Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Archive | Financial

Hunt for yield pushes more investors into riskier assets

Posted on 29 November 2016 by

Pension funds and insurance companies have increasingly embraced riskier assets in their hunt for higher returns over the past five years.

Alternative assets such as property, infrastructure, private equity and hedge funds have been bought up by institutional investors in a world where yields on safer government bonds have hit rock bottom.

Total assets managed by the 100 largest alternative investment managers rose to $3.6tn this year, up 3 per cent on 2015, according to consultants Willis Tower Watson, as these assets have become more embedded in the portfolios of pension funds and insurance groups.

This switch into alternative products has prompted warnings that some of these institutional investors could be severely affected in the event of a financial shock or the seizing up of liquidity in the markets.

The OECD, the Paris-based group of mostly rich nations, warned last year that pension funds and insurance companies faced a growing threat of insolvency because of their increased allocations to riskier assets.

“The main concern is whether pension funds and life insurance companies have, or might, become involved in an excessive ‘search for yield’ in an attempt to match the level of returns promised earlier to beneficiaries or policyholders when financial markets were delivering higher returns. This might heighten insolvency risks,” the OECD said in its business and finance outlook for 2015.

So what are institutional investors doing to make sure they are not taking on too much risk?

Chris Hitchen, chief executive of the UK railway pension fund RPMI Railpen, says: “It is much harder to get returns today because yields are low. It takes decent returns as well as decent contributions to make decent pensions. This involves some risk.

“We have risk systems in place to try to ensure we do not get into a position where we are forced sellers. In the event of falling markets, we want to be in a position where we have enough liquid assets to pay our pensions and firepower to invest at lower prices.”

RPMI has investments in quoted shares, real estate, infrastructure, private equity and hedge funds, all considered riskier than government bonds, traditionally the safest assets.

The group has a system in place that monitors risk to its portfolios daily, while it employs experienced fund managers to ensure that its funds’ positions deliver the best returns with risks reduced to the lowest possible levels.

Other institutions such as Legal & General Investment Management carefully monitor systemic risk, or the perceived dangers to the markets of a breakdown in the financial system that would prevent investors from being able to sell assets or liquidate positions.

LGIM says that risks to the system are elevated because of rising worries over a hard landing in China, the threat of a break-up in the EU as the economies continue to struggle to grow, the potential fallout of Brexit and concerns over the impact of expected US interest rate moves.

John Roe, head of multi-asset funds at LGIM, says: “There are elevated risks in the system. As a fund manager or institutional investor, that means you have to be more vigilant and think more carefully about the weightings in your portfolio.”

Other fund managers say investors need to be more disciplined and flexible, seeking opportunities in areas of the market such as corporate high-yield bonds, subordinated bank debt, infrastructure and equities.

“Equities look good value and so does infrastructure. But you need a longer term horizon to invest in these type of securities,” says the investment director of a top UK fund manager.

“A pension fund that is still open to new members and is looking to hold an asset for a long time can be quite comfortable with equity volatility or the illiquidity in a market like infrastructure because they can hold these assets for years.

“Some pension funds refer to their quarter as 25 years, rather than three months. If you have that kind of long-term horizon, you can take quite a lot of risk and not face any threat in terms of insolvency.”

However, the reality is that it is much harder today to make decent returns.

“Going forward, if you want 8 per cent today in returns, you are going to struggle,” says Mitch Reznick, co-head of credit at Hermes Investment Management. “It is harder to hit those kind of returns with zero interest rates.”

He adds that the days when a pension fund or insurance company could rely on government bonds, typically considered close to risk-free, for returns, is in the past.

Unless a pension fund puts all its money in cash or treasury bills, which offer zero rates or in some cases negative yields, then there will always be a danger that the market could undermine its portfolio and cause losses.

As Jim Leaviss, head of retail fixed income at M&G Investments, says: “There is no such thing as a free yield. If you want yield, you have to take some risks.”

Tullett Prebon gets approval on ICAP deal from German regulator

Posted on 29 November 2016 by

Tullett Prebon will formally separate the 1,500 voice brokers it is buying from ICAP on January 1, setting what were once two long-time rivals in the over-the-counter markets on radically different paths.

Last Thursday Tullett received approval for the deal from German regulators, the final significant hurdle of more than 30 regulatory permissions it needed, according to three people familiar with the process. 

The sign-off was important as ICAP has earmarked Frankfurt, where it has a small office, as an alternative base in the event of a hardline UK departure from the European Union, the people said.

The deal still has to receive sign-off from a handful of jurisdictions such as the Philippines and Brazil, but both managements regarded the German approval as a critical step. As a result they are now preparing for the transaction to close at the end of the year, the people said. Both companies declined to comment.

It will draw to a close two years of discussions about the acquisition, in which Tullett will buy the voice brokers and some associated data and trading assets of its rival in an all-share deal worth about £1.1bn. It will be renamed TP-ICAP and will mark the biggest bet of the 15-month tenure of Tullett chief executive John Phizackerley.

He is doubling down on a gamble that humans will still be a vital part of the over-the-counter markets, where deals have historically been negotiated by phone. That world in recent years has been upended by regulation, increasing use of technology and low interest rates, which have damped market volatility.

Tullett will become the world’s largest interdealer broker. Its near 3000 brokers act as middlemen to move illiquid assets such as swaps and commodities.

It will give it the scale to compete with main rival BGC Partners and will aim to increase margins by investing in better technology. 

It is also setting up a new technology centre in Belfast to save the company about £5m a year on technology costs and the figure is likely to double with the integration of the ICAP business. That total would add to the £60m savings Tullett has targeted from the ICAP deal.

Nevertheless ICAP shareholders, the largest of whom is founder and chief executive Michael Spencer, will take a majority stake in TP-ICAP.

UK and US antitrust authorities had concerns over conflicts of interest in the original plan for ICAP to take a near 20 per cent stake in the enlarged Tullett. The two companies also conceded to set ICAP’s oil trading desk to INTL FCStone, a US broker, to safeguard competition in oil trading.

By contrast Mr Spencer is shedding the voice brokers that were the cornerstone of his business. ICAP will be renamed NEX Group — “a name that embodies agility, speed and forward thinking” its advertising says — and focus on electronic trading and market infrastructure.

NEX’s BrokerTec platform is the main venue for trading US Treasuries while renminbi trading has risen to become the third largest currency pair on its EBS venue.

Jes Staley’s contrarian bet on investment banking at Barclays

Posted on 29 November 2016 by

“Better to be a lucky chief executive than a good one.” This is how one top 10 shareholder in Barclays sums up the performance of Jes Staley almost exactly a year since the 59-year-old American took over as the bank’s chief executive.

Mr Staley himself admits that he has taken a contrarian bet by “doubling down” on the future of Barclays’ investment bank at the expense of selling its large African operations and cutting the dividend in half — both unpopular decisions with some investors.

Yet, for now, this gamble seems to be paying off for the Massachusetts-born former JPMorgan Chase executive. Barclays shares have outperformed most European rivals in recent months, rising two-thirds from the seven-year low they hit immediately following the UK’s vote in June to leave the EU.

“If you can be contrarian with a strategy and get lucky or be right it gives you a lot of wind behind your sails,” Mr Staley told the FT Banking Summit earlier this month. “To a certain extent, the doubling down and committing Barclays to being a tier one investment bank was that contrarian move.”

Close allies of the Barclays boss say he has been helped by “exogenous events”, including a recent rebound in trading of bonds and loans, a key engine of its investment bank. Another share price boost came from the election of Donald Trump as US president, which many analysts expect to benefit banks by producing lower taxes and higher interest rates.

“Externalities have started moving in our favour,” says Sir Gerry Grimstone, the City grandee who became deputy chairman of Barclays shortly after Mr Staley took over. “The steepening of the yield curve, Brexit and the election of Trump — these are all positive for Barclays.”

“The City won’t benefit from Brexit, but New York is likely to be stronger, so our US operations give us a natural hedge against Brexit,” he adds. “We are moving into a position where we are the only significant investment bank left in Europe.”

The contrast with Mr Staley’s predecessor Antony Jenkins is striking. While Mr Jenkins declared in an FT interview two years ago that “the universal banking model is dead” — suggesting a split between retail and investment banking was on the cards — Mr Staley has been far more supportive.

“The single biggest thing I would say he has brought is leadership,” says Sir Gerry. “I was amazed when I came … we had some excellent people but the top table had become almost completely dysfunctional. There was a complete lack of direction as to where the investment bank was going. The empire was in bad shape.”

In strengthening the top management, Mr Staley has hired so many former colleagues from JPMorgan — including his new heads of risk, operations and investment banking — that his former boss Jamie Dimon called Barclays chairman, John McFarlane, to say the poaching had to stop.

Another area where observers give him credit is addressing Barclays’ weak capital position. The bank’s common equity tier one ratio — a key measure of balance sheet strength — has only inched up slightly since he took over to 11.6 per cent and it is still below its 12.5 per cent target.

Yet Mr Staley has promised that by selling most of its majority stake in its South Africa-listed subsidiary, cutting the dividend and accelerating the run down of its noncore unit of toxic and underperforming assets it will add another full percentage point to its capital ratio.

A second top 10 shareholder praises Mr Staley for pushing through the strategy despite the resistance of Mr McFarlane, who ran the bank himself for a period last year. “That was a big and I’m not sure an easy win,” says the shareholder.

Chirantan Barua, banks analyst at Bernstein, says: “I think he did a brilliant job of understanding that capital is the crucial issue at Barclays.”

He adds: “Yes, he has been lucky. But not shrinking the investment bank further was the right thing to do anyway. I have always thought you cannot shrink to glory in investment banking.”

With the Bank of England set to announce its annual stress test results on Wednesday, Mr Barua says he is “still nervous” about Barclays because it “has the lowest capital of the UK banks and the highest macro risk”.

The main risk he identifies is that Brexit could trigger a sharp UK economic slowdown that causes a jump in defaults at its Barclaycard credit card unit. He adds that many of the potential benefits of a Trump presidency are already priced into the bank’s shares, “so the risk is if there is any disappointment on that”.

Mr Staley is convinced that the strong position Barclays gained in the US market from buying Lehman Brothers after its 2008 collapse and the woes of many European rivals, such as Deutsche Bank and Credit Suisse, are already strengthening the UK bank’s position.

“The economics of the broker-dealer function of investment banking are getting better every day,” he said at this month’s FT conference. “Go to any main bond fund and sit down with their main debt trader … and they will all say bond spreads are far wider, bond prices are gapping more, the market is more illiquid, I need to pay more to my broker-dealer to get a trade done than I did two years ago — and that is revenue to us.”

Some investors still worry that Mr Staley’s bet on investment banking — where returns still lag behind its cost of capital — at the expense of Africa’s growth potential may be too short term and could backfire, especially if costs start to slip out of control. For instance, having cut back operations in Asia recently, the bank is now hiring again in the region and loosening a hiring freeze to do so.

“We’ve been told in the past that Africa is an important growth engine and long-term bet,” says the second top 10 shareholder. “It might be the right thing to do now but will it be the right thing in 10 years?”

The recent rally in Barclays shares has taken them within 10 per cent of the 233p per share average price at which Mr Staley invested £6.5m as he prepared to join the bank last year. But the weaker pound means that in US dollar terms — what matters more to Mr Staley — he is still about $2.7m out of pocket. Both he and his investors will be hoping his luck continues to hold.

Further reading

● Analysis: Europe’s investment banks: down, but not yet out
● Lex: Barclays’ margin for error
● City Insider: An uneasy truce

Lending to UK manufacturers slows but consumer credit rises

Posted on 29 November 2016 by

Bank lending to manufacturers declined 5.2 per cent in October compared with one year ago, according to the latest statistics on money and credit in the UK economy published on Tuesday by the Bank of England.

Manufacturing, which accounts for roughly a tenth of the UK economy, is expected to be one of the most sensitive parts of the economy to the decline in the exchange rate because of the sector’s reliance on imports.

The total volume of lending in the past three months grew at the slowest rate since the summer of 2015, because of a monthly decline of 0.2 per cent in October — this was a £3.2bn decrease in the total amount of lending compared with September.

Total business lending decreased by £8.2bn in October compared with the previous month. The decline was mainly due to a £10.5bn fall in loans to the financial services industry.

Consumer lending, however, increased 10.5 per cent compared with October last year and mortgage lending reached the highest level since March. Mortgage approvals rocketed in the first three months of 2016 as buy-to-let landlords rushed to buy new properties before a tax change.

There were 67,500 new mortgages approved in October, beating the forecast consensus of 65,000.

Tuesday’s data add to a picture of divergence between different sectors of the British economy following the EU referendum vote. Consumers have been mostly unfazed by the result and continued shopping while businesses and financial markets have been more circumspect.

Business and consumer borrowing are being bolstered by the Bank of England’s easy monetary policy as well as new measures introduced in August following the referendum, said Howard Archer, chief UK and European economist at IHS Markit. “Low interest rates are supporting consumer and business borrowing.”

The latest estimate of economic growth, released this month, found that the better than expected growth in the three months following the referendum was because of both consumer spending and business investment remaining strong in the third quarter.

However, government statisticians warned that many of the investment decisions would have been taken before the referendum result.

Commenting on the BoE’s money and credit statistics, Elizabeth Martins, UK economist with HSBC, said: “Credit conditions remain very loose, and there is little sign so far of borrowers, either consumer or corporate, starting to worry about Brexit at this point.”

The European Commission’s monthly survey of economic confidence, also published on Tuesday, found that business sentiment rose back above the pre-Brexit level in October.

It also found that consumer confidence slipped back to levels seen in the immediate aftermath of the referendum, although these figures are quite volatile.

Consumer expectations of price increases climbed in October to reach their highest level since 2011, according to the survey.

FCA considers tighter curbs on high-cost consumer credit

Posted on 29 November 2016 by

The UK financial watchdog is considering tighter controls on high-cost consumer credit, including payday loans, catalogue credit and pawnbroking.

The Financial Conduct Authority said on Tuesday it was looking for feedback about credit products as well as overdrafts as part of a crackdown that has put many payday lenders out of business.

The FCA initially pushed through a price cap on payday loans in January 2015, and said it would consider whether the cap should be changed or scrapped. The regulator was especially interested in whether consumers had turned to illegal lenders as a result of payday lenders closing.

However, in a separate report out on Tuesday, Citizens Advice, the consumer advocacy group, found no rise in illegal loans as a result of the tougher rules for payday lenders. The group, which helps consumers with debt problems, instead recorded a fall in the number of illegal loan cases in the past year.

Additional research from the Social Market Foundation found that while the new rules had caused the payday loan market to shrink — the number of loans sold in January to April 2016 was 42 per cent lower than in the same period of 2013 — costs for borrowers had also fallen.

The FCA first said earlier this month that it would also look to implement measures to improve transparency for overdraft users — including whether new rules are needed surrounding a so-called monthly maximum charge for overdrafts — following recommendations from the Competition & Markets Authority.

On Tuesday, the regulator, which first began regulating consumer credit in 2014, said it would “look in more detail at overdrafts from a consumer protection, as well as competition, perspective”.

Andrew Bailey, FCA chief executive, said: “This is a significant moment for our approach to consumer credit regulation as we continue to ensure that this market works well for consumers.

“As an organisation, we have already taken many steps to address the risk of consumer harm by putting in place new rules for high-cost, short-term credit firms and taking action against non-compliance across all credit markets.”

Citizens Advice has called for a cap on prices for so-called rent-to-own transactions, where people lease household products for a weekly or monthly rate, with the option to buy the product after a certain time.

The advocacy group is also pushing for caps on prices for logbook loans, where people borrow against the value of their car, and guarantor loans, which require loans to be co-signed by a second person.

Eurogroup chief talks tough on UK’s Brexit demands

Posted on 29 November 2016 by

One of the eurozone’s most senior financial policymakers has said that bloc must take a strict line with Britain in its EU exit talks, saying that the City of London cannot be allowed full market access if it will not fully apply European rules.

“We cannot allow a third country to have access, full passporting rights to the financial services market in Europe, if at the same time we allow them to deviate on capital requirements, consumer protection standards, whatever,” Jeroen Dijsselbloem, the president of the Eurogroup, told members of the European Parliament on Tuesday.

“We can’t allow the the financial services centre for Europe and the eurozone to be outside Europe and the eurozone and to go its own way in terms of rules and regulations,” he said.

“We cannot allow that to happen.”

Mr Dijsselbloem said that the only obvious way that Britain could safeguard market access for its financial services industry would be to adopt a “Norwegian model” – in other words full membership of the European Economic Area and compliance with EU single market rules.

This “of course doesn’t appeal to the British,” he said.

Mr Dijsselbloem’s tough stance echoes warnings yesterday from Mario Draghi, the president of the European Central Bank, that Brexit raised
“sovereignty” questions for the euro area – a reference to how far the
currency bloc should seek to repatriate certain types of core trading activities from London.

“We have to take a firm stand on this, there is no alternative,” the
Euroogroup president said.

Mr Dijsselbloem also echoed a prediction from Mr Draghi that the main economic burden of Brexit will fall on the UK, not Europe.

“Investors are simply hedging their risks, they need to take decisions, this year, next year, for the coming years,” he said.

“So they will rethink their investments, and I say this without any joy at all, this will start having an impact on the British economy, the City, in coming years”.

“It’s going to be a tough ride, specifically for the UK.”

Ex-Logica analyst passed inside information to neighbour and relative

Posted on 29 November 2016 by

A former business analyst at Logica allegedly passed inside information about its £1.7bn takeover by CGI Group to his London neighbour and to his brother-in-law, a court has heard.

The UK’s Financial Conduct Authority has charged Manjeet Singh Mohal with two counts of passing on inside information on May 28 2012, three days before the Reading-based technology services company disclosed an approved takeover by CGI. That announcement that would see the FTSE 250 company’s share price soar from 65.7p to 110p.

‎Reshim Birk, Mr Mohal’s neighbour in the London suburb of Southall, bought shares and options in Logica after ‎a tip-off from Mr Mohal, the FCA alleges. Surinder Pal Singh Sappal, Mr Mohal’s brother-in-law, also bought shares, the watchdog says. Mr Birk and Mr Sappal face one count each of insider trading, according to the indictment.

Mr Mohal, who had worked at the company for a decade as a business analyst, was not included on Logica’s formal list of insiders on the takeover, but in 2004 he signed an official company code of conduct around inside information “akin to the Official Secrets Act,” Andrew Marshall for the FCA said on Tuesday.

“The prosecution ‎case is that when you look at the evidence, there’s clear evidence that he must have obtained inside information and that he then disclosed it to Reshim Birk and Mr Sappal,” Mr Marshall told the jury at the Old Bailey. “We can’t say precisely how he got that information. We don’t have to prove it either.”

Mr Mohal sat next to Ryan Willmott in Logica’s office. Mr Willmott was on the insider list for the takeover and was gathering information about the deal, the jury heard. Mr Mohal was assisting Mr Willmott in the weeks running up to the takeover. The group finance director has given evidence that she was “surprised” Mr Mohal was not considered an insider, the jury heard.

Mr Mohal called his neighbour, Mr Birk, in the early evening of May 28 as the Logica board was meeting to discuss the deal announcement, the jury heard. The next morning, Mr Birk called his broker at Investec and bought £20,000 of Logica shares and, unusually for his portfolio, £5,000 worth of options, saying he had a “hunch” about a possible takeover — prompting a warning from the broker over illegal trading.

A suspicious transaction report was filed by Investec the next day.

The defendants deny the charges and now face a four-week trial.

Insider trading carries a maximum sentence of seven years in prison — although the longest sentence meted out in the UK to date has been four and a half years in another FCA case earlier this year.

Witnesses in the trial will include Charles Wilkinson, who was head of corporate broking at Deutsche Bank at the time, advising Logica on the takeover. ‎Logica officials will also appear as witnesses.

The trial comes after a probe by the FCA dubbed Operation Holt.

The besuited defendants sat silently in the dock as Mr Marshall outlined the prosecution case to the jury.

The trial continues.

Paris-listed advisory Rothschild seeks to expand in the US

Posted on 29 November 2016 by

The Rothschild name may be better known in the US for fine wine rather than finance, but the Paris-listed bank’s co-head is determined to change that by breaking into the world’s biggest market for mergers and acquisitions.

Olivier Pécoux, co-head of the Franco-British advisory and wealth management specialist, said it was spending €20m this year on bulking up its American operations, including the hiring of several senior bankers and opening a Chicago office.

“Clearly we are under-represented in the US,” said Mr Pécoux, adding that the bank aimed to increase the share of its revenues coming from North America to 20 per cent of the group total. “It is a bit frustrating because it is taking a lot of time.”

He said the bank was “looking at several options” to expand its US presence, including the possibility of a new office in San Francisco, to add to those it also has in New York, Los Angeles and Washington DC. It has a total of 160 bankers in the US.

Rothschild said net profit rose 72 per cent to €67m in the six months to September, as revenues rose 18 per cent, driven mainly by a more than one-third jump in revenues from its M&A and financing advisory businesses.

The family-controlled bank warned that the M&A market was expected to be more “challenging” in the coming months. Mr Pécoux said the UK’s vote to exit the EU would have no impact on its operations, but if it caused a slowdown in the British economy that “could have a knock-on effect on M&A activity”.

Revenues from its private bank and wealth management arm fell 4 per cent due to lower transaction commissions, while revenue at its merchant banking unit rose 7 per cent after its first private equity fund started to earn a profit-share known as carried interest.

The bank said it was on track to complete the acquisition of Compagnie Financière Martin Maurel, the Marseille-based private bank, early next year to create a combined group with almost €10bn of assets under management.

Rothschild spends €20m to expand in US

Posted on 29 November 2016 by

Franco-British investment bank Rothschild is spending €20m this year on bulking up its American operations, as it seeks to break into the world’s biggest market for mergers and acquisitions.

Olivier Pécoux, co-head of the Franco-British investment bank, said the effort includes the hiring of several senior bankers and opening a Chicago office.

“Clearly we are under-represented in the US,” said Mr Pécoux, adding that the bank aimed to increase the share of its revenues coming from North America to 20 per cent of the group total. “It is a bit frustrating because it is taking a lot of time.”

He said the bank was “looking at several options” to expand its US presence, including the possibility of a new office in San Francisco. It already has 160 bankers and offices in New York, Los Angeles and Washington DC.

Rothschild & Co said net profit rose 72 per cent to €67m in the six months to September, as revenues rose 18 per cent, driven mainly by a more than one-third jump in revenues from its M&A and financing advisory businesses.

The family-controlled bank warned that the M&A market was expected to be more “challenging” in the coming months. Mr Pécoux said the UK’s vote to exit the EU would have no impact on its operations, but if it caused a slowdown in the British economy that “could have a knock-on effect on M&A activity”.

Revenues from its private bank and wealth management arm fell 4 per cent due to lower transaction commissions, while revenues at its merchant banking unit rose 7 per cent after its first private equity fund started to earn a profit-share known as carried interest.

The bank said it was on track to complete the acquisition of Compagnie Financière Martin Maurel, the Marseille-based private bank, early next year to create a combined group with almost €10bn of assets under management.

Aberdeen: hosting parasitic passives

Posted on 28 November 2016 by

Existential angst can be a problem for Aberdonians. It isn’t just the long Northern winters. Or the three-nil drubbing the local football team received from Celtic on Sunday in the Scottish League Cup final. Aberdeen Asset Management, the granite city’s investment champion, finds itself challenged by a shift towards passive management as most primarily active investors do.

A 40 per cent drop in full-year pre-tax profits to £222m is a poor advertisement for the group’s specialisation and its accompanying bias towards emerging markets. Revenues fell as investors pulled a net £32.8bn from Aberdeen’s stewardship. Assets under management rose 10 per cent to £312bn. But this reflected acquisitions, of which chief executive Martin Gilbert is a skilful exponent.

The difficulty he shares with other asset managers of an active stripe is the high fixed cost base that comes with employing teams of well-paid stock pickers. That creates financial strains when trends are unfriendly. Aberdeen will pay out 100 per cent of underlying earnings in dividends this year. This is unsustainable. The company has net cash of £548.8m but also has to reassure regulators it can withstand any run on its funds.

The position of all active managers is precarious. Last week a report from the Financial Conduct Authority criticised the high profits made by active managers, which, on average, underperform indices after fees. In the US, one-third of US mutual funds are now passive, compared with one-quarter three years ago.

Index funds are certainly cheap. That is because they are free riders, like our Christmas mistletoe which grows as a parasite on other plants. They only exist thanks to a host organism, in this case active funds. These determine which stocks the indices should include and the relative weighting of each. The proportion of funds managed passively will naturally be limited by rising returns from the dwindling active part of the industry.

The problem for groups such as Aberdeen, which sensibly offers index funds itself, is that this pivot point still appears to be a long way off. Before it is reached, heavy costs cuts will be required, and with them, fund manager job losses.