A Pound of Feathers
What's heavier: a pound of feathers or a pound of gold? They weigh the same. The old riddle gets at the difference between weight and density.
"That's obvious," you say.
It is.
Here's another riddle: what's worth more to a company: a dollar of fee income or a dollar of interest income?
"A dollar is a dollar. They’re worth the same." you say.
Again, you're right.
Sort of.
Clearing things up
Financial clearing house Marex earns income through charging fees, taking spread between bid and ask prices and earning interest on deposits. Investors, as a rule, don't like interest income that much. They value it less than fee and other sources of income. Banks often trade at lower prices relative to earnings than other types of companies.
Investors see interest income as riskier than fee income. Jay Powell has the final say on what interest rates will be and everyone else has to fall in line. Jay doesn't work for Marex or any other financial services company. His job is to keep a lid on inflation and keep people working.
So, if inflation fades, rates come down. With lower interest rates, there's less space for financial companies and Marex to earn it. Jay has his hand on the scale of interest income. Not so for fee income. Investors look at this relationship and think "$1 of fee income > $1 of interest income." Financial companies with more fee income earn higher value in the market than more interest heavy ones.
Marex, though, doesn't make most of its interest income through loans. It's not a bank. It holds its customers’ collateral (cash) so that it can provide its clearing service. It earns interest on these balances. If interest rates fell, it would earn less, right? Right?
Marex grew up in the ZIRP era. For that part of its existence, it earned all of its income through fees, commission and spread. When interest rates shot up in 2022 this was a new, happy world for it. It could actually earn some income on those balances.
Its customers — sophisticated financial institutions — were less enthusiastic. They came around and said "Hey, it’s costing us a lot more now to have our cash tied up as collateral, we could be earning interest on that. We're doing the same amount of business with you guys, but it's way more expensive! What are you going to do about it?"
Marex said "OK." It offset some of its other income with the interest earned on collateral. The mix of its income shifted to favor more interest. Overall income of its business, though, has grown with the volume of services it provides.
Sometimes investors are dense
There are two takes on Marex's interest income:
The company doesn't have any say on it. It moves with central bank rates. That's risky and low value. Investors shouldn't value it highly.
Marex uses rates as a dial to share value with customers. When rates are higher, it can dial back its fees and commissions. When rates are lower, it can turn this back up. It can tie its income to the volume of its business, not whatever the prevailing interest rates are.
Management's turned the dial before. CEO Ian Lowitt tells the story of how it had to rework its customer agreements over the course of a quarter to adapt to rates shooting up. That hand is still on the dial if rates move again.
Rather than think about fees and rates as separate streams of income, investors ought to think about Marex simply charging for the service it provides. The mix — between interest and other streams — will depend on the rate environment. The level of income, though, will depend on the volume of its business.
That volume has been growing fast — faster than the overall market. Marex grew customer volume about 26% in 2024. The market only expanded 3%. Marex's income grew even faster.
Investors are still skeptical. Marex's share price reflects expectations and fears in-line with the first view rather than the second. That gap opens the door for an attractive investment.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.