The negative correlation between stocks and bonds has vanished. Both asset classes are in freefall and UK fund managers are feeling the pinch. Updates from Schroders, Jupiter and St James’s Place have offered a mixed view of the sector. This is suffering its worst year to date since the financial crisis.
Falling markets are always bad for asset gatherers. They suffer a drop in income from fees levied as a percentage of portfolio values. Rising interest rates mean conditions this year are particularly challenging. Higher yields on bonds are luring investors away from income products cooked up in the low rate era.
The sector is trading at a forward earnings multiple of 8.7, its cheapest since 2008. But with earnings forecasts still near their recent peak, value is likely to remain elusive.
Schroders reported assets of £752bn at the end of September. The bulk of a £20bn decline since the summer came from the group’s Solutions division. This provides pension funds with the liability-driven investment services that almost blew up the gilts market last month.
At Jupiter, new chief executive Matthew Beesley reset the capital return policy. A new buyback sent shares up 6 per cent. Earnings estimates are just a third of last year’s peak and the valuation is rock bottom. But to thrive these days, asset managers need to be big or specialised. Jupiter is neither.
In contrast, St James’s Place is resilient thanks to its adviser-led model. Net inflows of £2.2bn lifted funds under management to £143bn. Low volatility of earnings is reflected in shares with a beta of 1.03 against the MSCI All-World index, less than for Jupiter, BlackRock and Amundi.
Earnings estimates for SJP have typically fallen by half during peak to trough transitions, these have further to go. Shares back at 2020 levels and trading on 15 times earnings seem too rich in that context.
For a clearer sign the sector has hit rock bottom, look out for renewed takeover interest. Consolidators will buy weak businesses for their asset management contracts, if not their stock pickers.
City Bulletin is a daily City of London briefing delivered directly to your inbox as the market opens. Click here to receive it five days a week.