BlackRock expects ‘trillions’ in bond fund investments

One thing to start: One of the UK’s most successful fintech entrepreneurs Nick Hungerford has died aged 43 from a rare form of bone cancer. Hungerford co-founded Nutmeg, a digital wealth management firm, in 2011, and sold it to JPMorgan Chase for around £700mn a decade later. Hungerford had recently set up Elizabeth’s Smile, a charity to support children who were bereaved due to terminal illness, as a tribute to his two-year-old daughter Elizabeth. Our thoughts are with his family and friends.

BlackRock, the world’s largest asset manager, reckons investors are ready to pour trillions of dollars into fixed income funds.

While many investors snapped up money market products to take advantage of rising rates, BlackRock’s president Rob Kapito expects much of this is poised to shift into bonds.

“There are trillions . . . that are ready, when people feel rates have peaked, to flood the market and we need to position ourselves to capture that,” said Kapito.

The New York-based fund group reported earnings on Friday that beat expectations and posted a jump in assets under management to $9.4tn.

The group recorded $1.4bn in net income in the second quarter, a rise of 27 per cent over the same period last year, buoyed by the recovery in the benchmark S&P 500 index.

“Most asset managers are shrinking and BlackRock has been growing,” said Kyle Sanders, equity analyst at Edward Jones. 

He said although net inflows of $80bn over the quarter fell short of expectations, they remained “healthy”. Sanders noted that this differentiates BlackRock from competitors, with many suffering from net withdrawals over the past few months.

T Rowe Price, for example, reported net outflows last week of $20bn for the second quarter, although assets under management climbed to $1.4tn owing to the market rebound.

Still, State Street, another big player in the ETF market, posed strong quarterly net inflows of $38bn in its investment management arm. Shares in the custody bank fell, though, after it warned about paying higher rates to retain deposits.

BlackRock’s profit surge comes even though the asset manager has faced sustained attacks from Republican politicians for what they claim is a “woke” approach to investing. BlackRock has attempted to deflect the criticism by emphasising the breadth of its offerings, from index trackers to alternatives. “Clients want more from BlackRock, not less,” said chief executive Larry Fink.

Recent cost-cutting efforts have also boosted the asset manager: it has clawed its way back to an adjusted operating margin of 42 per cent, almost where it was a year ago.

Fund chief executives divided on UK pension plans

While some asset managers praised the UK chancellor’s Mansion House speech last week on tapping the domestic financial services industry to galvanise the economy, others were more critical of Jeremy Hunt’s plans.

One of the initiatives involves nine of the UK’s largest pension providers committing 5 per cent of their defined contribution default funds to unlisted equities by 2030. The government believes this deal could unlock up to £50bn of investment in high growth companies by 2030 if all UK pension schemes follow suit.

Some asset managers lauded the move. Peter Harrison, chief executive of Schroders, told the Financial Times: “We need to get to a position where we ensure that people save for the long term and take adequate risk, rather than the consumer protection culture.”

“The big nonsense at the moment is the trade-off between low cost and decent outcomes. The reason DC funds don’t put money into private markets is because they compete purely on price . . . We need to move away from cost to focus on value.”

Stephen Bird, chief executive of FTSE 100 fund manager Abrdn, said: “The average Brit has an underfunded pension . . . In truth, unless you set targets and measure against them, it won’t happen.”

Others, however, were more sceptical about the initiative.

“We should have done it when interest rates were low, now you’re coming into a much more hostile macroeconomic environment,” said Hendrik du Toit, chief executive of asset manager Ninety One. “The bit they’ve missed in the push to make the UK a creator of unicorns is encouraging the billionaires of this world to be here and to back people here.”

Matthew Beesley, chief executive of Jupiter Asset Management, agreed with the direction of travel but sounded a note of caution.

“As active managers our job is to funnel capital to parts of the market that we believe are inefficiently priced — at times that will include growth assets and private assets, and at times it might not,” he said. “So having any kind of fixed allocation suggests putting another objective above the [pension] trustees’ focus, which is risk-adjusted returns.”

Chart of the week

The gap in government borrowing costs between emerging and developed markets has fallen to the lowest level since 2007, as investors price in interest rate cuts in certain emerging economies and further tightening in the west, writes Mary McDougall.

The spread fell to less than 2.9 percentage points last week, the narrowest in 16 years, according to data from Allianz Global Investors.

“Investors are recognising the narrowing of the credibility gap between policymakers,” said Richard House, chief investment officer for emerging market debt at Allianz Global Investors. “Emerging markets have done a good job at navigating this inflation shock and I’m not sure you could say the same about some of the western central banks”. 

In Latin America and eastern Europe, central banks reacted more quickly to raise rates in response to inflationary pressures after coronavirus restrictions were eased.

JPMorgan’s widely followed benchmark of emerging market local currency government bonds has delivered a 7.5 per cent total return year to date, boosted by the Latin American sub-index, which has risen 21 per cent, and by central and eastern Europe, which has gained 11 per cent.

At the other end of the scale, US government bonds have delivered total returns of just 1.6 per cent this year, while German bonds have returned 1.2 per cent.

Investors are positioning for further gains, given the high real yields on offer in emerging market debt, declining inflation and the prospect of rate cuts that should boost bond prices.

“Local currency rates and bonds present a very attractive opportunity over the next six months and beyond,” said Liam Spillane, head of emerging markets debt at Aviva Investors.

Five unmissable stories this week

Goldman Sachs Asset Management has agreed to acquire Norwegian educational technology company Kahoot, marking the latest take-private deal in Europe. The cash offer gives the company a value of NKr17.2bn (£1.3bn).

Fund manager Nick Train has warned that UK equities are “abysmally” out of favour with investors and could remain “frustratingly cheap for a very long time”. Train, who is one of the UK’s best-known fund managers and runs the £4.4bn Lindsell Train UK Equity fund, said the UK market could be a “moribund value trap”. However, he said this presents opportunities to snap up “wonderful companies that are wrongly priced”.

Thousands of UK employers are expected to see “significant” cuts to the insurance levy they pay to the corporate pension rescue scheme, as the body passed the threshold of becoming better funded than the plans it protects for the first time. The Pension Protection Fund’s war chest grew to £12.1bn as of March this year, up from £11.7bn in the previous financial year.

Hedge fund Bridgewater Associates has warned the US battle with inflation is far from over, and that bets on a rapid series of interest rate cuts from the Federal Reserve next year are premature. Over the following year investors expect the central bank to reverse course, cutting borrowing costs six times to around 3.8 per cent by November 2024.

The UK and EU are rolling back one of their most high-profile pieces of financial regulation in an effort to revitalise the region’s capital markets, but investors and brokers warn the move may come too late. UK chancellor Jeremy Hunt said he would reverse Mifid II regulations, which ban stockbrokers from wrapping investment research costs up with the commissions clients pay for trading.

And finally

The British Museum is hosting an exhibition focused on the relationship between luxury and power spanning Persia to Greece between 550-30bc. The collection, which includes opulent gold and silver sculptures, explores how luxury was used as a political tool in the Middle East and southeast Europe. The exhibition is on show until 13 August.