FT Asset Management: The Year Ahead

One thing to start: Happy New Year everyone! I’m Brooke Masters, the US financial editor. Harriet Agnew is on a much deserved sabbatical, so Laurence Fletcher, the FT’s hedge fund correspondent, and I will be taking turns writing the newsletter for the next month.

Ten trends to watch

Now that most people are back to work after the holidays, it seems like a good time to talk about the issues the industry will confront in 2023.

Cost Pressures Rise: Many asset managers face a reckoning as falling markets force them to cut costs and make tough decisions about where to invest for growth. Assets under management dropped by 20 per cent or more at many firms, and the grim results are prompting many investors to rethink their choices. Consolidation may sound like the answer, but Cyrus Taraporevala, the recently retired chief executive of State Street Global Advisors, warns that an attempt “to be all things to all people” is misguided.

Fixed Income Boost: bond investing may prove to be a bright spot in the gloom, as rising yields coax investors back into the segment. After a year that saw the bond market’s worst performance in three decades, big investors are starting to wade back into bonds, and some market analysts believe this may herald the return of the 60 per cent equity, 40 per cent bonds portfolio that lost its lustre during the long period of low interest rates.

Active vs Passive: Some fund houses hope that stark losses in funds that track indices will lead investors back to valuing stock and bond pickers, but they shouldn’t count on it. At mid-year, US large cap active managers were having their best year since 2009, but that still meant that 51 per cent of them underperformed the S&P 500. And JPMorgan research found that the shift to passive index tracking funds accelerated during the period rather than slowing down.

Private Markets Stress: Private markets have long been the fastest growing part of the sector as more than $10tn poured into direct lending, private equity, infrastructure and real estate. Harvard University’s endowment manager has warned that sharp cuts in valuations are coming, and the prices of stakes in private tech start ups are already falling, but many investment advisers say that these strategies are an essential part of investing for the long term.

ESG in the crosshairs: Red-state Republicans have been making hay by attacking BlackRock and other US asset managers’ use of environmental, social and governance factors in investing. Look for Republicans in Congress to pick up the attack now that they control the House of Representatives. At the same time, global investors are continuing to direct money into renewable energy and decarbonisation projects world wide.

Chinese Opportunity: The Chinese government’s decision to reopen to the rest of the world will put the question of expanding financial services there back on the agenda of many of the world’s largest asset managers. At a time when tensions with the US remain high, managers will have to decide whether and how to participate in the country’s new and potentially huge private pensions market. BlackRock, Goldman Sachs and Amundi are among those taking steps in that direction.

Decline of Mutual Funds: Last year saw a decisive gap open up between mutual funds, which suffered massive outflows in stormy markets, and exchange traded funds, where money continued to pour in. Investors continue to be attracted by lower fees and the ever growing variety of ETFs being offered. But the shift may not stop there. Fidelity is among the groups betting hard on direct indexing and other personalised portfolios, which allow investors to follow their own preferences and tailor their portfolios to minimise taxes.

Regulatory thicket: In the US, the Securities and Exchange Commission spent last year churning out proposals that would affect asset managers in a variety of ways, including tighter rules on short selling, private equity fee disclosure, fund names and fund pricing. The comment period on most of them has now come to a close, so chair Gary Gensler and his fellow commissioners will soon have to decide whether to push forward with some or all of them. Meanwhile the post-Brexit regulatory divergences between the EU and UK are becoming increasingly clear, and watchdogs

Pension fund reallocation: In the wake of last autumn’s turmoil in the UK gilts market, many pension funds have moved to increase their holdings of liquid assets to give them more flexibility in turbulent markets. That could push many of them to cut their allocations to property and private credit at a time when many of these assets are valued at much higher multiples than public company securities.

Hedge fund shifts: There was lots of turmoil in the hedge fund universe last year. Macro hedge funds that trade bonds and currencies cleaned up last year, and multi-strategy hedge funds eclipsed fund of funds in terms of assets under management. But many traditional long-short equity traders had a brutal year, as they were caught by the tech stock meltdown.

Chart of the week

Russia’s invasion of Ukraine has dramatically reshaped the global market for liquefied natural gas in 2022, with Europe becoming the largest customer as it sought to replace dwindling Russian pipeline gas supplies.

In previous years, the EU lagged behind Japan and China on LNG imports, writes Shotaro Tani, but Russia’s weaponisation of energy has forced the bloc to seek alternative fuel supplies.

With Europe’s need to import greater volumes to fill up its storage facilities in 2023, the global LNG market is set to remain tight, potentially pushing up prices for gas users worldwide.

“When the price rises in Europe, Asia then has to [increase the amount it pays] accordingly, to be able to compete to attract LNG cargoes,” said Olumide Ajayi, senior LNG analyst at Refinitiv. “Europe has become the premium market.”

And finally

I’ve always been an enormous fan of Edward Hopper: I make a pilgrimage to see “Nighthawks” (1942) almost every time I find myself in Chicago. So I wholeheartedly recommend a visit to New York’s Whitney Museum of American Art which is hosting an exhibit of his paintings of that city until early March. Hopper’s quiet landscapes capture an often overlooked side of the bustling metropolis.

Have a good week! Laurence will be writing to you next Monday.