Asset Management: BlackRock and the Republicans

One scoop to start: Somerset Capital Management, the boutique fund manager co-founded by Tory MP Sir Jacob Rees-Mogg, is to wind down after large client redemptions made the business unsustainable.

Fink: ‘The king of the woke industrial complex’?

BlackRock and its founder Larry Fink have become a punchbag for Republican politicians over the past two years as part of their larger campaign to tap into “anti-woke” concerns about programmes to promote diversity and address climate change. 

Last week, in a debate between four Republican candidates vying to emerge as the party’s top alternative to Donald Trump in the 2024 elections, the $9.1tn asset manager came up three times, writes Brooke Masters in New York. 

“BlackRock was mentioned by some candidates in last night’s debate more than inflation or the national debt,” Fink wrote in a LinkedIn post on Thursday. “That’s a sad commentary on the state of American politics. Now I know why they call this the political silly season.” 

Both Vivek Ramaswamy and Ron DeSantis specifically referred to BlackRock in multiple attacks on Nikki Haley, who has risen in the polls and gained backing from some wealthy donors. The men sought to portray her as a pawn of secret financial interests, tying her to their critique of investing based on environmental, social and governance factors. 

“Larry Fink, the king of the woke industrial complex, the ESG movement, the CEO of BlackRock, the most powerful company in the world, is now supporting Nikki Haley. And to say that doesn’t affect her is false,” said Ramaswamy, who has positioned himself as an anti-ESG champion. The biotech entrepreneur also accused Fink of “telling Exxon and Chevron they can’t drill here”. 

DeSantis, who is governor of Florida, boasted that he “took $2bn away from BlackRock”, referring to the state’s decision to move some investments to another asset manager. Eighteen states have passed some form of anti-ESG law, and Texas and West Virginia among others are boycotting BlackRock funds. 

Fink said in the LinkedIn post that he had met at least five presidential candidates but not endorsed any of them. “I meet with policymakers all the time to understand the implications for our clients. That’s my job.” 

He also took issue with the claims about energy companies, saying “BlackRock clients have more than $170bn invested in American energy companies” and touted last month’s $550mn investment by a BlackRock fund in Occidental Petroleum’s carbon capture project. 

A reckoning for commercial real estate

Behind the glittery facades of London’s Selfridges and New York’s Chrysler Building, Austrian property billionaire René Benko assembled a financial time bomb. 

Benko’s Signa Group, which bought stakes in the two trophy assets and amassed a €27bn property portfolio, racked up at least €13bn in debt during the years when the cost of borrowing was next to nothing, writes my colleague Joshua Oliver in this deep dive. 

The decision to go all-out during the era of cheap money left Signa dangerously exposed to the sharp rise in interest rates this year. JPMorgan estimates at least €4bn of the debt owed by two pivotal Signa subsidiaries is at floating rates. And rising interest rates have hammered commercial property values across the market, reducing the value of the assets used to secure Signa’s loans. 

Signa Holding, the central company, recently filed for administration.  

The group faces tough questions about its business practices and valuations, but its unravelling is the most prominent symptom yet of a painful adjustment to higher interest rates across the multitrillion-dollar global commercial real estate sector. Property owners prospered in the world of cheap debt that made real estate investment relatively attractive. But that high has led to a predictable reckoning. 

“The scale of the cyclical reset in terms of real estate valuations is as big as the early 1990s or the global financial crisis,” said Alex Knapp, chief investment officer for Europe at $100bn global private real estate investor Hines. “This is a big one, if that wasn’t obvious.” 

With the era of ultra-low interest rates over, property owners — from small private businesses to large public companies — face higher interest bills, falling valuations and in many cases a need for cash to pay down debts. Read the full story here

Chart of the week

Liontrust was once a darling of the UK’s asset management industry, with chief executive John Ions presiding over an increase in assets from £1bn to £36bn in the decade to September 2021. 

Then, Ions put the company’s success down to having the right products, listening to clients, and “momentum”, with the group benefiting from a decade of rising equity markets and later households’ pandemic-era savings.

But shares in the £27bn UK asset manager have lost four-fifths of their value since their peak in August 2021, and assets have dropped by a quarter, as Sally Hickey and I explore in this analysis. 

When Liontrust is ejected from the FTSE 250 this month, it will cap a year in which the UK asset manager has suffered billions in outflows, attempted a doomed bid for Swiss rival GAM and shed half its market value. 

Part of the pain has been sector-wide, with midsized managers finding themselves squeezed between juggernauts, such as BlackRock and Vanguard, and specialist managers, such as Baillie Gifford. The flight to passive funds has compounded pressure to cut fees at the same time as regulatory costs have been rising. 

Liontrust has also faced problems of its only making, notably a dealmaking spree that has had mixed results. Since Ions was named chief executive in 2010, he has bought seven firms in 12 years as part of a push to diversify the business. 

The purchase of Alliance Trust Investments in 2017 is widely seen as a success, bringing sustainable investing expertise to Liontrust just as the theme found favour with investors.

But other acquisitions, among them Neptune Investment Management in 2019, Architas in 2020 and Majedie in 2022, are still to pay off. Most recently Liontrust was forced to retreat from a bid for GAM, after it was derailed by activist group NewGAMe. Ultimately only one-third of GAM shareholders backed the takeover in August. 

Liontrust’s fortunes illustrate how M&A is not a panacea for the challenges facing the fund management industry. Read the full story here

Five unmissable stories this week

BlackRock plans to roll out generative artificial intelligence tools to clients in January as part of a larger drive to use the technology to boost productivity. The world’s largest money manager has used generative AI to construct a “co-pilot” for its Aladdin and eFront risk management systems. Clients will be able to use BlackRock’s large language model technology to help them extract information from Aladdin.

Carson Block’s hedge fund Muddy Waters has revealed a bet against the New York-listed Blackstone Mortgage Trust, a $22bn real estate investment trust managed by private equity giant Blackstone. Block told the Sohn investment conference that there was “a lot of rot in its book”, and that many of the borrowers whose loans make up the trust’s holdings were in danger of being unable to make payments.

Jeff Ubben launched Inclusive Capital Partners in 2020 with high hopes and much publicity. The firm typically buys stakes in non-ESG friendly companies in an attempt to drive change from within. Here’s the inside story of why Ubben is now winding down the firm and returning cash to investors.

Private credit and leveraged lending markets remain vulnerable to “sharp revaluations”, the Bank of England has warned, in its latest attempt to sound alarm bells about risks building up in non-bank finance. The BoE’s financial stability watchdog said that “a worsening macroeconomic outlook could . . . cause sharp revaluations of credit risks,” adding that valuations appeared “stretched . . . particularly in the US”. 

UK investors returned to equities for the first time in six months, as asset managers looked to reorientate their portfolios to account for brighter sentiment on inflation and interest rates. Retail investors in the UK added a net £449mn to equity funds in November following half a year of net outflows, according to data from funds network Calastone.

And finally

Everyone knows the ‘Twelve days of Christmas’, but not as rewritten by John Julius Norwich in this charming correspondence, which chronicles the daily thank-you letters from one increasingly bemused young lady to her paramour. Illustrated by Quentin Blake.