Market

Asset managers and the wreck of ‘spec-tech’


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‘Spec-tech is getting wrecked’

Happy New Year. We have barely had time to break our new year’s resolutions and already markets are off to a bumpy start.

Last week investors deserted a trade that has generated big returns since the financial crisis: ditching shares of fast-growing (and often unprofitable) technology companies and buying into relatively staid businesses that are expected to benefit from an economic recovery.

It does not take a markets savant to figure out that the withdrawal of central bank support and rise in US interest rates this year present a challenge for risky assets pumped higher by the Fed’s economic largesse, writes markets editor Katie Martin.

Notably, expectations of this tightening dealt a fresh blow to speculative tech bulls such as Cathie Wood’s Ark Invest, whose flagship exchange traded fund is down almost 10 per cent this year. As Hani Redha, a portfolio manager at PineBridge Investments, put it: “Spec-tech is getting wrecked.”

And as active fund managers position themselves for a world where interest rates are not at rock bottom, the longstanding pressures (think fee compression, passive and performance) that are challenging their raison d’être continue. Exhibit A: three-quarters of stockpickers lagged the US market last year.

A rising tide of hot equity markets lifted almost all listed managers in 2021 but the dispersion between winners and losers is set to increase in 2022, as investors favour groups exposed to fast-growing areas such as private assets, according to analysts.

Tom Mills, an analyst at Jefferies, says:

“Generally buoyant equity markets and pandemic-related cost savings have provided a significant crutch to asset managers’ earnings [since the] short, sharp market correction in March 2020. A future and potentially more prolonged drawdown would likely be more damaging to operating margins given many managers are now investing for growth.”

Chart showing forward P/E multiples for US-listed asset management groups

Meanwhile there are few people who can get away with drawing parallels between Steven Spielberg’s original Jurassic Park and the ETF industry. But my colleague Robin Wigglesworth is one of them. He looks beyond the heady headlines for the ETF industry (close to $10tn after a second year of record growth) at the incipient risks. Notably, the proliferation of “complex, expensive, derivatives-based ETFs that are thinly disguised fee extractors sold to retail investors or day traders looking for thrills”.

And if risk is on your mind, don’t miss John Plender on the multiple investment risks of 2022. Onwards and upwards.

Hertz: Life for rent

It has been a tough time to be a distressed debt manager. There have been few good investment opportunities during the decade-plus bull market in which central bank intervention has propped up global markets.

So when the pandemic hit in spring 2020 and global travel ground to a halt, Certares Management and Knighthead Capital Management sensed an opportunity and raised $1.5bn to invest in the distressed travel sector.

They did not have to wait long to put the money to work. In May 2020, Hertz filed for bankruptcy. The pair of investors embarked on a marathon auction process to take the company out of Chapter 11 administration, and when they emerged victorious, made an audacious $2bn investment in the century-old car hire pioneer.

“There’s always one sector that’s at the centre of every distressed cycle,” says Tom Wagner, who set up Knighthead in 2008 to invest in distressed assets. “In this case, it was travel and leisure. If we could get it right, we could get the whole portfolio right.”

Now the two New York-based funds are sitting on paper gains of almost $3bn from the trade. The pandemic continues but the rental car industry’s fortunes have reversed. A global semiconductor shortage has curtailed the production of new cars, and so with limited ability to expand their fleets, the likes of Hertz and Avis Budget have raised prices to match soaring demand. Meanwhile, supply chain constraints have led to a surge in prices for used cars, helping rental car companies’ bottom lines because they hold huge fleets that they sell to used car dealers as they age.

In this analysis, my colleague Antoine Gara and I lift the lid on one of the hedge fund industry’s most lucrative trades of 2021. We also hear about a very different future that Certares and Knighthead envision for Hertz, one in which its fleet and network of locations are redeployed as infrastructure, both for the booming electric car industry and the coming era of autonomous taxis.

Race and finance: asset managers fail to walk the walk

Shundrawn Thomas, a black American from the south side of Chicago, now serves as president of Northern Trust Asset Management, a $1.2tn fund house based in the Midwestern US city. When he began working in financial services three decades ago, it was a “culture shock” to walk on to a trading floor where so few people looked like him, Thomas recalls.

But even now, he says he has stepped into meetings where clients have “presumed I was the help, not the senior leader”. With few black mentors available, Thomas says, black employees face additional hurdles when they try to climb the corporate ladder in asset management. “Informal” recruitment, with current employees recommending candidates for jobs or promotions, often benefits people who went to the same schools or have the same background. Overall, working in the clubby world of asset management can be an uncomfortable experience for minority employees, he tells my colleagues Attracta Mooney and Madison Darbyshire in this deep dive.

After the murder of George Floyd in 2020, the $110tn global asset management industry stood out in its efforts to signal its concerns about racism. Leading institutional investors not only made public promises to foster diversity in their own ranks, they also voted in increasing numbers to support shareholder resolutions calling on other managements to do the same.

A year and a half later, asset managers are struggling to live up to their professed ideals. Black employees and members of other minority groups remain dramatically under-represented in the sector — particularly in senior roles — and industry executives say it could take years to mount the recruitment efforts needed to make their workforces truly diverse.

“The failure to diversify is not just a moral issue, it’s about performance,” says Robert Raben, founder of the Washington-based Diverse Asset Managers Initiative and a former US assistant attorney-general.

What do you think can be done to improve diversity in the asset management industry? Email me: [email protected]

Chart of the week

Chart showing assets under management in 'growth equity' investing

Growth equity has become one of the hottest corners of the private capital industry, as ever-larger companies eschew public markets and find strong demand among investors desperate for higher-returning bets. Data provider Preqin estimates that growth equity has more than doubled in size since the end of 2016, to almost $920bn at the end of March. Groups such as TPG and Permira are expanding in growth equity. But there are signs of frothiness. “The game has changed phenomenally,” says Mike Turner, a partner at law firm Latham & Watkins. “There’s quite a lot of FOMO [fear of missing out] investing going on, a lot of investors coming into the market who don’t fully understand the companies and the opportunities they are investing in.”

Top stories you may have missed over the holidays

Bill Stromberg, the outgoing chief executive of T Rowe Price, warned of “free-form risk-taking” in buoyant markets last year and said investors should “step away from risk” to avoid being burned in an increasingly speculative market.

More staff turnover at Ray Dalio’s Bridgewater Associates. The world’s largest hedge fund has appointed two co-chief executives to replace David McCormick, who is leaving for an expected run for the US Senate.

The UK’s crypto lobby has stepped up its influence in Westminster with the launch of a cross-party group of lawmakers, as politicians on both sides of the Atlantic intensify efforts to regulate growing digital asset markets.

Some investors are turning to hedge funds to help them weather the likely shift in global monetary policy in the coming year. The $500bn California Public Employees’ Retirement System is unlikely to be among them. Hedge fund fees remain “problematic”, says Marcie Frost, chief executive of the US’s biggest public pension plan.

Non-fungible tokens have evolved from a niche part of the crypto market to become a $40bn industry in 2021. A look into a breakout year in which buyers spent almost as much on digital collectibles as traditional art.

The so-called stakes of activist investors need greater scrutiny, writes head of Lex Jonathan Guthrie. The real scale of the financial outlay of holdings by investors such as Paul Singer and Patrick Drahi is often overestimated.

There are few hedge fund managers who could raise $1bn shortly after losing investors a quarter of their money. But Chris Rokos, founder of $13bn Rokos Capital Management, has done just that.

Pension plans must be free to make decisions without political interference at a time when governments are looking to tap retirement pots to meet economic goals, according to Caisse de dépôt et placement du Québec, one of Canada’s largest pension funds.

British companies are trying to muscle in on the US retail investing boom. A growing number of them are seeking to target US retail investors prepared to back fast-growing and sometimes riskier businesses, according to OTC Markets Group.

New enforcement powers that let the UK pension watchdog seek jail terms if corporate activity damages a workplace retirement scheme have begun to affect dealmaking, according to pension advisers. Potential buyers are now more cautious of companies with defined benefit schemes.

And finally

Bemelmans Bar at The Carlyle, New York
Bemelmans Bar at The Carlyle, New York © Don Riddle

Dry January is overrated. With that in mind, here’s the How To Spend It guide to 25 hotel bars where you can kick off dry martini January in style.

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