Asset Management: Rees-Mogg’s Somerset Capital in sale talks again

One thing to start: On Friday UK chancellor Kwasi Kwarteng announced the biggest tax reduction since 1972. Investors have warned that the bonanza of tax cuts and spending measures risk undermining their confidence in the country. Meanwhile the City is contemplating its love-bomb Budget.

Rees-Mogg boutique prepares for second act

Three years after Somerset Capital Management rejected a bid of up to £90mn it is in sale talks again at a mooted valuation a fraction of what Artemis Investment Management had offered.

The emerging markets boutique finds itself at the nexus of two negative trends. Emerging market assets are deeply out of favour with investors, and rivals in the space, such as Ashmore, Abrdn and Genesis Investment Management are also struggling. Meanwhile small fund managers, particularly those with lacklustre investment performance, are grappling with rising costs and pressure on margins. Both of these factors have contributed to Somerset’s assets under management halving from a $10bn peak in 2018.

The firm’s high-profile political connections mean it doesn’t enjoy the luxury of flying under the radar. It was started 15 years ago by the Eurosceptic business secretary, Jacob Rees-Mogg; Dominic Johnson, a former vice chair of the Conservative party; and fund manager Edward Robertson.

Somerset is now at a critical juncture. Rees-Mogg left in 2019 and last week Johnson told clients he was stepping down as chief executive, ahead of a potential move into politics. The change means around half of the equity in the business will be held by retired partners who are not involved in the day-to-day running of the firm, leaving Somerset grappling with how to incentivise the next generation.

The firm is now in discussions with potential buyers, including emerging markets boutique Emso Asset Management. A management buyout is also being considered.

But while a sale or merger might make financial sense and relieve some pressure on Somerset’s cost base, it is not a guaranteed saviour. In practice, fund management mergers are notoriously tricky to pull off without alienating clients or staff. One person close to Somerset said through any kind of deal, “they need to keep clients and talent . . . but that’s not necessarily guaranteed”.

Hedge funds bet against asset managers

Hedge funds have had precious few companies to short sell during a decade-long equity bull market, but this year’s sell-off is providing them with some enticing new targets.

One area where managers have been building up their shorts — bets on lower prices — is against long-only asset managers, including FTSE 100-listed Abrdn, emerging markets specialist Ashmore and fund platform Hargreaves Lansdown, report my colleagues Laurence Fletcher and Joshua Oliver.

Ken Griffin’s Citadel, Steve Cohen’s Point72, Marshall Wace and Odey Asset Management are among hedge funds that have been running bets against their mainstream fund management peers.

Long-only asset managers are of course geared to rising markets, which lift the value of the assets on which they earn fees, while growing confidence usually leads to greater client inflows. But, lacking the ability to short sell, they are often exposed when markets fall. Recent updates from all three companies show as much, while Morgan Stanley analysts have highlighted that Abrdn’s earnings power remains “highly vulnerable to macro/markets”.

All three stocks have already fallen sharply this year. But with global stocks plunging to a two-year low and predictions of further pain as central banks tighten monetary policy, hedge funds appear to have found a geared play on further equity market pain.

The $3.8tn hedge fund industry has not on the whole had the best of decades. Quantitative easing stifled much of the volatility they like to trade, while client flows have lagged well behind the private equity industry. When the end of the bull market came, many funds were not ready.

But with markets heading south, identifying and betting against the potential losers such as traditional asset managers could be the opportunity for equity hedge funds to prove their worth once more.

Chart of the week

Executives at publicly traded US companies are becoming increasingly worried about the spectre of a further escalation of tensions over Taiwan, a major supplier of crucial components like semiconductors, writes Federica Cocco.

The number of annual regulatory filings citing Taiwan as a risk factor has risen significantly over the past 12 months, according to Financial Times calculations based on Sentieo data. In March, a popular time for releasing so-called “10-k” reports, 116 companies mentioned Taiwan as a risk to their business, and the rolling 12-month average this month reached its highest level in at least 16 years.

Technology companies represent the sector most concerned, with those in the semiconductor industry raising the loudest alarm. This is because Taiwan, which is the biggest producer of the most advanced chips, is rapidly becoming one of the world’s most dangerous geopolitical flashpoints. The fear is that in the event of a conflict with China, US firms will be unable to get the microchips needed to make smartphones, electric cars, new weapons, computers industrial machines, and even medical devices. Healthcare is the second most-concerned sector.

10 unmissable stories this week

Is it time for retail investors to go into private equity? Faced with limited scope for further growth from institutional and high-net worth portfolios, managers are eyeing a broader range of individual investors. Meanwhile top private equity executives partied on the French Riviera last week as the buyout industry faces a reckoning.

European governments must push back against fossil fuel companies’ efforts to capitalise on the energy crisis by locking consumers into long-term dependence on hydrocarbons, Generation Investment Management co-founder and former US vice-president Al Gore has said.

Where are all the women in asset management? This sector, which espouses the value of diversity for better decision-making and acts as enforcer at the companies where it invests, has failed to make great strides itself, writes columnist Helen Thomas.

Mikkel Svenstrup, chief investment officer at Denmark’s largest pension fund ATP, has compared the private equity industry to a pyramid scheme, warning buyout groups are increasingly selling companies to themselves and to peers on a scale that “is not good business”.

Calpers, the biggest public pension plan in the US, admitted a decision to put its private equity programme on hold for 10 years had cost it up to $18bn of returns as it announced an overhaul of its governance.

Loss of biodiversity is now considered as serious as climate change, and investors including Schroders, M&G Investments and Legal & General Investment Management are increasingly realising that they have an important role to play in conserving it.

Inside the strategy of Canadian asset manager Brookfield’s $15bn global transition fund, which plans to allocate half of its capital to heavily polluting companies with the aim of accelerating their transition to greener, more environmentally sustainable, business models.

Another challenge for firms seeking to burnish their environmental, social and governance credentials. Lawyers see vast grey areas in the way asset managers verify the environmental bona fides of their products — creating a risk of being sued.

The head of the world’s largest sovereign wealth fund has urged investors to stay focused on environmental, social and governance issues. Nicolai Tangen, head of Norway’s $1.2tn oil fund, warned of a “real danger” that economic turmoil and a political backlash in the US would drive them down the agenda.

Federated Hermes, a champion of environmentally friendly investment strategies, has bowed to client demands to withdraw sponsorship of a coalition of senior US public officials that opposes action on climate change in an embarrassing U-turn for the $632bn asset manager.

And finally

If you’re in New York this week, a) come and say hello at our asset management conference (details below), and b) pop into the Whitney Museum of American Art to see this exhibition of works from between 1900 and 1930 by American modernists. At the Dawn of a New Age: Early Twentieth-Century American Modernism draws primarily from the Whitney’s permanent collection and covers an era that critic Walter Lippmann characterised as “bursting with new ideas, new plans, and new hopes.”

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