November 29, 2022

StuffStrife

Enduring Values

Asset Management: Vanguard closes in on BlackRock’s ETF lead

Queen Elizabeth II, Britain’s longest-serving monarch, has died. The Queen was so much more than a head of state — she was quintessential Britain.

Vanguard vs iShares

One of the investment industry’s biggest rivalries is becoming ever more intense. Vanguard is closing the gap on BlackRock’s lead in the $6.6tn US exchange traded fund market, a pivotal battleground for the world’s two largest asset managers, write my colleagues Brooke Masters and Chris Flood.

BlackRock used its 2009 purchase of the iShares ETF business from Barclays — an acquisition which has been described as the asset management industry’s “deal of the century” — to build a dominant position at the top of the rapidly expanding ETF market.

But Vanguard has been catching up fast in recent years. Notably in the US, its ETF business has gathered inflows of around $656bn since the start of 2020, outpacing growth at BlackRock’s iShares ETF unit, which has pulled in about $411bn over the same period.

Both managers have exchanged punches in the long-running price war over ETF fees, but they have adopted very different approaches when it comes to courting investors.

Vanguard’s strategy has focused on offering a limited range of products as portfolio building blocks and using its reputation as the lowest cost provider to appeal directly to retail investors and financial advisers.

Meanwhile BlackRock offers a far broader set of ETFs and it also targets big institutional investors as clients.

Numerous other managers including State Street, Invesco, JPMorgan Chase, Fidelity and Charles Schwab are also expanding their US ETF operations, but none of these competitors has been able to come close to the new business growth achieved by Vanguard and BlackRock.

As they jostle for dominance, the top two have left other investment houses behind. Together the pair control more than 60 per cent of a US ETF market that has increased almost fivefold to $6.6tn from $1.35tn a decade ago.

“The race in the US ETF market will be far from over even if the leadership baton does pass from BlackRock to Vanguard,” says Todd Rosenbluth, head of research at VettaFi. “Both managers are winning a disproportionately large share of an [ETF] pie that is continuing to grow.”

So, for the time being, the US ETF market looks set to remain a two-horse race.

The existential crisis facing UK equities

A tumbling pound and a renaissance for the fossil fuel industry will not be enough to reverse a long-term trend and draw investors back to the UK stock market, according to a leading British fund manager.

I sat down with Richard Buxton, an investment manager in UK equities at London-based Jupiter, to find out what he thinks could bring people back to major investing in the UK. His response: “I can’t hand on heart provide a heap of compelling answers.”

Investors have pulled £6.6bn from UK equities strategies this year, making 2022 already the biggest year of outflows in a decade, according to data from the Investment Association, a trade body. This outstrips the £4.8bn withdrawn in 2016, the year of the Brexit referendum. UK-focused funds have recorded net outflows every year since then.

Meanwhile UK government bonds and the pound have dropped on estimates that inflation could reach 20 per cent next year if energy prices remain high, and investors and analysts expect them to weaken further as the country issues billions of pounds in debt to fund prime minister Liz Truss’s £150bn energy package.

Buxton pointed to several long-term structural trends that have also turned investors off UK equities.

“The multiyear trend of let’s go global — which is a sneaky way of getting lots of US exposure, because the US has been so all-powerful — you don’t reverse that overnight,” he said.

He also highlighted the UK market’s bias towards cheap “value” stocks in sectors such as mining and energy, and the absence of fast-growing technology companies, which have surged in the past decade amid record-low interest rates.

“The perception is that we’re a dull, boring stock market with no exciting go-go growth companies on ludicrous valuations,” said Buxton.

But this could stand UK investors in good stead in the current environment, he added, given that sectors like oil and mining tend to fare better than high growth stocks during periods of inflation.

“I actually think oil and mining is a wonderful place to hide in a commodities bull market and an equities bear market,” said Buxton. “It will take a three-year bear market crushing the Nasdaq before people say the trend of going global maybe wasn’t such a good idea.”

What do you think could bring back investors to UK equities? Email me: [email protected]

Chart of the week

Line chart of 12-month drawdown of standard  60/40 portfolio in US and Europe (%)

Global stocks and bonds have been falling in tandem since mid-August with galloping inflation forcing big central banks such as the Federal Reserve, Bank of England and European Central Bank to ratchet up the pace of monetary policy tightening, writes Chris Flood.

Policymakers have repeatedly signalled they will continue with interest rate rises until they have tamed the worst inflationary pressures in four decades, but fears are growing among investors that the combination of monetary tightening and high energy prices will lead to an economic recession in both the US and Europe.

Since the start of the year, both the FTSE All World index (including dividends) and the Bloomberg Global Aggregate bond index have dropped 16.8 per cent.

This synchronised weakness has created problems for investors who model their portfolios on a classic “60/40” ratio, where three-fifths of their money is invested in equities and the rest goes into bonds. That provides investors with exposure to both the capital gains and dividends offered by shares and the safe income stream of a bond.

10 unmissable stories this week

FTX Ventures, the investment firm led by billionaire Sam Bankman-Fried, will buy a 30 per cent stake in SkyBridge Capital, the fund of ex-Trump aide Anthony Scaramucci, as he continues his mission to try to bolster the struggling cryptocurrency market.

Josh Harris, the billionaire private equity executive who left Apollo Global Management last year after a messy succession battle, is returning to the investment industry with the launch of a $5bn investment firm. 26North aims to be a contender in financial markets including private equity, credit and insurance.

A risk analytics company chaired by multi-millionaire financier Arki Busson has lost a number of senior managers, as it tries to raise capital and repay bondholders including Louis Bacon’s investment firm Moore Capital.

Autumn has set in and investors are looking back at a period of summer exuberance in markets through a notably more sober lens, writes markets editor Katie Martin. Summer optimism has given way to worries about the impact of rising rates and pressure on earnings.

Richemont shareholders have rejected activist investor Bluebell Capital’s campaign to shake up the board of the Swiss luxury group, handing a victory to billionaire founder Johann Rupert. Read our profile of the South African businessman here.

BlackRock has hit back at Republican politicians for what it calls their “misconceptions” about its approach to climate change, arguing that its efforts are “entirely consistent” with a duty to maximise investor returns.

Kim Kardashian is launching a private equity firm to acquire stakes in fast-growing media and consumer companies. The firm, SKKY Partners, is a collaboration between the reality TV star turned business mogul and Jay Sammons, a former Carlyle Group executive who has carved out a niche investing in celebrity-backed ventures.

Investors should be cautious for the rest of 2022 about US equity and credit as markets have not absorbed the Federal Reserve’s determination to keep interest rates as high as 4 per cent, advises Greg Fleming, the veteran banker who heads Rockefeller Capital Management.

Addy Loudiadis is stepping down as chief executive of Rothesay, a group she co-founded within Goldman Sachs 15 years ago and has since turned into the largest UK pensions insurance specialist.

Katie Koch, chief investment officer of public equity at Goldman Sachs Asset Management, is leaving after two decades at the US bank. She is joining $220bn Los Angeles-based asset manager TCW Group as president and chief executive officer, one of only a handful of women to run a big asset manager.

And finally

The lion rampant flag flies at half mast at Balmoral Castle
The lion rampant flag flies at half mast at Balmoral Castle © Jeff J Mitchell/Getty Images

Just a short drive from the Queen’s beloved Balmoral in Aberdeenshire is the glorious Fife Arms, a boutique hotel from the founders of global gallery Hauser & Wirth. More than 14,000 pieces of art, including both antiques and specially commissioned artworks, have been integrated into every room, corridor, and corner. Next month the Fife Arms is hosting the Braemar Literary Festival, featuring speakers including authors Ian Rankin and Sebastian Faulks, and chef Angela Hartnett.


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