Asset Management: Growth investors adapt to new paradigm

‘The problem is the next year’

Growth investors are, by nature, optimistic. They believe we are living through a once-in-a-generation wave of technology-led change and that a small group of companies can make exponential gains by shaping the future. The role of the successful investor is to identify these businesses.

For this Big Read, I sat down with a number of the world’s top growth investors — from the likes of Coatue Management, Baillie Gifford, T Rowe Price and Polar Capital — to understand how they are thinking about the market environment right now. Their investment philosophy has run into the buzzsaw of rising interest rates, inflation, war and a looming recession, all of which has led to an indiscriminate sell-off in tech stocks.

Tiger cub Philippe Laffont, founder of New York-based Coatue, is among the more bearish voices. After the market downturn earlier this year, Coatue liquidated positions in its hedge fund. In May, the fund was sitting on more than 80 per cent cash, according to investors.

“It feels to me like there’s definitely value in the public markets over the next five years,” says Laffont. “The problem is the next year.”

“The world is getting worse, not better,” he goes on, rattling off the list of macroeconomic headwinds he worries about: no end in sight to the war in Ukraine; global energy and food crises; rising interest rates to combat soaring inflation; geopolitical tensions between the US and China, and between China and Taiwan.

Some believe the setbacks represent a cautious buying opportunity, and while the macroeconomic environment may have given rise to a more conservative short-term approach, everyone I spoke to said they still had faith that the technological revolution that underpins their portfolios was only beginning.

But one thing is for sure, says David Older, head of equities at €33.2bn asset manager Carmignac:

“We’re not going back to the way things were. Regardless of how high you think interest rates will go, this change from basically free money to cost of capital is going to have some ongoing negative effects for growth companies.”

How can growth investors adapt to this new paradigm? Email me: [email protected]

Fund managers pitch ‘alts’ to retail investors

A saturated market for institutional clients is pushing asset managers to pursue another business: selling so-called alternative investments to rich individual investors, writes Madison Derbyshire in New York.

Alternatives stray outside mainstream portfolios of stocks and bonds into asset classes such as credit, private equity and real estate. Harder to trade and often walled off by accreditation requirements, they have historically been the domain of large investors such as pension funds and endowments.

That looks set to change. According to a report by McKinsey, the average retail investor has just 2 per cent in alternatives, compared with 30-50 per cent for institutions. The consultant estimates that the retail share could double to 5 per cent in the next three years, adding between $500bn and $1.3tn in new capital to alternatives.

“The bottom line is if you think about the size of the market, high net worth is as big as institutional wealth,” says Joan Solotar, head of private wealth solutions at alternatives manager Blackstone. “These are massive markets that have been largely untapped.”

Blackstone, Sun Life Financial and KKR are among those ramping up their alternatives offerings for retail investors, many of whom are looking to diversify beyond the struggling 60/40 portfolio of stocks and bonds.

“At least 15 to 20 new products with different strategies, from all different large managers, will hit the market in the next nine months,” says Steffen Pauls, founder of retail-focused private equity investment platform Moonfare. “It’s a huge change.”

Read the full story here

Chart of the week

Thousands of victims have been swept up in a tidal wave of fraud that accompanied the crypto boom during the Covid-19 pandemic, writes Joshua Oliver in this Big Read.

Scammers stole $6.2bn from victims worldwide in 2021, according to the blockchain research group Chainalysis, an annual increase of about 80 per cent. Losses from crypto-related scams reported to Action Fraud, the UK’s national reporting centre for fraud, more than doubled to £190mn last year compared with 2020. And, by the end of August, losses were 25 per cent higher than the same period last year.

Yet investigators lack the resources to investigate the accompanying rise in fraud cases — especially when the sums involved in individual scams are seen as relatively small. And, with the cost of living crisis set to worsen, UK regulators warn another fertile environment for scammers may be on the horizon. “We are concerned that, in current economic circumstances, people could be tempted to invest in fake investments,” says Nausicaa Delfas, interim chief executive of the Financial Ombudsman Service.

10 unmissable stories this week

Debt monsters in the downturn: the FT digs into the scores of debt-laden companies that suddenly face uncomfortable increases in their borrowing costs after a long epoch of rock-bottom interest rates papered over cracks in their business models.

Robert Gibbins’ Autonomy Capital, the macro hedge fund hit by a sharp sell-off in emerging markets, has offered investors the opportunity to withdraw their money and be paid back some losses after falling nearly 30 per cent so far this year.

Struggling fund manager Abrdn plans to return up to £500mn to shareholders in an attempt to head off a revolt after its humiliating relegation from the FTSE 100 earlier this month. The payout, which could be in the form of a special dividend, will come from selling down stakes in other companies.

Markets suffered yet another fainting fit this week after a fresh inflation surprise, writes markets editor Katie Martin. The long-awaited pivot to a friendlier Federal Reserve policy looks increasingly remote, and another reckoning beckons for investors.

After more than three years’ wait, the Financial Conduct Authority has raised hopes that a payout of more than £300mn could be awarded to investors in the collapsed £3.7bn Neil Woodford fund, ahead of a court case which is expected to start in December.

There’s a new sheriff in town at Jupiter Asset Management. Incoming chief executive Matthew Beesley is preparing for a restructuring to slash costs and revive growth following years of investor outflows at the £48.8bn asset manager.

Wall Street investors are on edge about the $15bn debt sale planned to fund the leveraged buyout of software maker Citrix. Low demand for bonds and loans is flashing a warning as inflation risks rock capital markets.

Fundsmith founder Terry Smith called time on his £319.4mn emerging markets strategy, saying that performance had “fallen below our expectations”. Lex digs into the pain for emerging economies that convinced one of the UK’s best-known stock pickers that he couldn’t win.

Ethereum completed an extraordinary software update this week. The so-called “Merge” was described as changing the foundations of the $200bn cryptocurrency ether and a vast share of Web3. Hedge funds betting on the shift created “one of the most crowded trades in crypto’s [short] history”.

Elsewhere in crypto, FTX founder Sam Bankman-Fried paid about $45mn for a 30 per cent stake in SkyBridge Capital, the vast majority of which was immediately invested in cryptocurrencies as part of a deal to shore up confidence in Anthony Scaramucci’s fund business.

And finally

If you only watch one thing this week, make sure it’s Skandal!, a Netflix documentary charting the incredible story of how my FT colleague Dan McCrum took down Germany’s huge and fraudulent payment processor Wirecard. Everything is in there: the lying, the spying, the dirty tricks, the legal attacks, the disbelief across the entire German establishment, the gormless auditors and the comically incompetent regulators in Frankfurt.

FT Live event: Future of Asset Management North America

Hosted by the Financial Times, in collaboration with Ignites and FundFire, Future of Asset Management North America takes place on September 28-29 at the Westin Times Square and bring together senior leaders from North America’s leading asset and wealth management firms including, Oaktree Capital Management, Russell Investments, JPMorgan Asset Management and many more. Connect and build relationships with some of the biggest names in the industry and discover the strategies that will differentiate the asset managers of tomorrow. Register now.