Asset Management: BlackRock sends a shiver through the funds industry

One thing to start: I’m Laurence Fletcher, the FT’s hedge fund correspondent. While Harriet Agnew is away on sabbatical this month, Brooke Masters, the FT’s US financial editor, and I will be taking turns writing the newsletter.

BlackRock warns and cuts

It has been one of the biggest winners from the stimulus-fuelled bull market of the past decade or so, but fund giant BlackRock has shown it is not immune to last year’s profound change in market conditions.

Chair and CEO Larry Fink has warned that “negative markets had a substantial impact” on the world’s largest fund manager last year, with assets down $1.4tn on the year and Q4 revenues down 15 per cent, reports the FT’s Emma Dunkley.

Perhaps more ominously for the asset management industry, Fink also warned that the operating environment “is unlike anything we’ve seen in decades”.

BlackRock’s results, which also showed a fall in operating margin but a quarter on quarter jump in long-term net flows, come after my colleagues Adrienne Klasa and Madison Darbyshire reported that the group plans to cut 500 employees from its global workforce.

The cuts equate to a reduction of about 2.5 per cent of its total workforce of almost 20,000 people. Headcount had risen significantly since the start of the coronavirus pandemic — numbers rose roughly 23 per cent from the end of 2019 to the third quarter of last year — so reducing numbers in a bear market is hardly surprising. BlackRock had already said in October it would pause discretionary hiring.

But while the job cut numbers are not huge, the move reflects a growing feeling that 2023 could represent a painful period of reckoning for many asset managers.

Having benefited from the decade-long bull market in stocks (and a much longer bull market in bonds), they are now having to cut costs and make hard decisions about where exactly they should invest for growth. Some financial services sector companies, including Goldman Sachs, are already embarking on cost-cutting drives and lay-offs.

All eyes are on the US Federal Reserve and whether a pause or even a pivot in its series of aggressive interest rate hikes is coming. Many investors yearn for a return to the years of the “Fed put” and rising markets. Should this not prove to be the case, then asset managers are likely to feel more pain this year.

Is the asset management sector set for a year of outflows and job cuts? And who is going to come through stronger? Email me your thoughts at laurence.fletcher@ft.com.

Baillie Gifford’s $14bn hit

Also feeling the effects of the bear market is £228bn-in-assets fund firm Baillie Gifford.

The 115-year-old firm, whose early bets on disruptive technology stocks helped turn it into one of the world’s most influential tech investors, lost more than $14bn in 2022 on US electric vehicle maker Tesla and ecommerce company Shopify, according to calculations by the Financial Times.

A combination of surging inflation, rising rates, and a sharp sell-off in tech stocks have weighed on the growth-focused fund group, report my colleagues Emma Dunkley and Chris Flood.

Tom Slater, manager of flagship £13.8bn Scottish Mortgage Investment Trust, admitted it had been a “humbling year” and that it had been a “mistake” to assume changes in consumer behaviour would outlast the pandemic.

While Tesla has ultimately been a success for Baillie Gifford — the stock has risen by nearly 2,000 per cent since the company started investing a decade ago — it has been a large drag last year, with shares down 65 per cent. Until 2019, the firm was the second-largest shareholder, behind CEO Elon Musk.

Although its shareholding in Shopify is smaller, its 75 per cent fall last year has also proved painful. The stock had previously risen as a result of the shift to online shopping during the pandemic.

Baillie Gifford is far from the only fund firm hit by the tech downturn. Sharp falls in fast-growing tech stocks with little in the way of earnings inflicted heavy losses on many long-short equity hedge funds last year, with Chase Coleman’s Tiger Global one of the most high profile examples.

Like Tiger, which last year told investors that its losses marked “one point in time on a long journey”, Baillie Gifford is a long-term investor. Slater said that lower valuations now offer “a very attractive entry point for investors”. And partner Nick Thomas said the firm still has conviction in Tesla, adding that “it’s just been a difficult period”.

Chart of the week

America’s riskiest corporate bonds have kicked off 2023 on an upbeat note, with investors tolerating a smaller premium to hold low-grade debt following persistent evidence of cooling inflation.

Yields on speculative-grade US bonds have fallen by about 0.8 percentage points in the first two weeks of January to just over 8 per cent, according to an ICE BofA index, signalling a rise in price, reports the FT’s Harriet Clarfelt.

Yields for borrowers with the lowest credit quality have dropped even more emphatically, according to an ICE gauge of distressed debt, sliding 3 percentage points to 19.5 per cent — a level last seen five months ago.

Those moves partly reflect a rally in US government debt, fuelled by expectations that the Federal Reserve will soften its stance on aggressive interest rate rises in the face of slowing price growth. The decline in benchmark Treasury yields has boosted the appeal of lowly rated corporate bonds that typically offer higher returns.

But whether the move in junk bonds really heralds a more benign backdrop is unclear. Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors, said the high-yield market “does not have a great record for alerting you well in advance of a recession.

“It’s typical that people seem to stay with it, maybe overstay their welcome,” he said, “figuring, ‘well, I’ll get out before everybody else does’.”

10 unmissable stories this week

Activist Nelson Peltz is trying to force his way on to the board of Walt Disney, putting himself in direct confrontation with recently returned CEO Bob Iger. The stage is set for one of the biggest US proxy fights in years.

Private equity group Carlyle has sounded out two senior Wall Street bankers about becoming its next CEO following the abrupt departure of Kewsong Lee last year. In recent months it has held discussions with Citigroup chief financial officer Mark Mason and outgoing Morgan Stanley chief operating officer Jonathan Pruzan.

The hedge fund firm of billionaire trader Chris Rokos plunged from profits of £914mn to a small loss in its most recent financial results, after its fund was hit by bond market turbulence in autumn 2021. However, the media-shy co-founder of Brevan Howard enjoyed a far better 2022, with his fund finishing the year up around 51 per cent.

Sebastien de La Riviere, the fund manager at Elliott behind activist campaigns at GSK and Fresenius, has left the hedge fund firm, the latest in a string of senior departures from its London office.

Fallen billionaire Sam Bankman-Fried invested $20mn in a venture capital fund run by Paradigm, a large backer of crypto start-ups, which then took a stake in his now-collapsed cryptocurrency exchange FTX.

UK fund manager Terry Smith was paid more than £36mn last year as his investment boutique Fundsmith reported a record annual profit for the year to March 2022. However, 2022 itself proved to be a tougher year, with his fund losing 14 per cent. Smith has blamed the end of “easy money” and warned too much monetary tightening could lead to recession.

US regulators are cracking down on collateralised fund obligations — vehicles that parcel up stakes in hundreds of private equity owned companies — over fears that rating agencies are downplaying the dangers of the products.

Traditional portfolios comprising 60 per cent stocks and 40 per cent bonds, the cornerstone of many investors’ asset allocation, suffered their worst performance last year since at least 1999, as the inverse correlation between stocks and bonds broke down. Many investors surveyed by Amundi and Create Research believe these portfolios are likely to remain under pressure this year.

Short sellers made aggregate profits of $300bn last year betting against US stocks, helped by falls in the price of the likes of Tesla, Amazon and Apple, according to S3 Partners. That goes some way to make up for the $572bn they lost between 2019 and 2021.

FTSE Russell has ejected dozens of companies from its FTSE4Good All-World benchmark for failing to meet more stringent environmental standards, the first time it has taken such a step.

And finally

One of London’s most famous landmarks, Battersea Power Station, begins its third annual Light Festival this week. Eight pieces of illuminated artwork, including a giant slinky, ‘a post-apocalyptic sunset’ and a bath plug, will brighten up the dark winter evenings both inside and outside the former power station until early March.

And, increasingly important for many of us these days, it is free.

Brooke will be back with you next week.