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On Today's Boomberg Intelligence Show, we dig inside the big business stories impacting Wall Street and the global markets. Each and every week we provide in depth research and data on some of the two thousand companies and one hundred and thirty industries our analysts cover worldwide. Today, well look at why sales at the sportswork company Nike are declining. Plus we'll discuss how the Inflation Reduction Act is impacting the energy sector. But first we begin in the M
and A space. DirecTV and Dish have agreed to combine in a deal that would create the biggest PayTV provider in the US. That one included about eighteen million subscribers. Under the terms of the transaction, DirecTV will acquire Dish TV and Sling TV from EchoStar, and DirecTV would assume about nine point seventy five billion dollars of Dish's debt. The deal is contingent upon regulatory approvals and bondholders writing off nearly one point six billion dollars in debt related
to Dish. Co host Alex Steel and I were joined by Githa Rong Andathan Bloomberg, intelligence analyst on the US media space. We first asked, getha, what's driving this deal?
What's really driving this deal is desperate times kind of call for desperate measures, Paul, So, satellite TV has steadily seen an erosion of its subscriber base. I mean, at one point it was the only other game in town, along with cable TV, for people to get access to different PATV packages. Today the world is a completely different place.
I mean, you have cable, you have satellite, which is of course the traditional facilities based operators, but then you also have a whole slew of new Internet based options. Whether you know it's a YouTube TV, which gives you all of the linear TV options, or whether it's like completely different what are known as sphalts services subscription video on demand services like an Amazon Prime or Netflix, and
so the world today is completely different. And because of this, satellite TV has has seen a huge, huge erosion of its subscriber based dish and direct TV. Once upon a time, you know, they were some of the largest PATV operators. They've lost about sixty three percent of their satellite subscriber base just over the past seven years.
That's unbelievable. Did two wrongs then make a right slash? Will regulators like it?
So regulators of course squashed this deal back you know, about twenty years ago, but then again, it was a completely different landscape. They have to kind of understand that things have completely each change today. One of the main appealing points of satellite TV, why people even taken in the first place, is because in a lot of areas in rural America, this is the only way that you
can get access to PATV. But things have been changing because you know, we've had this whole initiative to narrow the digital divide, So more and more houses in rural America are getting wired up and with that they now have the option to switch to Internet based TV, which is you know, exactly what Distion direct Tv are saying. This is the reason why they've lost subscribers. So this is the reason why there is more competition, and therefore regulators should allow the deal to pass.
And I guess a parallel announcement here is that TPG Group, the private equity company, is going to acquire AT and t's seventy percent stake in direct TV that TBG doesn't already own. So in effect, a private equity owner is now going to own the entire US satellite television business. What's going on there?
Why?
Why is this happening?
Yeah, exactly, Paul. So it's you know, Charlie ergan walking away from the PATV business, and in many ways again AT and T also walking away from the PATV business. And as you well know, AT and T had invested heavily in the media businesses. They had bought the whole Warner Brothers operation, which they kind of got rid of, selling that to Discovery, and then of course they had also bought the Direct TV operations, which they sold a
thirty percent stake to TPG. They still retained a seventy percent stake, and of course with that deal with TPG, they are completely exiting that business. And for both of them, if you kind of look at what you know is the final endgame here for both AT and T and EchoStar or the other part of the dish business, they really want to kind of focus on their core business, which is the wireless business for AT and T. Of
course it's the wireless business for EchoStar. They have, you know, built, they've mastered a huge amount of spectrum, and they ultimately want to become the fourth largest wireless player in the United States, and this deal really helps them do that and kind of focus their resources, investments, time, and energy on just that part of the operation.
This might be a dumb question, but do they grow their customer base at this point? Is they're a customer base to grow, or as you said, do they just become better at execution and they kind of cut with synergis and that's how they become successful.
Yes, they outline about a billion dollars in synergies. A lot of those will of course be programming costs. They still will be with the combination, they still will be
the largest PATV operator. They will have about nineteen to twenty million subscribers, but there's not a whole lot to really grow ALEX, So it's really more kind of stemming the declines, if you will, just reducing the bleeding and becoming much much more efficient in kind of delivering customized, tailor made packages for the PayTV market.
And Keith, you're about thirty seconds left. What's your forecast for just the overall pay TV business? Are paying subscribers going to go to zero? Is where we're going to be all streaming stuff soon?
I hope not, but we're definitely seeing that. You know, YouTube tv is becoming a major major player in the market again. They are delivering linear TV channels. They right now are you know, about the third or the fourth largest operator eight million subscribers, so they actually have more
subscribers than Dish has on its satellite business. But we eventually in the next two to three years see them becoming the largest player and then that of course changes the whole dynamics off the whole PATV market because then you have a streaming based operator that's the largest operator of you know, the PATV market.
Our thanks to Geitha Ranganathan Bloomberg Intelligence media analyst. We move now to the tech space. Open Ai is bolstering its efforts to build the world's leading generative artificial intelligence technology. The company has completed a deal to raise six point six billion dollars in new funding, giving it a one hundred and fifty seven billion dollar valuation. The funding round was led by Thrive Capital and Microsoft. Other investors included
Costla Ventures, Fidelity Management, and Nvidia. Open Ai also tapped Global Banks for a four billion dollar revolving line of credit on top of its recent fundraising. For more and all this. Guest hosts Bailey Lipscholtz and I were joined by anaag Rana, Bloomberg Intelligence technology analyst. I first asked anarrog what else he knows about what's going on with open Ai.
Yeah, Openea is really taking going to lead over the last three years because of the launch of chat GPT and after that it has become the go to things, even for enterprises. We recently did a CIO survey and open Ai Microsoft combination was far ahead than all the other large language models that was out there. So that's
on the enterprise side and consumer side. We already know how well they are doing both on the app that they're selling along with the distribution that the the what they won with Apple being part of CD when the software upgrade is going to come. So open AI in the world of large language models really at the top of the top of the mountain at this point, and this is one of the reasons you're getting these high valuations.
Yeah, I just want to put into perspective. At one hundred and fifty seven billion dollars, open ai would be larger than uber and at that six point six billion dollars in funding relative to IPOs, it would be the twelfth largest global IPO since twenty eighteen. So anak are we in a AI bubble as it relates to private markets?
I think, to be very frank with you, I can only answer that five years from now. But we just you know, updated our numbers looking at capital expenditures for the top five six companies. These companies, which includes Amazon, Microsoft, Meta, Oracle, et cetera. In twenty twenty three, they spent about one hundred and ten billion dollars in all the things what
we call capital expenditures. In twenty twenty five, they're going to spend about two hundred billion dollars so that's a massive increase of ninety billion over a two year period. You know, where is that money going to? Expansion of data center, buying more GPUs, buying more hardware, expanding their own large language models.
So it really feels.
Real, frankly as to the amount of money that the big guys are spending it over here, and they won't be doing it if they didn't see the demand on the other side of the equation.
This has been a turbulent year for the company here. I know, lass November the company's board fired and then quickly we hired the CEO, Sam Altman. Following months had a lot of key leaders leave, including the co founder, the chief technology officer. It seems like the market's kind of forgotten all about that, or maybe it's not a problem anymore. How's the market dealing with some of that turmoil we've seen over the last year.
I think people tend to forget that who's really behind a lot of backing off this particular company, and that's Microsoft, and you know they have the biggest distribution and among enterprises. So if they are basically telling people if you want to create an enterprise application using some AI large language model, here is OpenAI model and you can host it on our cloud platform. I think that is resonating very well
with customers. So as long as that continues for the next several years, open AI's revenue will continue to go up. And you know, then you can you know, argue whether the valuations is high or not.
And just from the bloom we're reporting Tiger Global put in three hundred and fifty million dollars, Ultimeter putting in at least two hundred and fifty million dollars. But to your point, if Microsoft is able to write such large checks, how does that impact the funding environment for AI companies. I'm just thinking about the biggest competitors for open ai in Anthropic and XAI.
Yeah, I mean Anthropic is backed by you know, Amazon Web Services at this point primarily, and almost all the others. The one thing we heard, you know, from reporting from Bloomberg News is that open aye is asking them not to back up you know, Elon's xai or others. And I think that's partially the reason you see all the other plays coming in because and by the way, there's not going to be one winner, They're going to be
multiple models. They're going to be multiple companies doing well here, and there is no reason Anthropic can't thrive in this way or Mistral or all the other large language model companies.
What do we know about open AI's financials if anything.
It's I mean, I don't have a clear picture on it. I've I've read as much as you have, and you know, we have seen projections out there for the next several years they can get to I don't know, five billion, ten billion or so forth. So I mean it's it's unless we see the s one when they go public, you know, up till at that point, you know, it's it's it's purely a guess work.
Do we have any sense of do they have an appetite to go public? Is it a sense of timing? What are their plans for going public? If any?
See?
My personal view is they don't need to go public at all. They don't need the funding they will you know, the whoever is part of this particular ecosystem is getting
rich every day. I think they should figure out how to grab as much enterprise workloads as possible before they think about it, because one thing is for sure, even as they are doing this land grabbing right now, they're at a loss, and they will be at a loss for several years out because the cost of running these workloads is very high and it's going to you know,
you're not going to see any free cash flow. You're not going to see any But once you've got public, you know, you really go under the lens when it's about profitability and your margins.
Wellly have about thirty seconds. But going back to a story that has been reported out recently in terms of giving all in a stake in the company that could be worth more than ten billion dollars, what do you make of those conversations and what that could mean for the company and its ambitions.
Yeah, I mean it's always talked about how he is doing for the greater good of the world. But I bet I guess when you get this much options you change your mind on that. But it's it is what it is.
Our thanks to anaag Rana, Bloomberg Intelligence technology analyst, coming up or break down why investors are disappointed in Tesla despite its first quarterly sales gain this year. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies and one hundred and thirty industries. You can ask us Bloomberg Intelligence if via b I go on the terminal. I'm Paul Sweeney and this is Bloomberg.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Apple Card playing en Broudouto with the Bloomberg Business app, Listen on demand wherever you get your podcasts, or watch us live on YouTube.
We move now to earnings from the sportswear company Nike, and they you reported first quarter sales that fell ten percent and we're short of analyst expectations. Thank He Also, it drew it's for year sales guidance, citing a transition to its new CEO, Elliott Hill, who will arrive later this month. The company also said it'll postpone its investor Day, which had been scheduled for November for more. Co hosts. Alex Steel and I were joined by Punam Goyle, senior
US e Commerce and retail analyst at Bloomberg Intelligence. We first asked Poonam for her take on Nike's latest quarterly results.
It was weak, right. Their sales continue to drop and there's no signs of a recovery at least yet until they have a better planning place. I'd say this year for them, their fiscal year is going to be the year of a reset. Once the new CEO comes into play in just a few weeks, he will have a new playbook and that playbook will drive Nike's turnaround in the fiscal twenty twenty six.
So part of that was, yes, cleaning the sleeve for him. They got rid of their investor day for all of those reasons. Can we assume that this is the drop, this is the worst it's going to get. It's only up from here.
I would say fiscal twenty twenty five the year of a trough. I wouldn't necessarily say that to that physical one Q is a trough because as you probably heard, they have guided to fiscal two Q sales to be down eight to ten percent, which is roughly still in line with one queue. And with the holiday season being unpredictable, we have port strikes, we have a shorter holiday season
with fewer days of shopping. You know, things are still very much up in the air from a macro perspective, and the Nike has its own troubles on top of that.
All right, So from your perspective, Punum, what is the problem with Nike.
The problem is that they don't have enough newness in their pipeline and they haven't been focused on merchandise. Nike has to have good merchandise, new merchandise, performance based merchandise in front of consumers on a constant basis to really drive the outperformance that they had seen a pre pandemic. They lost that under the current leadership because the focus is more on DTC and using the franchises that did
well and really just adding new variations of them. For example the Air Force, Right, we have so many variations of the Air Force, saying with the dunks and saying with the Jordan's just new color waves. So we need to see more. We need to see them do more on the product front and then the marketing of it of course too.
So what s Nike saying just about the consumer in general these days? Because I would think WOY with their broad product line in reach, they would have a pretty good view.
They you know, the consumers uneven, they're spending in certain places and then they're not spending. For example, they talked a lot about their new product that they brought to market earlier.
This year.
That's actually done really well for them, and that's a good sign. But then the rest of the stuff is just status quo. They are seeing weakness in their own retail channels, and the weakness is coming from traffic, right. So this goes back to the macro a little, where traffic is down in the stores, Traffic is down on line, and traffic is what's hurting sales because the average selling price was actually up, which means they're able to sell
these expensive sneakers. They're just not able to get enough people to come in and buy them.
Okay, do Nikes have sneakers with those heels, because if they did, I'd feel like, Yeah, there's like a whole brand of like sneakers with a heel, so like stilettos, and they have the look of a sneaker, and I think they have I think that would be helpful.
I don't think they have that, but I don't know if they actually need.
That to win They probably they're not talking up fair enough. But in all seriousns though, how is China doing for Nike?
China is not doing well. China has struggled for some time, and I think the China struggle will eb and flow. The highlight for China is a new stimulus that they have just gotten, and I think that can serve as a catalyst to help at least improve sales from where they are today in the near future, because that should get Nike back onto people's feet there as they have
more spending pass. The thing is, though, everyone's fighting for share in China right That's the growth engine for most app leisure companies, and while Nike does have a lead still in China, it's one among many players, the locals and the nationals.
Thirty seconds, Punham, what's the you know, the holiday season look like we have any growth there? For US retailers, there will be growth.
We think e commerce is going to lead, Bob. We think there's a value play here. Consumers are scratched. It's a shorter season. There's going to be a lot of deals in the next few weeks of the time day kicking off, so shoppers bull shop deals and will shop early.
Our thanks to Punham Goyle, senior US e Commerce and retail analyst at Bloomberg Intelligence, We look next at the ev giant Tesla. Tesla posted its first increase in quarterly vehicle sales this year, but the automaker let down investors who are expecting more of a bump from China boosting electric car subsidies for more. Co hosts Alex Steel and I were joined by Keith marton Bloomberg Auto Reporter. We first asked Keith for his take on Tessa's recent numbers.
Yeah, there's a little disappointment on the vehicle sales. They came in just under analysts expectations about one thousand vehicles under They sold four hundred and sixty two thousand and four hundred and sixty three was more the It was a consensus, but more to the point, they kind of missed the whisper expectation, which was maybe as high as four seventy. Seems like there's some softness in the cyber truck. There also were high expectations for sort of a cash
for Clunger's sort of promotion going on in China. They've doubled the incentive for EV sales if you turn in an older model there. That was expected to give more tailwind to Tesla, and that didn't quite materialize the way that investors expected.
You know, just in terms of ubers, for example, every Uber I'm in now feels like it's a Tesla. I don't know if you guys experienced the same thing. And I feel like, is that a good or bad sign for Tesla, because yeah, okay, it's promotional, but I feel like the reason why all the Ubers are now Tesla is is because it's a promotion, like get this off my lot. Are we at the trough with that?
Yeah? You know, Model three and Model Y. That is the volume of the company, which are their you know, mainstream cars, their luxury models does not sell very well anymore. It's getting pretty long on the tooth. And cyber Truck, you know, is priced sort of around one hundred thousand, and that limits its volume under twenty thousand probably for the quarter. So they are becoming a more mainstream brand, and when that happens, they become Ubers.
Matt from Westchester emails in here and says, is Tesla ever gonna have a new model? We haven't had a new model like ever, really, like just an upgraded model.
Yeah. This is you know, sort of a long standing issue that the product lineup, with the exception of cyber Truck, which for now is a niche vehicle, that the lineup is getting stale. But you know, Elon must is really focusing more on Tesla as an AI company. They have this event coming up next week to unveil the Robotaxi that he's really been talking up, and that's actually moved up the stock from the way he's positioning the company.
So he's trying to speak less like a traditional automaker and more like an AI tech company.
I feel like it's always been that. It's been like Tesla's a tech company. Nope, it's a car company. No, now it's an AI company. How does the sales though, that we're seeing for EV's, because that's still the bread and butter, How is that stacking up against its peers like a GM or Forward.
Well, I mean, Tesla's still far and away leads to the market. But GM, for example, had an excellent quarter in EV sales because they've just rolled out this thirty five thousand dollars Chevy Equinox electric vehicle and that's a great price and it's below Tesla's lowest prices, so you know,
new competitors are coming in. Tesla's supposed to have a lower priced EV coming next year, but Elon hasn't really talked much about that, so you know, as more competitors come in, as they come in at the lower end of the market, that's going to chip away at Tesla's share.
Our thanks to Keith Thoughton, Bloomberg's Auto Reporter. We move now to earnings from Carnival Cruise Line. Carnival reported third quarter sales and profits that beat analysts expectations while raising its full year outlook for a third time this year, but the companies share slumped shortly after the report as a company delivered a softer outlook for demand next quarter. For more, co host Alex Steel and I were joined by Brian Egger, Bloomberg Intelligence Senior Gaming and Lodging analyst.
We first asked Brian to break down Carnival's results.
Overall, strong quarter and more of what we've been seeing in the past, which is strong onboard spending, close in booking has looked really good and overall the demand pace from the consumer's perspective is quite strong. I can't really attribute anything to the specifically to the stock price decline. I do know there was some discussion on the call
about the effect of expense timing. Higher dry do costs expense timing going into the fourth quarter, but that's generally in line with what was previously expected and not at all indicative of any kind of systemic cost issues. Overall, from a demand perspective, Compared to the other sectors we follow, cruise lines have not shown any crack.
Yep, Where are they in terms of deploying their fleet? Are they fully deployed?
Now?
Do they keep ships in port? I don't know what they do here? How does that work?
Yeah, they're fully deployed. They're back to full pre pandemic levels of deployment and ocumancy. In fact, one of the pieces of good news going I think into next year is a capacity growth is quite modest, so that kind of is another favorable factor in terms of yield demand for next year.
What do we think the relationship is between say, you know, US GDP and Carnival, Like, how a recession proof or not recession proof or sensitive?
Are they?
Yeah?
I've generally viewed cruises in general as being modestly cyclical, but if you go back as storically over decades, passenger growth has kept pace with supply growth even across weaker economic periods. Although this is probably a consumer cycle coal it has generally proven to be less cycle coal than other sectors because of this significant penetration expansion opportunity getting more first time cruisers.
We've heard from Carnival and from the other cruise lines that demand, as you mentioned, remains very strong.
Why aren't they just.
Launching new ships, cranking out new ships to meet the demand and try to take the mantage of it.
They're doing that, and over time you're going to see kind of this mid single digit capacity growth measure just happens to be a point in twenty twenty five where the level of capacity of growth is like zero point seven percent. So it's a more modest period of growth here, which I think probably entering some period of economic and certainty not itself a bad thing. They're also adding more amenities other than the new ships, like their private island destinations and things of that sort.
Excuse me, Wait, so I take a cruise to a private island. Whose island?
Yeah? So Celebration Key is one of those private island destinations that most of the cruise companies have, and that's something that they're going to be unveiling going into next year. So I think that, combined with generally strong pace of demand and the fact that on the ships themselves, the
onboard spending really has not led up. Those are all very favorable factors, and we're obviously watching this closely given all the understandable concerns about what happens with the consumer, there's any kind of economic slowdown.
What's the biggest cost drivers that these companies have to manage here?
Yeah, I mean generally fuel has always been something we watch carefully, fuel food supplies. You know, it's kind of a different kind of labor composition than other industries, but certainly if you look at the cost growth picture, we carefully watch things like foreign currency exchange movements and fuel cost growth.
All right, thanks to Brian Egger, Bloomberg Intelligence senior Gaming and lodging analysts, coming up on the program and look at how leadership and strategy changes have impacted Harvard University financially. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two that companies and one hundred and thirty industries. You can access Bloomberg Intelligence via Bigo on the terminal. I'm Paul Sweeney, This is Bloomberg.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on applecard Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa Play Bloomberg eleven thirty.
Each week we look at research from Bloomberg's n EF previously known as New Energy Finance. They're the team of Bloomberg that tracks and analyzes the energy transition from commodities to power, transport, industries, buildings, and agricultural sectors. This week we looked at the Inflation Reduction Act and its impact on the energy sector. For more, co host Alex Steel and I were joined by Thomas Rowlands Reese, bnev's head
of research for North America. We first asked Thomas, what has happened over the last two years in terms of deployment and project and what is left to do?
I think the main thing that has happened, you know, you'll see most of the money will have flowed through into the build out of the power sect, particularly into solar and wind and storage. Now there's a question of whether that was all going to get built anyway, and what you'd say the real value of the inflation Reduction Act, there is been more of a buffer against changing commodities prices. So when the Act was passed, natural gas was pretty expensive.
It's come down a whole lot since then. So at the time, you know, you might have argued that that stuff was going to get built anyway, but with the drop in prices, I think that actually maybe it wouldn't happen, So it gave that stability to that sector. Then outside of that, one of the big things we've seen is the development of supply chains. You know, where the US was really at a standing start with regards batteries and solar in particular, now we're seeing a lot of factories
being announced in different states across the country. And then finally a real uptick in investment in hydrogen Electoralizer orders have have significantly ticked upwards. Those are some of the it's kind of kept the power sector on the steady path that was on, and then it's really poured fertilizer on the ground of some of these more nascent technologies in your world of you know, kind of managing this transition to a cleaner energy.
What is the political risk that for this market, for this part of the world. If we were to get a reelection of former President Trump, what would that mean.
It's something we get asked about a lot, and actually we're producing some research right now to really answer that question. I think one of the things that we have concluded is that actually the main provisions of the Inflation Reduction Act are probably safe for a couple of reasons. One is that in the US it's so hard to change legislation, you know, with you don't have a trifector, and you know, whatever the result of the election, a trifector is somewhat unlikely.
And even if there was a Republican trifector, a lot of the investment from the Inflation Reduction Act is going into states and into districts represented by Republicans, so there's they would have to have a really big majority in both chambers of the House. So I think there are certain aspects of the Inflation Reduction Act that could change.
There's how the laws are implemented. There's a lot of regulations still being written around some of the tax credits, and that could be written differently because that happens in government agencies which report up to the executive branch. But I think there's less risk than maybe one might assume.
How much money still needs to get deployed. I just was really struck by Sarah Week for example. It's where all the energy people go and talk about stuff. It's a big conference, happens in Houston every year, happens in March, and Secretary Granholm is really like, guys, come and get money, like we have it, we will give it to you. Come to us to let's give us money. And some
people don't like that. Some people are like that just shows that we're spending money on stuff that we don't necessarily need to spend money on.
Yeah, I mean, it's an interesting one because for the most part, the Inflation Reduction Act is not a pot of money, in that the majority of the investment would come through tax credits, which are really just dependent on how much stuff gets built. Where there is a pot of money, and I should have come in with the actual figure is the amount that's been authorized for the
Loan Program's office. So and that is the one that is really politically under threat because that you know, that was the the program in the past that was associated with Cylindra. So there is this perception that this is money being allocated to companies that may fail, and there's a lot of that money still yet to be spent currently, and it's it's an ongoing process.
What industries are doing relatively well versus their benchmarks, versus maybe some industries that aren't. We were talking to Brian Egger from Bloomberg Intelligence about the cruise industry and their carbon footprint and trying to manage that. Which industries are doing well, which maybe you're struggling.
I suppose on I think of things on a really macro level, so you know, I divide the world into power and transport and industry, which obviously is a real simplification most of them. Momentum in decarbonization to date in the US has been in the power sector, okay, and most of that has been because of gas plants replacing coal plants, which doesn't get you to zero, It just brings emissions down in the near term. So wind and solar is then the next wave, and that's really starting
to kick in now. So there is good progress in power. Then transport historically hasn't had great success in reducing its emissions. But I think we're just at the start of the electric vehicle wave, which is gonna I think be a slow burn over a couple of decades, because even if electric vehicle sales increase quickly, it takes time for the whole vehicle fleet to turnover. But there is a downward
trajectory in transport. So it's really industry where what we call the hard to abate sectors, where there's.
More work to be done, like some men steel that kind of fun stuff before I let you go. What I've also noticed when it comes to the IRA specifically, it really helped ignite the supply side of it with tax credits, but now the demand side. So the gap between here's my cool hydrogen thing that I just built and then here's this company buying that cool hydrogen thing that I just built is wide.
Yes, how do we solve that?
I mean, that's very especially true for hydrogen, and that is fundamentally the issue around the policy support that hydrogen receives is it's so much has been focused on supply, but I think it speaks to a deeper issue of what policy has to come next, because I think the nature of the Inflation Reduction Act was really throwing a lot at all these different industries to get things kickstarted. It's a bit like putting petrol in the engine. Maybe not the best analogies such, but it put petrol in
the engine of the energy transition in the US. But whatever comes next needs to be more like a steering wheel because it's established this momentum. But there are all these questions now that are you know, we never knew we'd have this problem of oh, there's too much supply, where's the demand, because at the time there was no supply and no demand. Yeah, so the next wave of a legislation has to.
Our Thanks to Thomas Rowlands Reese, bnaf's head of research for North America, we turned out to a Bloomberg Big Take story we focused on this week, titled Harvard Endowment paid out a fortune and Lost its investing edge. The story talks about how Harvard's money managers underperformed after changing personnel and strategies at the worst times. Co host Alex Steel and I were joined by the story's author, Janet Lauren,
Bloomberg Higher Education finance reporter. We first asked Janet to discuss her findings and what she learned well.
I went and read through a lot of anal reports of the Harvard Management Company, which has managed Harvard's endowment for fifty years this year. And one issue that came up, which is no surprise to our listeners and readers, is there's been a lot of turnover there. Since two thousand and five, a guy by the name of Jack Mayer had extraordinary returns. The team he built, they paid their
managers a lot of money for really outstanding returns. They got a lot of complaints that system was dismantled, and since then they've had seven people running the fund, including some interims, but two people who stayed less than two years. Lots of turnover, lots of strategy changes. And you know, Harvard was the envy of the world, and if you look at their ten year return, you know they were in the bottom twenty percent.
Why the turnover, It seemed like a pretty good seat to me.
Yeah, Well, there's a lot of scrutiny. And one issue is, you know, if you're a top performer there, you're getting paid. You show up on the tax forms and everybody knows how much you are being paid, and there's a lot of scrutiny.
So who, like what universities are doing well if we rank them in terms of return and all.
That, Well, if you look at their big rival Yale. They are in the top ten percent of returns for a ten year annualized return in the twenty year annualized return. They've had largely one person, the legendary David Swinson, who managed their fund from nineteen eighty six, a Yale trained economist until he died in twenty twenty one, and one of his trusted lieutenants has picked up where he left off.
They have a very different structure. They've unlike Harvard, which used to employ, you know, more than two hundred people traders, They've always sought to work with outside managers, and they sort of were there at the beginning of private equity when there wasn't as much capital, and they seated a lot of these managers who've had excellent returns. And you know how private equity works, You're not going to get
a big return in year one or year two. There's this thing called the j curb, so it takes time. And you know, schools like Yale and Princeton and MIT whose CIOs have worked for Yale in the past, they all invest together and they've they've all done much better than Harvard.
So I mean that Yale I called it's referred to as the Yale model. It used to be, you know, back in the day, a sixty forty portfolio. Then Yelle said, no, we're going to allocate a lot two alternatives. I think in the simplest form, that's kind of the Yale model. Hasn't everybody replicated that.
Well, everybody's tried to, But can you get into the funds that Yale us in no way?
So they're still reaping the benefits of being early.
Absolutely, but now this year and last year we're not great years of returns for the biggest endowments. Private equity has really lagged in public equities this year, what was it, twenty two twenty three percent return? The college endowments are going to be nowhere near that. I mean, to be fully in the S and P would be too much risk for them. But you know, we've seen a few
schools report returns high single digits. You know, they need to get seven eight percent to get to pay their salaries plus inflation.
When we talk about what they're not investing in. There's been a huge social pushback we've seen at universities like Columbia when it comes to the war in Gaza. There's obviously been a big push against fossil fuel investments. How quick or how nimble are these endowments to respond to those.
Well, first of all, nobody is divesting from things related to Israel. But that's pretty clear, So that's not really a factor of what these colleges are doing. And Harvard did not divest from fossil fuels. They're rolling things off, and they had a loss in twenty twenty two, and they said a small portion of that was not being in the funds that you know, did very well on energy in twenty twenty two. Divesting is really is not
an investing strategy. It's going you know, what does Warren Buffett say, don't do anything with emotion and colleges, you know, if that's what they're looking for. You saw meddling with the change in pay structure, meddling with energy, meddling not such a good investment policy. And Harvard has also been pretty steadfast that they're not doing anything related to the BDS movement for twenty years.
They have been, so, I mean, they still have fifty billion dollar endowment, they're still the biggest they are, so I mean, I'm not going to cry for these guys.
Right now.
But also, you know who's nipping at their toes is the University of Texas. And the reason is they have an asset that's completely uncorrelated to anything. They have oil and they have two point one million acres of land in West Texas that they were just given in the eighteen hundred by the State of Texas, and a couple years ago they had an extra two billion dollar gains that had nothing to do with anything they did investing.
Wise, all right, Thanks to Janet Lauren Bloomberg Higher Education at Finance Reporter.
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