The siren song of private markets
The siren song of private markets
Are asset managers ready to explain illiquid investments?
This week Link Fund Solution announced its redress scheme for WEIF, the collapsed Woodford fund. The scheme was backed by the Financial Conduct Authority, and was approved by an overwhelming majority of investors. According to the FCA's calculations, investors will claw back about 77p to the pound, for a total of up to £230m.
So today seems a good time to talk about the pull investment managers are feeling towards private investments, and where trouble may be brewing.
This week, AJ Bell's latest Manager versus Machine report showed less than 40% of active equity managers were able to beat average passives in 2023. Retail investors have withdrawn £9bn from active open-ended funds over the past five years, while £75bn has flowed into passive strategies.
Demands for higher returns from active were always going to make private equity more appealing, but for the first time family offices now have more of their money invested in private equity, venture capital, and private debt than in publicly traded stocks. In a new survey, 41% of family offices surveyed said they planned to invest more in private equity funds.
Really, this is a question on whether asset managers are capable of managing and communicating the topic of illiquidity, considering so much of the products the industry offers are linked with very liquid investments.
With longer investment horizons and lock-in periods, managers admit clients often question how they can exit if things go wrong. Clients aren’t the only ones wondering. Earlier this year, a Scottish Mortgage Trust director named Amar Bhidé raised concerns about the expertise and governance of the trust's board in managing its investments in unquoted companies.
Bhidé, who was later removed from the board – make of that what you will – argued that the trust lacks the resources and oversight capabilities of venture capital firms to effectively monitor its illiquid investments. It sounds harsh, but just consider how many property funds (a mainstream illiquid investment that managers have long offered their clients) have had to close this year.
The rush for unlisted equity is compounded by the perception there are far fewer IPOs than before. (2020 and 2021 saw a massive, outlier spike. Current levels are closer to long term averages.) So investment managers are tempted. The question is, are they at all equipped to – excuse the pun – venture into venture?
Treasure Corner
ETFs in Europe are, seemingly, doing very well: over the past 13 years, assets under management for European-listed ETF increased eightfold, from $208bn to $1.6trn.
But earlier this month an analysis from Citi and HANetf revealed only half of ETFs in Europe are profitable. The annual operating cost of a UCITS ETF is at least $200,000-$350,000, and the breakeven range can be as wide as $80,000 to $500,000 per year. For providers thinking about their next launch the question is blindingly obvious: what separated the asset-gathering ETFs from the rest?
A 2022 study, titled Competition for Attention in the ETF Space (by Itzhak Ben-David, Francesco Franzoni, Byungwook Kim, and Rabih Moussawi) took nearly all equity ETFs that ever traded in the U.S. equity market – from 1993 to 2019 – and segmented them into four groups:
Broad-based are the ones that track indices. Smart-beta ETFs also track indices, but apply different weights. Sector ETFs and Thematic ETFs focus, respectively, on specific sectors or themes.
At the close of 2019, specialized ETFs managed just 18% of the industry’s assets. But...they generated about 36% of the industry’s fee revenues.
The discrepancy certainly wasn’t explained by performance. The findings showed the performance of specialised ETFs fell short of both raw and risk-adjusted returns.
The study also looked at the sensitivity of flows to fees. They found sensitivity to fees was much higher when there wasn’t a story.
They even found that when there’s high media exposure of the stocks in an ETF portfolio, flows’ sensitivity to fees goes down. The researchers concluded:
“Investors neglect the fees charged by ETFs when their attention is drawn to other product attributes.”
Also Happening
The Microsoft Excel world championship (Yes!) was won by a Sydney-based actuary. The competition turns Excel into an eSport, complete with an ESPN broadcast and running commentary. Naturally, winners are crowned with a cash prize and an oversized boxing-style leather belt. In a post-game interview one finalist thanked his wife, who “never made fun of me, even once, for competing in the Microsoft Excel world championship”.
The state of Tennessee is taking legal action against BlackRock for allegedly breaching consumer protection laws by not being transparent about its ESG investing practices. Also this week, the US House Judiciary chair subpoenaed Vanguard over ESG, alleging the asset manager may have violated US antitrust laws by engaging in agreements to "decarbonize" assets and reduce emissions. ESG is becoming a politicized issue, and we're entering an election year.
Japan is prodding its households to invest in equities. The country's legendary savers are being encouraged to invest their money in equities through lifetime tax exemption and raised contribution limits. Between the incentives and high inflation, government is hoping to nibble at an entrenched aversion to stocks. Japanese households hold just 24% of their assets in equities —compared with 54% in the UK and 75% in the US.
Coutts is being told to improve its communications. An independent review, prompted by the controversial account closure of Nigel Farage, found that while there was no evidence of political bias, Coutts needed to improve how it communicated account closures.
How Did Companies Use ChatGPT In 2023? Since its launch last November, businesses have been eagerly experimenting with ChatGPT. This is a review of business use cases for generative AI, good and bad.
Another blow to the London Stock Exchange. Pearson's largest shareholder, Cevian Capital, believes the publisher should move across the pond. Pearson's share price has remained stagnant in the last five years. With the majority of sales and executives in the US, Cevian is arguing Pearson is essentially an American company.
‘A quant winter’s tale’. Good recap from the FT on factor investing: How it started, how its popularity exploded-then-waned, and how it is possibly staging a comeback.