UK asset managers lose their way

One thing to start: Nicolai Tangen, chief executive of Norway’s giant oil fund, hosted its annual investment conference last week, gathering top investors like Oaktree’s Howard Marks, Apollo’s Marc Rowan and Tiger cub Ole Andreas Halvorsen. Tangen made headlines himself when he suggested that Europe is less hard-working, less ambitious, more regulated and more risk-averse than the US, with the gap between the two continents only getting wider.

Schroders launches search for CEO successor

Peter Harrison, the chief executive of Schroders and one of the longest-serving financial services bosses on the FTSE100, is to retire next year, we revealed last week. The asset manager, whose founding family is its largest shareholder and which has £750.6bn in assets under management, has hired headhunters Russell Reynolds to work on “a full and executive global search”. 

Since he took over the job eight years ago, Harrison has sought to offset the decline of the company’s traditional business by pushing into faster-growing areas such as private markets, acquiring a majority stake in Greencoat Capital — one of Europe’s largest renewable infrastructure managers — and expanding in wealth management and in its business line that offers outsourced chief investment officers and liability-driven investing to pension funds. 

But so far, this has failed to lift Schroders’ share price or profits. The group’s share price is down 40 per cent since its peak in September 2021, and has dropped about 15 per cent during Harrison’s tenure as CEO. Schroders recorded £618.1mn of profits before tax in 2016 — his first year in the top job — and last year profit before tax was £487.6mn.

Schroders’ fortunes illustrate how the business models of active managers globally have come under pressure from the rise of cheaper passive investing and a shift in investor demand from public to private markets. British players who are focused on equities have also had to contend with the fallout from a multi-decade shift by UK pension funds away from holding shares in their local market, which deprived domestic managers of a key revenue stream. 

Our commentator Toby Nangle argues that while it’s easy to be downbeat about the fortunes of individual firms or markets, there are also reasons to be optimistic. Many an active manager has pondered whether passive investing may be for them what digital photography was to Kodak. When it comes to retail funds, they may have a point. But retail is only part of the landscape. Active managers that adapt to the new institutional market can still flourish.

Do you see reasons for optimism in the UK asset management industry? Email me: harriet.agnew@ft.com

The Monaco hedge fund boss tied up with an indebted English town

In March 2021, an official at Warrington Borough Council in the north of England listened to a pitch to invest in a commercial building 75 miles away in Birmingham. Warrington invested £10mn. The stake is now worth £1.3mn. 

In this intriguing deep dive, my colleagues Jennifer Williams and Robert Smith bring you the story of how the matchmaker for the troubled deal between the real estate firm behind the scheme M7 Real Estate and the local authority was Lee Robinson, a Monaco-based financier whose interests have become unusually entwined with the Labour-run council. 

The 54-year-old former derivatives trader was present at Warrington’s 2021 meeting with M7, had introduced the two parties, and was also an investor in the property outfit’s funds. The Birmingham building, called Mailbox, last year defaulted on a loan, threatening to wipe out the council’s stake. 

The deal was just one of £120mn worth of investments Warrington has made since 2017 that have links to Robinson, who one council officer likened to star footballer Lionel Messi. 

Those investments include a heavily impaired £30mn stake in a challenger bank, more than £40mn in property funds managed by M7 and a further £47mn in often-opaque investment vehicles at Robinson’s own firm. 

Robinson’s relationship with Warrington is facing growing scrutiny from opposition councillors, who have struggled to fully understand the financial risks of the council’s dealings with him. 

“Conservative councillors, including myself, have been asking for relatively straightforward information about these investments for some time now,” said Tory group leader Nigel Balding. He added they were “usually fobbed off” by the council.

Warrington is part of a swath of UK local authorities that have ploughed money into speculative ventures over the past decade by taking on huge debts in response to severe centrally imposed funding cuts. And as Warrington’s debt has grown, so too have its links with a financier based 1,000 miles away on the French Riviera.

Read the full story here

Chart of the week

US stocks have risen in tandem with the dollar this year, in a break with historical trends that has led some analysts to question how much longer the rally can withstand the greenback’s strength, write Stephanie Stacey and Ray Douglas in London.

The dollar has climbed 4.7 per cent against a basket of six peer currencies this year, while in the same period Wall Street’s benchmark S&P 500 has added 7 per cent.

“If the dollar continues to trend higher, equities will struggle,” said Mislav Matejka, head of global equity strategy at JPMorgan. “Historically, equities and the dollar exhibited a strong inverse correlation.”

The dollar’s rise — driven by the Federal Reserve’s rate increases — was one of the factors weighing on stocks in 2022, according to strategists. The dollar index gained 8 per cent that year, while the S&P 500 shed almost one-fifth of its value, the biggest annual drop since the global financial crisis in 2008.

When the dollar is strong, US companies’ overseas sales convert into fewer dollars, offering smaller profits and a potential hit to earnings and valuations.

However, equities have been better able to “digest” the greenback’s rise this year because “the pace of the dollar strength is not as stark as 2022”, said Karim Chedid, head of investment strategy for iShares Emea at BlackRock.

He also noted that most major central banks, including the Fed, appeared to be moving from a tightening to an easing cycle, in contrast to 2022, with any US rate cuts likely to weigh on the dollar. “We’re at the peak of the rate cycle. Yes, the expectations have been pushed back, but we’re still expecting the rate-cutting cycle to begin.”

Five unmissable stories this week

With lowly rated, highly leveraged companies under pressure from high interest rates, and loan recoveries falling, traditional asset managers such as Invesco are now using “vulture” tactics similar to conventional distressed debt specialists such as Apollo and Elliott Management. Loosening credit agreements mean mainstream investors who once could avoid messy legal battles are having to evolve.

Proxy advisers like Institutional Shareholder Services and Glass Lewis are used to being caught in the crossfire between boards and shareholders. Dear board directors, please don’t shoot the proxy messenger, argues our senior business writer Andrew Hill. Diligent advisers and engaged investors are vital for a well-functioning shareholder democracy.

US hedge fund Elliott Management has been buying the bonds of troubled British utility company Thames Water, in a bet that markets have grown too pessimistic over the size of losses that investors may have to take on the debt. Meanwhile Elliott, which manages about $65bn in assets, has built up a $1bn stake in Anglo American using derivatives and investors believe the mining company is set to be bought or broken up even after it rejected a £31bn hostile takeover approach from Australian rival BHP. 

Have we reached peak private credit? The history of banking suggests that, on the contrary, another wave of bank disintermediation is likely, argues Huw van Steenis, vice-chair at Oliver Wyman. We are seeing the re-tranching of the banking system where banks parcel the riskiest slice to private credit, providing less risky lending themselves. Private credit could be the Ozempic to help banks on yet another diet.

Computer-driven hedge funds that bet on trends in financial markets are enjoying strong returns as bets on soaring cocoa prices and a sinking Japanese yen have borne fruit. Quantitative funds have gained 12 per cent for the year to the end of March, according to an index compiled by Société Générale, with names such as Man Group, Aspect Capital and Winton among those profiting.

And finally

A new exhibition at Tate Modern in London explores the groundbreaking work of a circle of friends and close collaborators — among them Wassily Kandinsky, Gabriele Münter and Franz Marc — known as The Blue Rider, who came together in the early 20th century.