1.3 billion) project to build the tallest
skyscraper in the City of London. Unlike his colleagues, however,
Badham was relaxed about the outcome. He was going to be out of
town the day after the June 23, 2016, vote, having booked a trip in
the expectation that remain would win. “When I told them I was
planning to go fishing that day,” he says, “they thought I was joking.”
So the morning after, as harried traders in the City of London
hunched over screens displaying the damage wrought on the pound
by the surprise vote to leave, Badham was 70 miles away on the
peaceful chalk banks of the River Test.
Unsurprisingly, his phone lit up. The project’s investors—a
global consortium of sovereign and pension funds—wanted to know
what the shocking result would mean for them. After all, this was
supposed to be one of the largest office buildings in Europe, and it
was going up in London’s financial district: Brexit ground zero.
You can hardly blame the investors for being nervous. The
plot of land at 22 Bishopsgate has a haunted past. The previous
owner had struggled to round up tenants following the financial
crisis and halted construction in 2012, leaving a seven-story con-
crete shell that came to be known as “the stump” before it was torn
down. Even so, after what Badham describes as a post-referendum
“moment of reflection,” the group behind Twentytwo—Axa, its
project partner, Lipton Rogers Developments LLP, and the inves-
tors—decided to push ahead.
More than two years later, despite all the uncertainty swirling
around Brexit, Twentytwo is a reality. Still rising, it towers over any
other structure in the City and is expected to reach 62 floors by the
end of 2019.
Sitting in the fifth-floor marketing suite, Badham displays
all the sangfroid he did in June 2016. “You can’t just turn the taps
off,” he says. But you also couldn’t just ignore Brexit and rush head-
long into the future, at least not right away. “You couldn’t sit there
at that stage and say with a straight face as an investment manager,
‘Yeah, don’t worry about it. It will be fine.’” So he waited awhile,
and now he’s sitting in a building that many thought would never
be built. Badham says about 15 percent of the space has been leased,
with the first tenants, including insurers Beazley Plc and Hiscox Ltd.,
expected to move in beginning in 2020.
That’s if all goes according to plan. Twentytwo, which looms
over the Bank of England where Bishopsgate meets Threadneedle
Street, is a one-building history of the peaks and troughs that have
characterized the City of London for the past quarter century. The
story of the land it sits on is littered with building plans that went
awry as different owners were spooked by one economic wobble
after another. Now comes Twentytwo, having traversed a boom, a
bust, and a boom again, finally to be built on the cusp of Brexit—and
another bout of uncertainty.
72 BLOOMB ERG MA RKE TS
THE VOTE TO leave the EU in 2016 immediately cast a pall over the
London real estate market. At the time, developers had plans to
build the equivalent of 50 skyscrapers the size of the instantly recog-
nizable Gherkin tower over the next four years, according to Mike
Prew, a London-based analyst at Jefferies Group LLC. Following
the referendum, he forecast an 18 percent fall in rents based on the
risk that international businesses might move as many as 100,000
jobs out of the U.K. DWS Group GmbH, then part of Deutsche
Bank AG, warned of an average fall of 10 percent to 15 percent in
central London office values over 2016 and 2017.
So far, the Brexit fallout has proved to be nowhere near
that bad. Apple, Facebook, and Google have all committed to
major new London headquarters in the two years since the vote
as tech companies challenge financial ones for top talent.
WeWork Cos., backed by SoftBank Group Corp., has become
the biggest tenant in the capital, hoovering up space in more than
40 locations. (In 2017, Bloomberg LP, which owns Bloomberg
Markets, moved into a new European headquarters on a 3.2-acre
site in the City.) Indeed, the enduring demand for workplaces,
plus the devaluation of the pound, which has made London
cheaper for foreigners, helped the City rack up a record year for
property investment in 2017.
For all that, Brexit-related unpredictability still exerts a pow-
erful pull on real estate. City of London office rents fell just over
2 percent in the third quarter of 2017 and haven’t moved since,
according to BNP Paribas Real Estate. That may understate the
slowdown. Landlords are offering more generous incentives to
keep headline rents high, thereby disguising real declines. Induce-
ments, including rent-free periods at the start of central London
office leases, increased to the equivalent of two years on a 10-year
lease in 2018, up from 1.5 years in 2017, estimates broker GVA.
Green Street Advisors Inc. forecasts a 5 percent to 7 percent drop
in City office rents by the end of 2019.
In that context, all eyes are on Twentytwo as the biggest
bellwether of London’s commercial property market. “I would be
worried,” says Nick Montgomery, head of real estate investment
at Schroders Plc. Even with rents falling, he says, “I think we will
see City vacancy rates getting up into double digits.” As of the end
of November, share prices of the two largest publicly traded devel-
opers of London office space, Land Securities Group Plc and British
Land Co., have fallen about 30 percent and 20 percent, respectively,
since the referendum. By comparison, the FTSE 250 Index was
down 7.7 percent during that period.
London has long been the world’s most international prop-
erty market, but the share of money from abroad flowing into
Twentytwo and other projects at a time of such political and eco-
nomic uncertainty is striking. Overseas investment in properties
in the City of London hit a record in the first half of 2018, account-
ing for 80 percent of the total, according to data compiled by Savills
Plc, a real estate broker. Foreign spending on London offices during
the same period was well over three times that invested in Man-
hattan properties, according to Knight Frank LLP, another broker.
Martin Greenslade, chief financial officer of Land Securities,
says the risk-taking by overseas developers reflects investment
timelines and return requirements that are different from those of
domestic players. That’s “if they require a return at all,” he says,
pointing out that some simply want to diversify their holdings or
store family wealth. Even so, says Toby Courtauld, chief executive
 “Given all the uncertainties, it’s fascinating
that there is so much capital out there looking to
buy some of this riskier kit”
officer of London-based developer Great Portland Estates Plc,
“Given all the uncertainties, it’s fascinating that there is so much
capital out there looking to buy some of this riskier kit.”
One of the most aggressive overseas investors in London
since the Brexit vote is Hong Kong-based C C Land Holdings Ltd.,
which last year bought the cheese-grater-shaped Leadenhall Build-
ing next to 22 Bishopsgate for £1.2 billion. And the company has
been in talks to buy land nearby for another skyscraper. “Brexit is
a real irritant,” says Adam Goldin, head of the company’s newly
established U.K. office. But, he says, “we have a generational time
scale so we are not looking at equity multiples on a five-year time
scale. We are looking to acquire very high-quality real estate that
can stand the test of time. We believe in the solid foundations of
the U.K. market, and I don’t think those fundamentals change,
whether it is inside or outside of the EU.”
IN 2015, WHEN 22 Bishopsgate was still a concrete stump, Axa and
its partners—Canada’s Public Service Pension Plan, British Colum-
bia Investment Management, and Singapore’s Temasek Holdings—
paid about £310 million for the land. Axa Real Assets CEO Isabelle
Scemama wasn’t in charge then, but asked if she would have signed
off on the purchase if she’d known Brexit was coming, she laughs,
pauses, and says, “As an investor, you don’t like uncertainty. And
Brexit has generated some uncertainty.”
Badham recalls the three reasons the partners decided to push
ahead despite Brexit. First was the enduring appeal of the world’s
greatest cosmopolitan center—“the schools and the culture and
the amenities and the housing. London is London.” Second, by
analyzing the development pipeline for London, plot by plot, project
by project, he and his team concluded that vacancy rates were
unlikely to rise too high. Finally, he reasoned that many of the
planned commercial projects weren’t going to get off the ground.
In the end, Badham’s view has largely been borne out. If you
scan the London skyline, you’ll see a thicket of cranes, but most of
them belong to residential projects. Over the past two years, there
have been fewer office buildings started each year.
What’s more, because of the financial crisis, development
VOLUME 28 / ISSUE 1
in London’s finance-dominated Square Mile was constrained
during the relatively economically healthy years in the runup to
the referendum, so pent-up demand has come into play since then.
The vacancy rate remains comparatively modest even as the U.K.
approaches its 10th straight year of modest economic expansion.
“I am positively surprised by the level of demand that is there,”
Scemama says. “It confirms my belief that demand is there for
good buildings.”
But it’s a renters’ market. To lure them, Twentytwo is piling
on amenities, from facial-recognition technology and an indoor
climbing wall with dramatic 42nd-floor views to space for 1,700
bicycles and air and lighting systems that meet standards set by the
International WELL Building Institute. More mundanely, the
owners, with a nod to competition from the likes of WeWork, are
offering tenants flexible office space setups and longer leases. Hiscox,
for instance, signed up to take the 8th, 9th, and 10th floors on
conventional leases that expire in 2037, but it will also have the
option of using 90 desks on another floor in a short-term deal.
With its rich—and somewhat tortured—history, Twentytwo
is a metaphor for the City of London’s changing fortunes in Brexit
Britain. There was a time when the Square Mile was fighting to
maintain its status as Europe’s premier home of big banking as
Canary Wharf, three miles or so to the east, was offering a lot of
open acreage for modern towers. Then along came the financial
crisis, shrinking the workforce at many City companies. These days
the City is competing with areas such as Shoreditch and Kings Cross
for tech workers—the kind of people, to put it simplistically,
attracted to bike parks and climbing walls.
Badham remains unworried about Twentytwo as it rises
toward the heavens in this changing environment. “We get this
British thing about ‘Oh gosh, it is awfully big and it is awfully scary,’”
he says. “In the context of the world and London’s position in it, it
really isn’t.” Anyway, he says, “when you’ve placed the building
contract, it doesn’t really matter what the rest of the world thinks,
because you’re building it anyway.”
Sidders covers real estate in London.
73
Wall
The people and companies cashing in
on a record boom in CLOs—
collateralized loan obligations—have become the

Street’s
new aristocrats of debt

Billionaire
Machine By TOM METCALF, TOM MALONEY,
SALLY BAKEWELL, and CHRISTOPHER CANNON

HE HAS THE FAMILIAR trappings of the ultrawealthy: a Beverly Hills A VERY GOOD YEAR
estate, a superyacht, art by Rothko and Pollock. But Eric Smidt is
Sales of U.S. collateralized loan obligations,
a new kind of super rich. He made his fortune by transforming an excluding reissues
Record high
old-fashioned business into a giant cash machine, aided by one of
the hottest plays on Wall Street: collateralized loan obligations.
Meet the new aristocrats of debt—the people and compa-
nies cashing in on a record boom in once-marginal investments $120b
with relatively high returns that have attracted yield-hungry
investors. On the road to riches, they’ve fueled a rapid buildup
in corporate debt that some think could become the epicenter
of the next credit crisis.
From low-profile executives such as Smidt to prominent
banks such as Credit Suisse Group AG, a host of players are making
a killing off CLOs. Fees linked to the industry topped $10 billion 90
in 2018 alone, according to calculations by Bloomberg. That’s in
addition to billions in payouts that private equity and other owners
have extracted from businesses.
CLOs are packages of risky loans that banks make to such
businesses as Smidt’s Harbor Freight Tools USA Inc. Some
lenders, including Credit Suisse, get paid for underwriting loans.
Another bank—say, Morgan Stanley—may also score a fee for 60

structuring the pool of loans into bonds of varying risk and return
and then selling those to investors. That bundle of debt, in turn,
needs an overseer. Enter CLO managers such as private equity
firm Ares Management Corp., co-founded by billionaire Tony
Ressler, and GSO, part of billionaire Stephen Schwarzman’s
Blackstone Group LP. They get a cut, too.
30
Looking at all of this, regulators around the world are sound-
ing alarms. For Bank of England Governor Mark Carney, the surge
is reminiscent of the boom in subprime lending just before the 2008
financial crisis. Some at the U.S. Federal Reserve have also expressed
concern that high debt levels make the U.S. economy more vulner-
able. The central bankers aren’t alone. “The risk is that if a bunch
of these get downgraded, many CLOs will scramble to sell,” says 2007 2018* 0
Gene Tannuzzo, a fund manager and deputy global head of fixed *Through Dec. 18
income at Columbia Threadneedle Investments in Minneapolis. Sources: Wells Fargo, Bloomberg

74 BLOOMB ERG MA RKE TS

THE CLO FACTORY AT WORK: A CASE STUDY

Discount retailer Harbor Freight Tools

refinances a loan in 2018.

$2.2b Loan refinanced

Fee for grading Fee for

a loan arranging a loan
refinancing

The debt is sold off to a variety of holders,

including hundreds of CLOs.

Ratings Credit
agencies Suisse

$928m
Minimum share of loan
held by CLOs

Fee for grading A $7.5 million piece of the loan is

a CLO packaged inside …

Structuring Management fee

fee
… CIFC 2018-1A,
a $650 million CLO bundling hundreds of loans
from various sources.

That CLO is sold to investors including …

Morgan CIFC Asset

Stanley Management
Angel Oak Capital Advisors
Janus Henderson
BlackRock

Source: Bloomberg

VOLUME 28 / ISSUE 1 75
BORROWING MORE, FOR LESS
Harbor Freight grew more active in the debt market as the cost of financing declined.
Size of Harbor Freight’s loan
2010
There’ve been signs the billionaire machine is sputtering.
Loan prices crashed in December. Even after a recovery in January,
they remained at their lowest levels in more than two years. Some
deals have been shelved or delayed, a change from the high levels
of demand when Harbor Freight’s loan was priced in early 2018.
Here’s a look at the key players and what’s at stake:
The Debtors: $1.3 Trillion
Harbor Freight, which sells discount tools—$7.99 wrenches and
$8.99 sets of pliers—has tapped the debt market five times
since 2010 to raise $6.8 billion, including refinancings, and paid
about $2 billion of dividends to shareholders including Smidt,
according to Bloomberg calculations. The company and Smidt
declined to comment.
That’s a fraction of the market. Corporate owners loaded
a combined $1.3 trillion in loans onto their books in 2018, con-
tinuing the trend of companies raising ever-larger amounts of
capital at lower rates as the decade progressed. About $40 billion
of leveraged-loan deals in 2018 listed dividends to shareholders
as one of the stated uses of the proceeds, helping to bolster the
wealth of business owners such as Smidt, who’s worth about
$3 billion, according to the Bloomberg Billionaires Index.
There have been plenty of other occasions when the loan
market has enriched individuals. AppLovin, a startup that operates
a mobile-ad platform, took out an $820 million leveraged loan in
July. Beauty company Anastasia Beverly Hills Inc. sought a
$650 million loan to help fund a partial buyout by TPG Capital LP.
Lender Fees: $6 Billion
When Harbor Freight went to the market to refinance in
January 2018, investors were drooling. The company got
$2.16 billion—it was fully funded just eight days after it was
announced. As lead lender in the deal, Credit Suisse would have
received the bulk of any fees for underwriting the loan. The bank
declined to comment.
The fees collected would have been even higher for a brand-
new loan issue. Lenders can charge about 2 percent of the
76
Loan spread over Libor, in basis points
$2b 500
1 350
2018 0 2010 2018 200
Source: Bloomberg
issuance; that generated at least $6 billion for them in 2018,
according to calculations by Bloomberg. While Credit Suisse
reaped some of those profits, it was only the sixth-largest player
in the U.S. leveraged-loan market last year, underwriting about
half the volume that leaders Bank of America Corp. and JPMorgan
Chase & Co. each brought to market.
Management Fees: $2 Billion
The Harbor Freight loan has made its way into hundreds of
separate CLOs. The biggest holders are funds run by Ares
Management, a Los Angeles-based company with a history of
creating wealth through private credit.
Fees paid to CLO managers such as Ares can mount quickly.
The larger CLO managers generally charge from 30 to 50 basis
points on the assets they manage. Ares declined to comment.
The amount of outstanding CLOs in the U.S. totaled about
$600 billion as of December 2018, according to data compiled
by Bloomberg. That means the industry’s combined management
fees were about $2 billion last year. Other industry players that
grabbed slugs of the Harbor Freight loan included CIFC Asset
Management LLC and hedge fund Och-Ziff Capital Management
Group LLC, both based in New York.
Structuring Fees: $2.8 Billion
Once these managers offer the CLOs to investors, Wall Street
takes another cut. Morgan Stanley was one of the banks involved
at that juncture as the Harbor Freight debt moved through the
market. It structured a $650 million CLO managed by CIFC.
The CLO bought $7.5 million of Harbor Freight’s debt and still
owns $4.6 million.
CLO structuring fees hit a record $2.8 billion in 2018, up
from $2.1 billion in 2017 and $671 million in 2016, according
to estimates by Freeman Consulting Services. Morgan Stanley
was also responsible for selling the CLO that included the Harbor
Freight loan to BlackRock, Janus Henderson Group, Southern
Farm Bureau Life Insurance Co., and other investors. Morgan
Stanley didn’t respond to a request for comment.
BLOOMB ERG MA RKE TS
 Smidt’s father, who died in 2016, raised the alarm long ago.
The elder Smidt criticized the practice of borrowing
to extract cash from the family business
The Investors: Yields as High as 20 Percent
Yield-hungry investors have been eager to buy into CLOs, fueling
the market’s growth. Returns on the riskiest equity piece can
reach 20 percent. While returns fell last year amid a rush of
supply, they still stood out in credit markets where corporate
bonds delivered small or negative returns.
Even traditionally conservative investors have increased
their exposure. The Canada Pension Plan Investment Board said
in September that it would invest in the riskiest tranches of CLOs,
putting $285 million into a vehicle for that purpose. Advantage
Insurance Inc. of San Juan, Puerto Rico, has also been investing
in CLO equity.
CLOs buy corporate loans with floating rates. That means
that unlike fixed-rate-debt investors, they can benefit when
rates rise.
BIGGEST PLAYERS
Value of U.S. CLOs under management
Credit Suisse Asset Management
$21.7b
GSO Capital Partners
18.9
The Carlyle Group
16.8
CIFC Asset Management
16.3
Source: Bloomberg
VOLUME 28 / ISSUE 1
The Warning Signs
Amid the exuberance, there’ve been signs of overheating in the
loans that underpin the market. For one thing, the majority of loans
have long been “covenant lite,” in industry parlance, meaning they
have fewer of the protections a lender typically demands.
What’s more, borrowers pushed the envelope in other ways
that might harm investors. They’ve added facilities that layer
extra debt onto existing loans. They’ve also adjusted earnings
calculations, which could overstate a company’s ability to repay.
Market jitters in late 2018 darkened the rosy outlook for
CLOs. Some loans were scrapped as investors became more wary
of companies that piled on debt.
Industry players shrug off the concerns, noting that CLOs
held up well in the last crisis. But others say this time will be
different, because now the heavy debt loads are carried by
companies rather than homeowners.
Smidt’s father, who died in 2016, raised the alarm long
ago. In a 2010 lawsuit—filed against his son a decade after he
sold his interest in Harbor Freight to him—the elder Smidt
criticized the practice of borrowing to extract cash from the
family business. But his son, who disputed the criticisms and
settled the case out of court, forged ahead, adding debt and spear-
heading a nationwide expansion of the closely held retailer. The
company’s revenue exceeded $4 billion in 2018, up from
$2.4 billion in 2013, according to Moody’s Investors Service Inc.
There’s no sign the family business is under stress. In Feb-
ruary 2018, Smidt and his wife, Susan, donated $50 million to
fund a heart institute at Cedars-Sinai hospital in Los Angeles.
Lloyd Greif, founder and chief executive officer of Los
Angeles-based investment bank Greif & Co., says Harbor Freight’s
bargain-basement prices make it likely Smidt’s company will
prosper, even in a recession.
“Lenders line up to write a check to him,” Greif says.
Metcalf covers wealth in London. Maloney covers wealth
in New York. Bakewell covers corporate finance in New York.
Cannon is a senior designer in New York.
77
Leaders With Lacqua / Backstage
Christine Lagarde
The International Monetary Fund’s
managing director since 2011 was
the subject of our cover Q&A in the
May/June 2016 issue. Here, she
divulges some of her off-duty habits
and preferences to Bloomberg TV’s
Francine Lacqua, co-anchor of
Bloomberg Surveillance and host
of Leaders With Lacqua.
78 BLOOMB ERG MA RKE TS
How many hours of sleep do you get a night?
Six to six and a half.
Are you a morning or an evening person?
Morning.
Do you have an essential morning ritual?
Green tea, buckets of it.
What’s your favorite sport or sports team?
Swimming and cycling.
Which app is in heavy rotation on your phone?
Health check and weather forecast.
What are you reading right now?
The latest [Michel] Houellebecq novel; the latest
essay by [Brookings Institution’s] Robert Kagan.
Printed book, e-book, or audiobook?
Printed and e-book.
What’s your favorite place to go on vacation?
My rose garden in May and June and a hidden
field of olive trees in Corsica by the seaside
in September and October.
Do you have a strategy for fighting jet lag?
Listen to your body and follow its guidance.
Little naps here and there do not hurt. Do not
drink alcohol; drink plenty of water.
What living or historical person do you truly admire?
Nelson Mandela.
What’s the last thing that made you laugh?
Any good joke from my son, who loves collecting
and sharing them—not all politically correct.
What is your biggest fear?
ILLUSTRATION BY AISTĖ STANCIKAITĖ FOR BLOOMBERG MARKETS
Climate change’s impact on my grandchildren.
What’s the best advice you’ve gotten?
Grit your teeth and smile. Don’t let the
bastards get you.
What’s the best advice you give to your children?
Listen to me!
If you were 20, what business would you get into?
Art, particularly classical music or theater.
Do you ever expect to retire?
To what?
 Cheat Sheet

A Compendium of Functions—
New or Featured
In This Issue

FEATURED IN THIS ISSUE NEW ENHANCEMENTS TO TRY RIGHT NOW

BI PMET Displays the Bloomberg Intelligence dashboard PEOP People Search has been enhanced with a map
on precious metals mining 19 visualization feature that you can use for tasks such
as planning roadshows. Go to {PEOP <GO>}. Run
RICH Ranks the world’s richest people each day
a search, such as “asset managers in Toronto,”
using live data 20, 21
by typing in the <What are you looking for?> field and
CACT BBK Displays corporate action data on buybacks 22 pressing <GO>. Then click the Map button in the upper
right to toggle to a map view.
EQS Screen for companies that have announced
stock buybacks 22, 23 INP Index Insights and Publications provides access to
announcements, research, and other information
SRCH Search for companies that have issued debt
related to Bloomberg’s multi-asset-class benchmarks
to fund share repurchases 23
including the Bloomberg Barclays Indices. The function
ESG Provides an overview of a company’s environmental, has been enhanced with a search feature that can help
social, and governance performance 29 you find relevant publications. Enter your search terms
in the field at the top of the screen, and click
APPS ESGH Opens a free trial of the ESGHub app,
on matching items to drill down to the documents
which combines Bloomberg’s ESG metrics and
you’re looking for.
CSRHub’s ESG ratings 30
NIMY My New Issue Monitor, which provides a central place
HRA Perform regression analysis on
to view and filter new bond announcements you receive,
any selected data series 32, 33
has been enhanced with a number of features. Among
ETF Slice and dice data on exchange-traded notes and them: You can now hide bonds traded under Rule 144A or
other exchange-traded products 39 Regulation S to match any restrictions that apply to you.
BAS Tracks and ranks broker activity for a selected CL Company Litigation gives an overview of a selected
exchange such as Brazil’s B3 45 company’s litigation profile. The function has been
enhanced to let you chart trends in lawsuits over
CMAP Maps a selected company’s properties
a selected period. In addition, you can see how the
such as factories 80
company’s litigation risk stacks up against that of
VOLC Chart FX option volatility along with spot competitors by clicking on the Peer Comparison tab.
and forward rates 80
SD Spark & Dark Charts has been revamped to help
FIW Compare pricing, performance, and liquidity you quickly set up spark and dark analyses and see
across lists of bonds 80 how natural gas and coal costs influence the
WATC Filter security watchlists 80 European energy markets.

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February/March 2019, volume 28, issue 1, BLOOMBERG MARKETS (ISSN 1531-5061) (USPS 008-897) is published six times a year with issues in March, May, July, September, November and December by Bloomberg Finance L.P., 731 Lexington Avenue, New York,
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The FFM Quiz
WHAT DOES FORD MOTOR CO. make in the factory closest to its headquarters? Which measure of British pound volatility is highest? Test
your knowledge with Bloomberg’s Functions for the Market quiz. Then follow the steps to see if you had the correct answer (and learn a bit
about how to tap into data and analytical tools in the process).
1. What product is made at the Ford factory nearest to the
company’s headquarters?
Cast and forged parts
2.0-liter engines
F-150 trucks
closest to the headquarters to see what products are made there.
The yellow dots represent factories—hover your cursor over the factory
Zoom in on Michigan in the map.
Run {F US Equity CMAP <GO>} for the Company Map function.
2. The British pound has been one of the most volatile
Group of 10 currencies, fueled by Brexit uncertainty. As of today,
which measure of GBP three-month volatility is the highest?
Realized, based on a daily close calculation
Realized, based on 48 BFIX snapshots per business day
Implied
and select Implied Volatility for 3 Months. Press <GO>.
Tick the first check box in the top center of the screen to graph a third line,
(High Frequency) and set the term to 3 Months again.
In the second field below Measure, select Realized Volatility
Volatility (Daily). Set the Term to 3 Months.
Use the drop-down menu in the field below Measure to select Realized
Run {GBP Curncy VOLC <Go>} for the Volatility Comparison function.
80 BLOOM BERG M AR KETS
Test Your
Market Knowledge
By KAI BLATNICKY, STEVEN GEE,
OWEN MINDE, and TOM SCHNEIDER
3. Which of these bonds in the five-to-seven-year maturity
bucket of the Bloomberg Barclays US Corporate Bond Index had
the narrowest G-spread—the spread to the interpolated matched
point on the government curve—over the past six months?
MSFT 2.7 02/12/2025
TGT 3.5 07/01/2024
CSCO 3.5 06/15/2025
see the bond that has the narrowest G-spread.
Click on Spread to sort from low to high to
Select G-Spread and 6M as the period.
Click on the Bond List tab and then on Relative Value.
Use the Facets side panel to filter for Maturity of 5 to 7 years.
menu in the upper left to select LUACTRUU Index.
Run {FIW <GO>} for the Fixed Income Worksheet and use the drop-down
4. Technology stocks nosedived in the latter part of 2018, yet
tech wasn’t the worst-performing sector in the S&P 500. Which of
these sectors underperformed technology in 2018?
Financials
Utilities
Health care
Enter 12/31/2018 in the As of field and hit the Returns subtab.
In the Group By drop-down menu, select BICS sector.
Run {WATC <GO>}, select Equity Index, and enter SPX Index.
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