One thing to start: Welcome to your special year-end edition of FT Asset Management. Let’s kick off with our new video on fractured markets, in which FT experts and financial industry insiders examine where the next big threats to the global financial system lie.
Acronyms should typically be avoided. But they happen to be a neat way of summing up the past year in asset management. Et voilà:
Former chancellor Kwasi Kwarteng’s “mini” Budget in September unleashed turmoil on the UK pension fund market. The £45bn package of unfunded tax cuts sent yields on government bonds soaring at an unprecedented speed and scale, shining a light on a strategy that’s widely used by the UK’s 5,200 defined benefit (DB) pension schemes: liability-driven investing, or LDI.
The LDI strategy typically uses derivatives to increase pension funds’ exposure to gilts while offering protection against moves in interest rates and inflation, and freeing up cash to invest in assets that can generate higher returns. The sharp move in gilt markets triggered calls for additional collateral from the pension funds, some of which either could not or would not stump up, or were forced into a fire sale of assets to meet cash requests.
The ramifications of the LDI chaos are still playing out. The Bank of England’s verdict is that the root cause of the pension fund crisis is poorly managed leverage. Pension fund leverage is decreasing while a desire for more liquidity is increasing, both of which have profound implications for asset allocation. The LDI providers, including BlackRock, Legal and General Investment Management and Insight Investment, and the role of consultants have come under renewed scrutiny. There could be mis-selling lawsuits ahead, analysts have said. More widely, the episode provided early warning of what the future might hold as a result of radical changes in the structure of the financial system since the crisis of 2007-09.
This year the fastest-growing segment of the asset management industry came to a reckoning. Russia’s invasion of Ukraine in February forced companies, investors and governments to wrestle with developments that at times appeared to pit the E, the S and the G of environmental, social and governance investing against one another.
Governments in Europe reneged on environmental goals by turning to fossil fuels to reduce dependence on Russian gas, and for some investors, surging oil prices left fossil fuel investments too lucrative to ignore. The war heralded a debate on the social utility of armaments, and banks and investors who for years had refused to back defence companies began rethinking their position.
Optimists argued that while the war in Ukraine is short-term painful for the energy transition, longer-term it will accelerate the transition to renewables because it aligns green ambitions with national security and securing energy sovereignty — and called on investors to double down on funding the transition.
In the US, ESG became increasingly politicised. BlackRock and its chief executive Larry Fink were a lightning rod for both sides of the political spectrum. Republican politicians stepped up their attack on the world’s largest asset manager over the use of ESG factors in investing, contending that the firm was hostile to fossil fuel. Democratic politicians for their part have lashed out at Fink and BlackRock for failing to do more to fight climate change, and a UK activist fund has called for his resignation over alleged “hypocrisy”.
Meanwhile Stuart Kirk, global head of responsible investing at HSBC’s asset management division, quit after stating in a speech that climate change does not pose a financial risk to investors. (He was subsequently appointed as an investment columnist at the Financial Times.) And German police raided the offices of asset manager DWS and its majority owner Deutsche Bank as part of a probe into allegations of greenwashing — the first time that an asset manager has been raided in an ESG investigation.
Elsewhere in Europe, top asset managers including Amundi, Axa and NN Investment Partners downgraded ESG funds holding tens of billions of dollars of client money from the highest level of sustainability. This illustrated how the existential questions about what ESG stands for are compounded by the fact that there is no universal, objective, rigorous regulatory framework for this kind of investing. Expect all of these dynamics to gather momentum in 2023.
SBF/FTX meets SEC/DoJ/CFTC
A year ago Sam Bankman-Fried sat before the US House of Representatives as the acceptable face of crypto. Earlier this month, the man once welcomed in Washington for his innovative regulatory vision was due to testify again, but this time to explain why his FTX cryptocurrency exchange, valued at $32bn only in January, had imploded. Instead, he was arrested hours before his hearing; his public appearances now are reserved for courtrooms.
The collapse of FTX left blue-chip investors including Sequoia, Temasek and Ontario Teachers’ Pension Plan, whose support helped lend his business empire credibility, facing tough questions as to whether they ever understood the business and how they got it so wrong.
FTX’s demise capped a year in which big-name asset managers including BlackRock, Schroders and Abrdn stampeded into digital assets, finding new ways to monetise investor interest even as trading volumes and prices for bitcoin and other cryptocurrencies slumped, and several major crypto hedge funds, exchanges and lenders, including Three Arrows Capital, Celsius and BlockFi collapsed.
ARKK, meet the Fed
If there’s one group that personified the regime change in markets this year, it’s Cathie Wood’s Ark Investment Management. The face of a tech-driven bull market on steroids, Ark’s stellar returns swung to heavy losses as a decade of ultra-low interest rates came to an end, and central banks led by the US Federal Reserve hiked rates to combat inflation. Growth investors like Ark, many of whom had delivered spectacular returns over the past decade as cheap money flooded economies, ran into the buzz saw of rising interest rates, inflation, war and the prospect of a looming recession. Once high-flying names, including Ark, Baillie Gifford and Chase Coleman’s Tiger Global, were left licking their wounds.
With the trouble yet to fully play out in private markets, some investors including Philippe Laffont’s Coatue Management and Gavin Baker’s Atreides Management started raising opportunistic funds to lend to cash-strapped private companies.
What a terrible year this has been for most investors — the classic mix of 60 per cent equities and 40 per cent bonds turned toxic. Assumptions on asset allocation got blasted as the ‘Great Moderation’ was replaced by a “new normal” of high inflation, higher interest rates and more volatility. It will be better in 2023, right? Yes?
A year in markets
10 of our best scoops
10 of our best longer reads
Lunch with the FT
Oaktree’s Howard Marks: ‘The short run is by far the least important thing’
The legendary investor on the business of bargain hunting, the dangers of emotion — and meeting his drug smuggler namesake
Baillie Gifford’s James Anderson: ‘There will always be the Ides of March out there’
The unlikely star of tech investing on backing ‘outliers’, the future for China’s entrepreneurs — and the comfort of 19th-century literature
Pimco’s Emmanuel Roman: ‘Markets are a very complicated Impressionist painting’
The famously literary financier on generational luck, where you find ideas, and the art of investing in good times — and bad times.
10 of our top news interviews
This year we said goodbye to Julian Robertson, founder of Tiger Management, a giant of the investment industry who was known for mentoring a dynasty of successful hedge fund managers known as the ‘Tiger cubs’. Read our obituary here and don’t miss the lessons to learn from Robertson and Tiger.
We also said goodbye to Scott Minerd, the global chief investment officer at Guggenheim Partners, who was considered one of the great bond investors of the past few decades.
Well that’s all, folks. Thanks for reading, and from all of the team, we wish you a happy, healthy and prosperous 2023. I’m heading to Argentina for a month-long sabbatical and will return in February. Please send any travel suggestions my way. And look out for the newsletter written by Brooke Masters and Laurence Fletcher in my absence. Harriet
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