By now it is received wisdom that David Solomon’s apparent victory at Goldman Sachs over rival co-president Harvey Schwartz is a reflection of where the emphasis of that firm is heading – namely, towards investment banking and away from the traders.
Solomon won out partly by virtue of his pedigree in investment banking, whereas Schwartz was hurt by his trading heritage.
That is broadly right, but there is a finer distinction at work too. Both men have had to preside over changes of strategy. Solomon has arguably nailed his; Schwartz’s efforts look a lot more like a work in progress and he has run out of time.
Proof that you can shift gears to match the zeitgeist matters more than ever in banking management at the moment – Jamie Dimon might be an exception (in all sorts of ways), but take a look around at the best bank chiefs and senior executives right now and they are change managers rather than steady-as-she-goes merchants.
So, too, has it been at Goldman. While the institutional side of the business was reaping the rewards of a buoyant environment for the kinds of trading clients that Goldman focused on, like hedge funds, investment banking had a few things to tackle.
One of those issues was sorting out the firm’s approach to debt capital markets work, which was at times oddly selective, even by Goldman standards. A conscious effort in leveraged finance, for example, is one of the things that has helped it build its DCM business to $3 billion of revenues in 2017 – more than double what it brought in six years earlier.
Goldman ranks fourth for global DCM in the last 12 months, according to Dealogic, behind the leading trio of Citi, JPMorgan and Bank of America Merrill Lynch. In 2010, it was eighth.
Its rise since then has not seen it grab noticeably more market share – that is still about 4.5%, compared with the leaders’ 6.5%; much the same levels, incidentally, as in 2010. But it has maintained its share and doubled its revenues while names like Deutsche Bank, Barclays and UBS have slipped.
It has also poured more effort into creative capital commitments – one of the reasons behind Euromoney’s choice of Goldman for World’s best bank for financing in our 2017 Awards for excellence.
Goldman has traditionally been seen as a sell-side house in M&A advisory and deservedly so. Over the last 10 years, its deal count has stayed at just over 60% sell side (an average of 220 transactions a year), with bankers at the firm proud of their higher likelihood of getting paid than rivals who spend more time chasing potential buyers.
That ratio isn’t changing yet, but there have been important tweaks to it, not least a push for bigger individual buy-side mandates and bigger capital commitments to bridge financings. It is a subtle shift, but one that illustrates the ability of a heritage franchise like Goldman M&A to adapt. It has also fed through to the DCM performance.
On trading, however, the movement has been the other way. Schwartz is full of ideas on how to make that business better suited to conditions. In fact, had the succession timing been a little different, he might yet have been bailed out by an environment that is are already shifting back towards Goldman’s traditional strengths.
Much of the strategic plan he unveiled last year to add another $5 billion of revenues was predicated on broadening the trading client base, including doing more with corporates. The firm won’t be binning these plans just because Schwartz has ended up on the losing side against Solomon – such strategies are not one-man shows, even at Goldman.
But the fact is that what has been done in investment banking at Goldman is held up internally and externally as the model. CFO Marty Chavez – who is, incidentally, from the same J Aron commodities brokerage background as Schwartz – told debt investors last August that the kinds of questions being asked about the firm’s FICC franchise had been asked in the past about its DCM unit and had been addressed.
Schwartz may well have ended up being in the wrong place at the wrong time when conditions soured for the kind of trading business that Goldman has been best at in the past, but Solomon has proved his worth at shifting a strategy in good time – and making it stick.
In the end, that may have been what mattered.
Investors loved banks in March, says the Bank of America Merrill Lynch Fund Manager Survey.
Only once before – in October 2017 – has the monthly poll seen the buy side report a higher allocation to the sector. It is now at a net 36% overweight, which is apparently two standard deviations above the long-term average.
Technology is close behind, at 34%, but investors have been telling BAML they are overweight tech since early 2009 – and really, if you exclude the occasional month of underweight, all the way back to the middle of 2005.
The pickup for banks is much more recent, dating from just the start of 2013 and excludes most of 2016.
What is striking is the contrasting performance of the two sectors relative to world equities during that time, measured by the relevant Datastream sector equity index against its world index. Investors have been piling into tech consistently as the sector’s relative performance has improved – from a low 50s level at the start of 2008 to about 100 (parity) now.
Global banks also now stand at about 100, but have fallen from a peak of over 160 in 2006. For a lot of that fall investors were underweight, but they flipped to overweight at the start of 2013 and performance has dropped from about 110 since then. It looks way better than in 2016 however. Investors are clearly betting on another leg up.
One of the more fun metrics in the monthly Bank of America Merrill Lynch fund manager survey is the ranking of investor views on the most crowded trade out there.
Unsurprisingly, Short Volatility was the biggest mover in the March poll, plummeting from a score of 18% (of investors ranking it most-crowded) in February to just 4%. That put it above only Long Bitcoin.
But investors reckon FAANG+BAT is the market’s most crowded trade – it was last month too, but in March it climbed from 23% to 38%. It’s a fair bet that current newsflow could send that down the rankings a bit for the next survey.
And if you're about to Google what FAANG+BAT is then (a) you were probably born before 1980 and (b) you already know what the G stands for.