News

One thing to start: Asset managers are under scrutiny on two continents for their power and importance as well as concerns about the products they sell. Just like bankers following the financial crisis, and the complex financial products (think CDOs, CLOs and MBSs) they cooked up, once again the focus is on an alphabet soup of acronyms, in particular ESG and LDI. Are asset managers the new bankers? Email me: harriet.agnew@ft.com

Leverage, liquidity and liability

As they made their pitch to overhaul the pension scheme of one of Britain’s biggest retailers, Next chief executive Lord Simon Wolfson remembers the consultants were “very sure of themselves”.

“Liability-driven investing”, the consultants promised, was a stress-free way to protect the fund from swings in interest rates by using derivatives.

There is one particular phrase that still sticks in Wolfson’s mind from the 2017 meeting: “You put it in a drawer, lock the drawer and forget about it.”

But Wolfson and his team ultimately rejected the plan. “If you only took historical data, it looked pretty robust,” said Wolfson. “But the great lesson from the financial crisis is that you can’t look to the past as a foolproof way of predicting the future. In the end, we didn’t care what the spreadsheets said: we didn’t like the smell of it, so we decided not to do it.”

Next went as far as to warn the Bank of England that LDI strategies, which at present have £1.5tn invested in them in the UK, “looked like a time bomb waiting to go off”.

And then came the explosion. After chancellor Kwasi Kwarteng announced £45bn in unfunded tax cuts on September 23, the pound fell and over the next few days UK government bond yields soared on the prospect of higher borrowing.

UK defined benefit scheme liabilities are measured against such long-term interest rates and, in general, higher yields are helpful, since they shrink companies’ outstanding obligations to retirees.

But the LDI strategies use a variety of derivatives to allow pension schemes to increase their exposure to gilts, without necessarily owning the bonds outright. When bond prices fall, counterparties demand more cash as collateral to keep the arrangement in place.

The shock fall in gilt prices led to a rush of cash calls. To raise the money, funds run by the likes of BlackRock, Insight Investment and Legal and General Investment Management, were forced to sell assets, including gilts, depressing prices further and risking a “doom loop”.

“The speed and the scale of the move in the gilts market was unprecedented,” said Simon Bentley, head of UK solutions client portfolio management at Columbia Threadneedle. “You had almost four consecutive ‘black swan’ days in terms of market movements.”

Read our inside story on how bond market mayhem set off a pension “time bomb” and where the LDI market goes from here.

Ashmore counts cost of contrarian bets

On February 23, senior staff at the UK’s most prominent emerging markets fund manager made a prediction about Russia.

Many countries, including the US, had warned that an invasion of neighbouring Ukraine was imminent, reports my colleague Adrienne Klasa in London. But while strategists at Ashmore kicked off their briefing saying investors needed to be cautious, their conclusion was clear: they did not believe Russian president Vladimir Putin would launch a full-scale invasion.

Indeed, the FTSE 250-listed group had accumulated almost €143mn in Russian government debt by the end of January — as more than 100,000 Russian troops massed on the border.

In the early hours of the next morning, Russian troops crossed the border and the war began. By the end of February, the worth of Russian debt had fallen 80 per cent; a month later, money managers across the industry were writing it down to virtually zero.

Ashmore’s soured bet compounded investor nerves given the years-long downturn across emerging markets, which has weighed on the £64bn asset manager’s performance and profitability. Assets under management have fallen by a third since September last year and the stock has fallen by the same amount since the start of the year. The firm has come under pressure from short sellers.

Many shareholders say they plan to stick with Ashmore, but some in the industry are asking if the influence of founder, chief executive and biggest shareholder Mark Coombs is hindering the 30-year-old business.

“It’s a good business that’s well run, with loads of alignment with shareholders, but one person dominates so it becomes idiosyncratic,” said an industry veteran. “The more idiosyncratic bets there are, the more people become concerned there’s stuff beneath the floorboards.”

Read the full story here

Chart of the week

Negative bond yields have become a thing of the past this year, following a string of large interest rate rises by global central banks — everywhere, that is, except Japan, writes Tommy Stubbington in London.

Negative yields — which occur when bond prices climb so high that buyers holding them to maturity are guaranteed to lose money — engulfed a large chunk of the global debt market during the depth of the Covid-19 crisis. Those sub-zero levels stemmed from huge central bank stimulus programmes, with the US Federal Reserve and several peers slashing interest rates and buying up swaths of debt in an attempt to backstop pandemic-hit markets.

The total stock of negative-yielding bonds ballooned to a record of more than $18tn at the end of 2020, according to a Bloomberg index of debt trading at yields below zero. But that pile has now dwindled to less than $2tn — all of it in Japan — after the eurozone and Switzerland ended their experiments with negative interest rates in an effort to tackle inflation.

10 unmissable stories this week

The pace of withdrawals from UK commercial property funds has accelerated rapidly since the government unveiled its “mini” Budget last month, in a shift that could spark a rush to sell buildings at depressed rates. Schroders, Columbia Threadneedle and BlackRock have said they are unable to handle heavy demand from investors seeking to withdraw from property funds.

The £90bn Universities Superannuation Scheme, the UK’s largest private-sector pension scheme, increased its exposure to debt-fuelled investment strategies earlier this year despite warnings from Cambridge and Oxford universities and Imperial College London that the move would bring “significant risks”.

Goldman Sachs Asset Management and Partners Group are among a group of investors seeking to buy cut-price private assets from UK pension funds, which are rushing to raise cash after last week’s crisis in the government bond market.

Failure to learn from the lessons of 2008 caused the LDI pension blow-up, writes deputy editor Patrick Jenkins. There are clear parallels with many of the issues that led to the financial crisis. There’s no such thing as risk-free is one lesson that people appear to have forgotten.

Tiger Global is raising a private equity fund that will target $6bn in investment, less than half the amount raised for a prior fund, as the prominent technology investor slows its once-breakneck pace. It comes as John Curtius, a partner at Tiger Global who oversaw a flurry of venture capital investments in software and business service companies over the past five years, is preparing to leave the once high-flying hedge fund.

BlackRock has chosen a new chief financial officer as part of a reshuffle that positions the world’s largest asset manager to fight back against criticism and promotes younger executives. Martin Small will replace Gary Shedlin, the outgoing finance chief. The reshuffle also added to the portfolio of Mark Wiedman, seen as one of a handful of possible successors to founder Larry Fink.

Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, has given up control of the firm, ending a drawn-out transition of power that had come to define the industry’s succession problems.

BlueCrest Capital, the investment firm co-founded by billionaire bond trader Michael Platt, has more than doubled its money this year after betting that inflation and rising interest rates would pummel debt markets.

Investment manager Janus Henderson will cut staff numbers by up to 5 per cent as part of efforts to reduce costs under the leadership of new chief executive Ali Dibadj. Staff will be officially notified of the job losses on October 18.

The founders of Gotham City Research and Portsea Asset Management, two of the biggest names in short selling, are joining forces to launch a new hedge fund, betting that a downturn in markets will help them replicate their successful wagers against companies such as Wirecard and Steinhoff.

And finally

PAD London, dedicated to 20th-century and contemporary design, returns to Berkeley Square this week with an emphasis on sustainable design. Meanwhile, enjoy Frieze London and its accompanying sculpture exhibition in Regent’s Park. And if you only visit one exhibition this autumn, make sure it’s the Cézanne retrospective that just landed at the Tate Modern from Chicago. The “hypnotically absorbing exhibition shows how one man reinvented the possibilities of paint,” writes the FT’s chief art critic, Jackie Wullschläger.

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