Ark lands in Europe

One thing to start: I’m in New York this week and I hope to see lots of you at our Future of Asset Management North America event taking place on Wednesday and Thursday at etc.venues 360 Madison. We’ve a great line-up, with keynote speeches from the likes of Jo Taylor, president and chief executive of Ontario Teachers’ Pension Plan; Capital Group’s incoming president and chief executive Mike Gitlin; and Rob Goldstein, chief operating officer of BlackRock, the world’s largest asset manager. Register now to save 20 per cent off your in-person or digital pass.

And one scoop: Sanderson Asset Management, a UK boutique backed by prominent investor Silchester Partners, is closing down after more than two decades, highlighting the challenge asset managers face when they need to transition from a founder-led business to one run by a new generation of partners.

Cathie Wood partners with Martin Gilbert

Cathie Wood’s Ark Invest has had a helluva ride in the past couple of years. Total assets across its stable of exchange traded funds peaked at $60.3bn in February 2021, had slumped to $11.4bn by December and have swung back to around $25bn in assets today. 

Increases in US interest rates have dragged on the high-growth technology stocks in sectors from robotics to space exploration that are her bread and butter. 

But Wood, never one to doubt her convictions (see my magazine profile of her last year), has now set her sights on Europe. Last week Ark announced that it has bought London-based Rize ETF, which manages around $450mn, as my colleagues report in this story. 

The deal brings Wood into partnership with veteran dealmaker Martin Gilbert, former chair of Aberdeen Standard Investments, whose company AssetCo previously owned Rize. 

“The top question we have [received] from investors is ‘why can’t we access your strategies in Europe’,” Wood told the Financial Times. “Active equity ETFs [in Europe] are really just now starting to roll out.” 

AssetCo’s active equity asset management arm subsidiary, River and Mercantile, will launch its own ETFs on Rize’s platform. Wood said the investment group was betting on rising demand from European investors for thematic ETFs — a nascent market compared with the US. 

According to data from provider ETFGI at the end of July, assets in US ETFs amounted to $7.6tn, compared with $1.7tn in Europe. 

Ark’s own challenges aside (all but one of its US-domiciled ETFs have suffered net outflows this year, and its flagship Ark Innovation has gained just 0.8 per cent a year over the past five), Rize’s fortunes illustrate the challenges facing subscale players in the region. 

Rize, which will be renamed Ark Invest Europe, was founded in 2019 by Anthony Martin, Jason Kennard, Rahul Bhushan and Stuart Forbes. Since then it has struggled to grow — only two of its 11 ETFs currently hold assets of more than €100mn. 

Gilbert’s AssetCo business acquired a 63 per cent majority stake in Rize for £16.5mn in 2021 and later invested a further £5.25mn. However, AssetCo wrote down the value of Rize this year, saying the business remained “materially behind plan”. Although there was potential in the business, it was emerging “later and slower” than initially hoped, the company said. 

AssetCo is selling the business little more than two years after it acquired it, and for a fraction of the price. Ark paid AssetCo £2.6mn upfront for its 70 per cent stake in Rize, and has agreed to a deferred payment of £2.6mn and an earn-out provision capped at £5.2mn over five years.

All of this underlines the difficulty facing smaller, subscale boutiques trying to establish a European presence in ETFs, where inflows are dominated by large global players like BlackRock, Amundi and DWS.   

Can Ark crack the European market? Email me: [email protected]

Lessons from the LDI debacle

If you cast your mind back to this time last year, UK markets were in full-blown crisis. 

On Friday September 23, then chancellor Kwasi Kwarteng had announced his “mini Budget” to parliament, telling the nation he was about to embark on £45bn of unfunded tax cuts, markets editor Katie Martin writes in this column.

Government bonds and sterling convulsed with sufficient violence to threaten the country’s entire financial system and push prime minister Liz Truss out of office.

The real problem set in, though, when gilts fell so heavily in price that they blew a hole in certain pension funds’ rate hedging in so-called liability-driven investment, or LDI for short — strategies that sought to match income and assets with future retirement promises.

Burnt on these hedges, the LDI managers, and sometimes their underlying pension fund clients, had to stump up cash to meet collateral, or margin, calls on their positions. To raise cash, they sold the most liquid stuff they could find, which was gilts. So gilts fell further. So then they had to sell more gilts. The Bank of England stepped in early in the following week to prevent a financial stability accident. 

Even now, bankers and investors say the whole episode is holding back the flow of money in the UK towards illiquid assets, as funds are nervous about holding paper they cannot sell in a hurry. 

The good news is that the LDI business has acted fast to prevent a rerun. Bankers say clients operating these strategies have widened their tolerance bands for shifts in bond yields. 

They have also padded out cash buffers, so that if they are called upon to feed funds to their banks to meet obligations, they can do that without resorting so quickly to selling assets.

Nonetheless, Katie makes the point that the incident is still bugging top policymakers because the lesson is that wherever you have leverage in the financial system, and wherever you have products that impose margin calls on users, you have a particular sort of risk. That risk is generally routine, benign, boring even. But the LDI crisis showed that even conservative, socially useful leverage can quickly become systemically horrible. 

Chart of the week

Hedge funds have been rushing to unwind bets against Britain’s £2.5tn government bond market as investors become increasingly convinced that the Bank of England is nearing the end of its rate rising campaign, writes Mary McDougall in London.

The total value of the UK’s bonds borrowed by investors to wager on a fall in prices last week dropped below £65bn, according to data from S&P Global Market Intelligence — its lowest level since at least 2006. 

It later nudged a little higher after the Bank of England paused interest rate rises on Thursday.

The decline in short positions comes as gilts have staged a comeback in recent weeks, after having been the worst performing leading sovereign debt market in the first half of the year. An Ice Bank of America index of gilts has risen by 2.7 per cent over the past month, although it remains down by over 3 per cent since the start of the year.

“I think we have reached terminal rates in the UK,” said Nikolay Markov, senior economist at Pictet Asset Management. “It could be very optimal to be long gilts as recent inflation was much softer than expected last month and we might not see second round effects coming from the labour market.” 

Five unmissable stories this week

Goldman Sachs’s asset management unit has raised more than $15bn to buy investors’ stakes in private equity funds and invest in deals where buyout groups sell portfolio companies from one of their funds to another, in the latest sign of sustained support for the fast-growing “secondary” strategy. 

A build-up of leveraged bets has the potential to “dislocate” trading in the $25tn US Treasuries market, the Bank for International Settlements said, the latest high-profile warning over the potential for crowded hedge fund bets to sow instability. 

Crispin Odey urged a woman he groped at the headquarters of his hedge fund to downplay the incident to the UK’s Financial Conduct Authority while it considered whether he should retain his regulatory approval as a “fit and proper person”. The founder of Odey Asset Management now faces the first lawsuit stemming from allegations against him of multiple instances of sexual misconduct over decades.

Phoenix Group has bought a minority stake in London venture capital firm Hambro Perks as the UK’s largest savings and retirement business seeks to increase access to fast-growing private companies for its customers.

Three-quarters of US public investment funds will have to prove that the vast majority of their holdings match their names under a crackdown on deceptive marketing adopted by the Securities and Exchange Commission.

And finally

A few decades ago, the residents of Wigtown (population c. 1,000) in south-west Scotland wondered if they could follow Hay-on-Wye in Wales’s lead. Wigtown beat at least four other contenders to become Scotland’s National Book Town, in doing so reinvigorating a regional economy that was reeling from the closure of the local creamery and distillery. 

Last weekend I attended the Wigtown Book Festival, now in its 25th year. It’s a rich and diverse programme — I heard James Naughtie speak about fictional spycraft in his latest novel, Peter Taylor expound on non-fictional spycraft in Ireland, Henry Dimbleby warn about disaster in our food system, and Katherine Rundell delve into the many transformations of John Donne. Upcoming highlights this week include Maggie O’Farrell, Michael Morpurgo, Abi Elphinstone, Louise Minchin and Peter Stothard. On until October 1.

While you’re in Wigtown, pay a visit to The Book Shop, said to be Scotland’s largest second-hand bookshop. Its owner Shaun Bythell, author of the bestselling Diary of a Bookseller, in 2014 shot a Kindle ereader with a rifle — look out for the carcass in the shop. And don’t miss my colleague Henry Mance’s entertaining piece from 2021 about how he channelled his inner Hugh Grant in Notting Hill and went to work for a weekend as a bookseller at The Open Book in Wigtown.