TheChek News Flow

Asoka Wöhrmann says rise of passive investing and wealth growth in Asia are causing ‘tectonic shifts’

Asoka Wöhrmann took on one of the investment industry’s most difficult roles last year when he was promoted chief executive of DWS, Germany’s largest asset manager.

He appeared to have picked up a poisoned chalice as head of an unstable business that had already employed four other chief executives since 2012. Nicolas Moreau, his predecessor, was brutally axed after two years in the role after DWS failed to meet ambitious performance targets agreed at the time of the company’s March 2018 initial public offering.

The IPO followed a protracted period of instability that included several failed efforts by its parent, Deutsche Bank, to sell the €752bn asset management business, multiple reorganisations and the departure of numerous senior staff members.

Mr Wöhrmann’s appointment immediately prompted questions as to how long he might survive the axe. But Mr Wöhrmann, 54, is a trusted lieutenant of Christian Sewing, the Deutsche Bank chief since April 2018 who was instrumental in his junior colleague’s promotion. 

“Asoka will get more support from Christian. Deutsche Bank badly needs the revenues that DWS can provide to shore up its weak funding position,” said an alumnus who asked not to be named.

Mr Wöhrmann’s position has been strengthened by a revival for DWS, which has attracted net cash inflows of €12.9bn so far this year, driving a 9 per cent increase in profits to €508m in the nine months ended September.

After flying from Frankfurt to London, Mr Wöhrmann is clearly buoyed by this progress and keen to discuss his vision.

“This is the most exciting time in my 21 years with DWS and Deutsche Bank,” he says.

“We are seeing tectonic shifts in the asset management industry with the rise of passive investing and ETFs, massive pricing pressures and profit margin erosion, the rise of Asia as the premier growth market, the growth of alternatives and systematic investments driven by huge increases in computing power.” 

Some analysts believe Mr Wöhrmann wants a transformational deal that would help DWS compete more effectively against the industry’s heavyweights.

DWS came close to agreeing a marriage with the asset management arm of UBS but negotiations collapsed over which parent would control the enlarged investment unit.

“DWS is a gem within Deutsche Bank,” he says, adding that structural pressures will drive more mergers and acquisitions in asset management.

Mr Wöhrmann will readily admit that the English language is not his strongest skill but there is no doubt about the quality of his intellect.

Over a dinner of lobster risotto that stretches for more than two hours, he acts as a genial host in a wide-ranging discussion. He talks about his birth in modest circumstances in Sri Lanka and his youthful hopes for a career as a university professor. At the end, Mr Wöhrmann opted for a move into the investment industry, which he found distinctly challenging.

“When I first came as an academic to DWS and was given the most difficult market — Japan — it was definitely a learning curve,” he says.

The bursting of Japan’s stock market bubble in 1990 and subsequent decline in the country’s property market provides, in his eyes, a powerful warning for policymakers in Europe.

“There are a lot of parallels between Japan in the 1990s and problems now confronting European economies. I fear that Europe will follow Japan into the same deflationary trap. We are forcing people to save more at a time when interest rates are falling. People will start storing their money under the bed, as [John Maynard] Keynes warned. Germany’s austerity policies have to change,” he says.

Yields on long-term German and Japanese government bonds are mired deep in negative territory, with policymakers in both countries struggling to stimulate economic growth.

“Weak economic growth and low bond yields will persist possibly for a decade or more. This is a new era for the world. Negative interest rates will lead to behavioural changes across the private sector,” Mr Wöhrmann says.

Many observers blame negative rates on the huge bond-buying programmes introduced by central banks in response to the financial crisis. This view is not shared by Mr Wöhrmann: “If central banks had not stepped in to rescue the financial system, then the problems across the global economy would be much worse.” 

Ultra-low interest have forced investors to shift into illiquid asset classes such as real estate, infrastructure and private equity in search of better yields.

“Alternatives is a growth area for us. But we cannot solve all of the problems in fixed income markets by a shift into alternatives,” says Mr Wöhrmann, who is guarded about efforts by private equity managers to persuade regulators that their funds should be opened to the general public.

“History has shown that retail investors want to be able to exit from their funds at short notice so we have to be cautious,” he says.

Further expansion is planned at the ETF unit of DWS where assets have just broken above the €100bn mark for the first time.

“The rise of ETFs is unstoppable. Europe will move down the same road as the US at a faster rate because of the pressures on fees. There will also be more demand for systematic approaches with low production costs. Combining machines with human capabilities will be key,” he says. 

These trends raise questions over whether traditional active management strategies will survive. Mr Wöhrmann’s predictions include concentrated equity and multi-asset portfolios along with emerging market debt and some areas of credit even if they are affected by negative rates.

But he freely admits to having made some wrong calls.

“People that cannot admit to their mistakes do not make good investment managers. I thought the rise of multi-asset would be unstoppable after Lehman’s implosion. Instead every underperforming equity manager was lifted by excess liquidity and falling rates boosted fixed income returns. But multi-asset managers that can make good asset allocation calls, they are the kings,” he says. 

In common with every leading asset manager, DWS is also strengthening its environmental, social and governance capabilities in response to rising client demand. It plans to introduce a group sustainability office and to attach ESG ratings to investments across its entire platform.

“ESG is no longer just a ‘nice to have’ feature. It has become part of an asset manager’s license to operate,” he says.

Pressed on whether DWS will divest from companies that contribute to global warming, Mr Wöhrmann says the focus will be on engagement rather than exclusions.

“We don’t believe in trivial approaches as they cannot tackle complex challenges such as climate change. We have to encourage people to follow their dreams, to invest for the future. You always have to look ahead,” he says.

Controversial German financier has enjoyed years of support from little-known brokerage

When one of Europe’s best performing asset managers plunged into crisis this summer, a little-known brokerage took a contrarian view on the illiquid debt securities at the heart of the affair.

H2O Asset Management was suffering what it likened to a bank run, with alarmed clients withdrawing €8bn from its funds. Large financial institutions struggled to see the value in the London-based fund manager’s holdings of hard-to-sell bonds, which backed a ragbag of businesses linked to a racy German financier with a troubled past.

Yet Shard Capital Partners, a small firm based on the 23rd floor of London’s iconic “Walkie Talkie” building, seemed confident these assets were worth a lot more.

When Shard’s name flashed up on trading screens indicating it could buy and sell some of those bonds at much better prices, it would have appeared to some traders that another small broker was prepared to chase business in the rough and tumble world of illiquid debt.

But to those in the orbit of Lars Windhorst, the name was instantly recognisable.

Debilitated by two corporate collapses, a personal bankruptcy and a suspended prison sentence, Mr Windhorst found that many big banks were reluctant to back him as he set out to rebuild his fortune at the beginning of this decade.

Instead, the flamboyant financier relied on a handful of small banks and brokerages in Europe and the Middle East to maintain markets for a host of private securities backing his businesses.

Documents seen by the Financial Times, alongside interviews with more than a dozen people familiar with Mr Windhorst’s operations, suggest that Shard — with its wide ranging regulatory licenses — has played a particularly important role in keeping his interests alive.

Mr Windhorst has turned to the brokerage’s founder, James Lewis, to carry out trades in esoteric securities for well over a decade. Even as Shard’s dealings with the German financier dragged the brokerage into high-profile spats — including a hedge fund’s misfired trade that stung a Wall Street bank and a dispute with a Big Four auditor — the relationship has endured.

“If you needed to sell, Lars would tell you to call James,” a fund manager who traded several bonds related to Mr Windhorst told the FT.

One of Shard’s regulatory filings offers a glimpse into just how much of its activity appears to have been linked to Mr Windhorst. The filing indicated that an offshore company controlled by the German financier represented 40 per cent of Shard’s over-the-counter debt trading volume in 2017.

Shard removed the document from its website after receiving questions from the FT. A spokesperson said the report, which was disclosed as part of the Mifid II regulatory regime, was “incorrect and is being reviewed”. The now-deleted filing also listed other entities with ties to Mr Windhorst as major counterparties.

Mr Lewis, known to his friends as “Jumbo”, is a keen marksman who has represented Great Britain in rifle shooting competitions. He caught Mr Windhorst’s eye long before he set up Shard in 2010. While working at Dutch broker Amstel Securities in 2004, the Englishman helped the then 28-year-old financier to offload his stake in a thinly traded Japanese company.

Shard was frequently involved in so-called repurchase agreements on stocks and bonds orchestrated by the German financier, where securities were sold with an agreement to buy them back later at a higher price. The brokerage proved crucial when Mr Windhorst’s empire faced a cash crunch several years ago, helping to facilitate a number of these short-term financing transactions to fill shortfalls.

But many of these “repo” trades caused problems.

Citigroup’s prime brokerage unit, for example, temporarily became exposed to a $400m hit on one of these repos, in which Shard acted as a broker, when the transaction failed to settle in 2015.

Mr Windhorst then had to fend off litigation from several parties alleging that he had reneged on repo deals, including a lawsuit from Ukraine-born billionaire Len Blavatnik in which Shard was mentioned as a broker in a complicated transaction that never came to fruition.

One former banker who witnessed the fallout from a failed repo trade that Shard brokered, described it as “an absolute shit show”, adding that it was “close to impossible” to value the bonds.

A spokesperson for Shard said the firm acted as an “execution only agency broker” in these trades and that they were carried out “under instruction from the client”.

Some of these disputed transactions, however, had consequences for Shard.

Three years ago the broker received complaints from its custodian bank, RBC Investor & Treasury Services, after failed trades linked to Mr Windhorst left Shard overdrawn to the tune of more than €30m. The same year, German private bank Berenberg filed a suit against Shard in London after becoming ensnared in a failed trade in which the firm acted as a broker. The case was quickly settled.

“[Shard] was labelled as a ‘defendant’ in a couple of cases, but within the documents and legal narrative it was clear its role in proceedings was as a ‘witness’ to the court,” the firm’s spokesperson said.

Shard was also forced to defend itself after Deloitte resigned as auditor of Sapinda Invest, Mr Windhorst’s flagship vehicle, in 2017, alleging that the brokerage provided it with letters that contained “deliberately false” financial information.

Shard said that “two independent specialist legal reviews” into Deloitte’s allegations found that the firm “did not have any intention to mislead”. The firm added that the UK’s Financial Conduct Authority did not take any action after making inquiries into the matter.

In the Deloitte case, Shard was acting as Sapinda Invest’s custodian, which involves holding cash and other assets on behalf of clients, a role it carried out for several companies backed by Mr Windhorst.

Directors at some of these businesses have complained that they had difficulty accessing their funds.

Mr Windhorst’s African farming group Amatheon Agri, for example, announced in 2016 that it “experienced delays” in drawing down amounts held at “a UK-regulated financial institution”, which people familiar with the matter said was Shard. The same year, medical robotics company Avatera filed a claim against Shard for “breach of fiduciary duty”.

Shard told the FT that it acts “under instruction only” and that the cash management of these companies was “a matter for them”. The spokesperson added: “[Shard] is rigorously compliant in its client money procedures.”

This summer, as Mr Windhorst was dragged into the H2O crisis, Shard was not far from the scene.

In late June H2O took hefty writedowns on €1bn of bonds linked to Mr Windhorst, after investment banks indicated they could be sold only at heavy discounts. In one instance, the fund manager slashed the value of bonds issued by La Perla, an Italian lingerie maker, to just 25 cents on the euro.

Days later, Shard indicated it could buy and sell those same bonds around face value, showing its confidence in securities others appeared to find toxic. Despite the difficulties Mr Windhorst has caused over the years, Shard was still by his side.

“It’s so hard to make money as a brokerage,” said one person who was close to Mr Windhorst’s operations. “Lars offered them a way to make money.”

In a statement, a spokesperson for Mr Windhorst’s investment company, Tennor, described Shard as a “valued and trusted service provider”. The spokesperson added: “Tennor has a nine-year working relationship with Shard Capital whereby Shard Capital has acted for Tennor Holding and a number of its portfolio companies in the capacity of custodian and settlement agent.”

Shard told the FT that it “earns fees from a number of different revenue streams and is profitable”.

A boost for Europe’s feeble banks can only be a good thing in Berlin’s eyes

It feels churlish to question the motives of Olaf Scholz, the German finance minister whose constructive suggestions on a pan-eurozone bank deposit guarantee may break the deadlock on completing banking union.

That union — begun with the creation of the ECB’s all-in-one regulator, the single supervisory mechanism, and consolidated with a vehicle to wind up lenders in trouble, the Single Resolution Board — came unstuck four years ago when Germany blocked a single deposit guarantee. Mr Scholz’s predecessor, Wolfgang Schäuble, was adamant German citizens should not insure the deposits of banks in riskier parts of the eurozone, such as Greece.

Last week, in a Financial Times opinion piece, Mr Scholz wrote that “an enhanced banking union framework should include some form of common European deposit insurance mechanism”. As he himself rightly pointed out: “This is no small step for a German finance minister.”

He added plenty of caveats, and a broader context of reforms to other areas of bank balance sheets, for example the assumption that all sovereign debt is risk-free. The proposal elicited some sniping, notably from Italy, which is unsettled by the idea of any sovereign debt reform that would make it harder for its banks to be anchor buyers.

But broadly there were nods of approval. Olivier Guersent, the European Commission’s director-general for financial stability, said Mr Scholz’s intervention was “a bold move and very welcome”.

It is bold: the German finance minister is not only risking a backlash from ordinary Germans, already fed up with the perceived cost of bailing out southern Europe after the crisis of 2011. He is also endangering political stability: the most senior SPD representative in Germany’s grand coalition wrongfooted his CDU partners.

So why might Mr Scholz be so keen on such an idea? Simply advancing the European project may be one motive. There is also a prospective economic benefit: as Europe’s biggest economy, Germany should benefit from a more efficient eurozone, financed by banks that can operate more readily cross-border.

Bankers have long complained about the uneven status quo, with the deposit guarantees that underpin weaker banks in weaker countries distrusted by stronger rivals such as Germany. A pan-eurozone guarantee — and the completion of banking union — would unleash a keenness for banks to merge into diversified cross-border groups.

The stark truth is, however, that few banking systems are as weak as Germany’s. And its two big lenders — Deutsche Bank and Commerzbank — have had a truly dreadful run. Both have seen their stock price slump more than 90 per cent in a decade.

In recent weeks, Commerzbank slightly exceeded expectations on profitability, as it deepened cost cuts. But its return on equity was still a pitiful 3.5 per cent in the third quarter. Deutsche has been lossmaking for three of the past four quarters, as it attempts a radical investment bank restructuring. Neither has a convincing plan to generate anything like an acceptable return under its own steam.

Of course, most European banks are finding life tough at the moment. The ECB’s negative interest rate policy has cut lending margins to the bone, and economic growth is running at barely 1.5 per cent. European banks operating in global markets have been left behind by American rivals, which have grown through acquisition and thanks to a large, thriving and structurally more profitable domestic market.

EU policymakers may lack the power to invigorate economic growth but they are keen to help lenders merge or acquire each other. Bank bosses often argue that cross-border mergers within the eurozone are unattractive, or even undoable, as long as banking union is incomplete.

This, then, is where another motive — perhaps the most pressing one — for Mr Scholz, may come in. If Deutsche is to find a way out of its impasse, there probably needs to be some kind of combination with a rival. The same applies if the German government, which still owns a 15 per cent stake in Commerzbank after a 2008 bailout, is to sell out and help solidify the country’s number two listed lender.

Don’t expect Mr Scholz to admit as much. That would spoil Germany’s strongman image. But if banking union can be completed, and Europe’s feeble banks — particularly Germany’s — can be boosted, that can only be a good thing.

NYT

(Saturday): Former national security advisor John Bolton knows about “many relevant meetings and conversations” connected to a pressure campaign on Ukraine that House impeachment investigators have not yet been informed of, but he is unlikely to testify about them to Congress; A form of vitamin E has been identified as a “very strong culprit” in lung injuries related to vaping THC, according to health officials, a major advance in an outbreak that has killed 40 people and sickened more than 2,000; Former New York City mayor Michael Bloomberg, who has entered the 2020 presidential race, plans to take an unconventional approach: He will skip traditional early-state contests and focus on big states that hold primaries after; Hospitals across the country are increasingly suing patients for unpaid bills, a step many institutions were long unwilling to take—in some places, major hospitals now file hundreds or even thousands of lawsuits annually, straining court systems; Donald Trump said he had not yet agreed to roll back any of the tariffs he had imposed on China and that, if a trade deal is reached, he would not eliminate all of the levies he’s placed on $360B worth of goods; Trump reached out to African-American voters at a campaign event, arguing that his economic and criminal justice policies had done more for them than decades of false promises by Democratic leaders who he said took them for granted; As global temperatures rise, a fledgling wine industry is growing across Scandinavia, as Nordic vintners bet they can develop what were once mainly hobbyist ventures into thriving commercial operations; + MA: In a bid to help transgender and non-binary people, cards issued by some banks on the Mastercard network will soon let customers use their chosen names on payment cards, even if they have not changed their legal names;

(Sunday): The tech industry has been more diligent in recent years about identifying online child sexual abuse material, with a record 45M photos and videos flagged last year, but it has consistently failed to take aggressive steps to eliminate the material, and its efforts often leave pedophiles with the upper hand; A new kind of suburbanization is sweeping through politics in cities such as Richmond Atlanta, Houston, and Denver, where Democrats are starting to breach Republicans’ firewalls in elections and turning red states blue; More than a hundred nations have joined a global campaign to reduce the international trade in mercury, an element so toxic there is no safe level of exposure, but the effort has backfired in Indonesia, which has become a major global black-market supplier; House Republicans’ scorched-earth strategy to fight against impeachment involves demanding testimony from figures at the center of Trump’s favorite unsubstantiated theories, such as those involving the Bidens in Ukraine; + Saudi Aramco: The world’s largest oil company took another step on its lengthy path to a stock market listing on Saturday, saying that it would announce a final price for its shares on December 5, with trading expected to start in mid-December; Sunday Business: Utility companies are investing tens of billions of dollars in natural-gas plants, insisting that renewables aren’t ready to serve as the primary source of electricity, but environmentalists and many states are pushing back against their efforts; Magazine: Feature story profiles Republican House Intelligence chairman Adam Schiff—whom Democrats believe could be the man to bring down Donald Trump—and looks at at the process he’s using to run the investigation.

WSJ (Weekend): “Months before Donald Trump pressed Ukraine’s new president to investigate Joe Biden’s son and alleged 2016 U.S. election interference, two associates of Rudy Giuliani urged Ukraine’s prior president to announce similar probes in exchange for a state visit to Washington”; +/- PCG: As many as 100,000 California residents who lost property, jobs, and loved ones in fires linked to the utility will eventually get their day in court, but Chapter 11 rules could shield the company from potentially crippling jury payouts by putting a lid on compensation; The Trump administration is proposing to raise the cost of applying for U.S. citizenship, as well as creating new fees for some asylum seekers and the ‘Dreamers’ in the Deferred Action for Childhood Arrivals program; As Democratic voters assess their choices for the 2020 presidential nominee, they are dividing into clear groups by ideology, race, and other personal qualities, leaving three candidates—Joe Biden, Elizabeth Warren, and Bernie Sanders—dominating the primary contest; Iran said it shot down an unidentified foreign drone near one of its Persian Gulf ports close to the Iraqi border, risking another flare up in the Middle East and further exacerbating tensions in the region; +/- DIS, AAPL, T: Research shows that Americans are willing to spend $44 monthly on streaming, on average, for 3.6 services, but 47% of U.S. consumers are frustrated by the growing number of subscriptions and services required, a situation that poses a potential problem for new arrivals; China’s “Singles Day,” created as a gimmick a decade ago, has entrenched itself on the Chinese calendar as a hybrid of Black Friday and Super Bowl Sunday and has become both an opportunity and a headache for shops and consumers; Emerging markets are increasingly adopting “earnings management,” artificially smoothing their earnings to pander to analysts and investors, according to research from Rayliant Global Advisors, which says the trend is even more widespread in emerging markets than in developed ones; H.O.T.S.: Defense stocks have delivered outsize returns over the past six years, but political issues and high valuations could pose problems; SQ is no longer in the food-delivery business, and now it must deliver more growth; Americans aren’t as optimistic heading into the holidays as they were last year, but certain measures bode well for holiday spending.

(Weekend): Front page story reports on the case in Italy in which thirteen bankers from Monte dei Paschi di Siena, NMRA, and DB were sentenced to imprisonment after being found guilty of helping the Italian bank hide millions of euros in losses using derivatives contracts between 2008 and 2012; Josef Stadler, head of the ultra-high-net-worth wealth management unit at UBS, said the world’s billionaires are victims of bad press, and that they are better corporate leaders than many less wealthy executives; Big Read piece on MCD says the company’s firing of chief Steve Easterbrook wasn’t about puritanism, but about grappling with a sexual harassment problem that has long plagued the company’s thousands of franchises; Lex Column: Saudi Aramco is proving a tough sell to investors—the company could meet its goals by badgering local billionaires and friendly wealth funds, but reaching numbers acceptable to crown prince Mohammed bin Salman could be tough; Like rivals J. Crew and ANF, GPS is being squeezed by cheaper fast-fashion chains at one end and premium ones at the other; SEC chairman Jay Clayton says lack of investor access to private companies is a concern, but disclosure issues at startups should make retail investors wary; Comment: Olfa Scholz, Germany’s finance minister, faces an uphill battle as he tries to convince his country’s political and financial establishments, as well as eurozone governments, on the merits of his plan to complete Europe’s banking union

(Saturday): Two former executives are suing Jim Spanfeller, the head of G/O Media, which owns The Onion and Deadspin, claiming he discriminated against female staff members; The annual UBS Billionaire Insights report says there are more billionaires than ever, and that their fortunes rose by 34.5 percent from 2013 to 2018, to $8.5T; (Sunday): Nearly two-dozen New York non-profits are among the richest in the country, raking in hundreds of millions in donations, according to a new analysis, with Columbia University at the ninth spot nationwide and the first in New York City; Some 33M Americans, many of them millennials, are financially tapped out and will not take vacations this winter, according to a new WalletHub survey; Fifty percent of U.S. commercial banks—more than 3,000 FDIC-insured institutions—could shutter in the coming years just as many start to report record profits, according to Neocova, a financial services technology company

Some central bankers want votes on every rate-setting decision

Christine Lagarde is to face calls for an overhaul of how the European Central Bank decides monetary policy as senior colleagues use the start of her presidency to argue for changes including formal votes on setting interest rates.

Ms Lagarde replaced Mario Draghi as ECB president at the start of the month and has invited the governing council, its top policymaking body, to present ideas on how to improve the central bank’s internal discussions. The issue is part of the agenda for her first council meeting on Wednesday.

Officials at four of the national central banks represented on the governing council told the FT they would make proposals ranging from holding regular votes on monetary policy to requesting that the president does not pre-announce policy plans.

At the moment votes on interest rates — the highest-profile decisions taken by the ECB, at 10 meetings a year — are only held on the initiative of the bank’s president.

Many of the ideas stem from frustration at how Mr Draghi oversaw monetary policy debates. This tension spilled over into public dissent by senior officials about the fresh wave of ultra-cheap money the bank launched in September, to respond to signs of an economic downturn in the eurozone.

Several of the central bank’s top decision makers were annoyed by Mr Draghi’s practice of announcing monetary policy changes before discussing them with the council.

The council is made up of the 19 central bank heads from each eurozone member country and six executive board members, including Ms Lagarde.

“I think it is a good idea to raise these things at the start, as these are more technical and organisation issues, so let’s put them on the table and have a proper discussion,” said one council member. “We want a more open, more consensual debate.”

Some of the proposals would bring the ECB more into line with the US Federal Reserve and the Bank of England, which both have regular votes on monetary policy decisions and publish the individual positions of their top decision makers.

At least one council member wants to have a vote on every monetary policy decision.

Ms Lagarde, who has yet to speak to several council members since starting the job on November 1, is expected to use her political experience as former head of the IMF and French finance minister to try to heal divisions within the ECB. She said before arriving at the central bank that she would “start with teamwork”.

Divisions within the council may make it harder for Ms Lagarde to loosen monetary policy further. This could frustrate investors, as markets are pricing in another rate cut next spring.

In September, the ECB’s monetary easing measures were opposed by about a third of the governing council, but no vote was held.

Several other council members said they would support the majority view despite criticising parts of the package, leaving some doubt over how they might have voted.

Mr Draghi said after the meeting, however, that there was such a “clear majority” in favour that a vote was not needed.

Among the dissenters, there was anger that Mr Draghi brushed off their opposition to the package, which included a cut in the ECB’s deposit rate and a restarting of its €2.6tn bond-buying programme.

The ECB has only published accounts of its monetary policy meetings since 2015, but it rarely has votes and never publishes details of individual council members’ positions.

There have been discussions about whether to hold regular votes on monetary policy before, such as in 2013, when executive board member Benoît Cœuré proposed such a move and also said the voting record should be published.

The ECB declined to comment last week.