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Invesco’s UK investment chief targets performance turnround

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Stephanie Butcher faces an unenviable task. Her challenge after a promotion in January to Invesco’s UK chief investment officer is to restore the once highly regarded asset manager’s reputation following a bruising few years.

Questions about Invesco’s future are swirling after the Trian hedge fund led by Nelson Peltz recently revealed that it had established a near 10 per cent stake, but Ms Butcher declines to speculate on the activist investor’s intentions.

“Improving the investment performance of the UK fund range is my priority,” says Ms Butcher.

Improvements are much needed. Invesco has led the “Spot the Dog” list of underperforming UK investment funds, compiled by wealth manager Tilney Bestinvest, for the past two years. Thirteen of Invesco’s funds with combined assets of £11.4bn were named and shamed for consistent underperformance in Tilney’s update published in September.

Invesco’s problems started to accelerate in October 2013, when star fund manager Neil Woodford announced he was leaving Invesco to set up his own ill-starred investment company. Since then, investors have pulled £31.5bn from Invesco’s UK domiciled funds, according to Morningstar, the data provider.

Mark Barnett, who had worked with Mr Woodford for years, took over the management of his popular income-focused funds, but endured years of underperformance. He came under even more scrutiny as Mr Woodford’s company collapsed. The former teammates owned significant overlapping holdings in unlisted and illiquid assets, which suffered significant valuation writedowns.

Mr Barnett left Invesco by mutual agreement in May.

Ms Butcher is reluctant to talk about Mr Barnett’s exit, but she says: “There have been a lot of changes where we believed that funds could be better run by different individuals or by other parts of Invesco. The UK funds [previously run by Mr Barnett] that have been taken over by new managers have performed very well since then.”

Asked if Mr Barnett should have acted sooner to offload the unlisted holdings, Ms Butcher diplomatically avoids criticism of her former colleague.

“These were funds that had held illiquid assets for a long time without any problems. But the tolerance for illiquidity among both clients and regulators shifted dramatically. When it became clear that clients’ tolerance for illiquidity had shifted dramatically, then we dealt with it,” she says.

“Clients have very different requirements compared with 10 years ago and their requirements will be different again in 10 years’ time. Businesses need to adapt to that,” she says.

Invesco has traditionally had a value focus in its equity investment strategies, a style that has underperformed due in part to investors’ insatiable appetite for technology stocks with strong growth prospects.

Ms Butcher believes it is more accurate to describe Invesco as “valuation driven” rather than a value manager.

“It is an important distinction. There is no sector that we will not invest in. We are quite happy to own technology companies where we understand the valuation. We are probably more value tilted than we have been in the past because the spread in company valuations is currently so extreme,” she says.

Other adaptations are under way across the UK fund range.

Invesco’s 2019 value assessment report concluded that its £6.7bn Global Targeted Return (GTR) fund was one of three from a range of 55 funds that had failed to deliver on its performance objectives. The veteran David Jubb stepped down in October from the team managing the GTR fund which has delivered miserly net annualised returns of 0.08 per cent net of fees over five years to the end of September.

“The GTR team has been frustrated with performance but the strategy was one of the few which successfully protected clients’ money in the heat of the coronavirus crisis. We don’t think there is a problem with GTR’s underlying investment philosophy and will continue to back teams when they are going through tougher periods of performance,” says the 48-year-old.

She emphasises that Invesco has taken multiple steps to improve its investment performance with the help of frank conversations with clients.

“Our clients have been very honest and direct. We have learned a lot through these interactions. We have become a better business as a result,” she says.

Initiatives to drive performance improvements include peer reviews, where a senior portfolio manager from one Invesco team is invited to critique the strategy of another.

“The peer reviews provide a genuine challenge to portfolio managers. A good fund manager wants their views to be challenged,” she says.

One result of this is an increase in idiosyncratic risk in portfolios, which indicates that portfolio managers are now more focused on company specific drivers of return. 

In common with every other big asset manager, Invesco is working on incorporating environmental, social and governance metrics into its investment processes. It has developed an internal rating system to identify which stocks it believes have the most room for improvement in terms of ESG issues, relative to what is already priced in.

Still Ms Butchers, who is not a fan of exclusions or divestment, says ESG ratings “can only be a part of the discussion” in any investment assessment, arguing in-person meetings with a company provide a much better sense of how it views ESG issues.

“ESG data are not perfect. It is difficult to put a number next to the culture of a company. The real value is sharing that information with companies and working with them to make improvements. We are ESG ratings-aware but not ratings driven,” she says.

More efforts are also being made to improve the gender, ethnicity and social diversity of Invesco’s UK’s investment teams. “We are now seeing a much more diverse mix of applicants. We will be a better business by having more diversity of all types,” says the mother of two children, three cats and 10 unproductive chickens.

Overseeing these changes while working from home has required careful co-ordination with all of the UK portfolio management teams and Invesco’s top leadership, which is based in Atlanta.

The Henley-based UK operation historically had “a tendency towards being quite siloed” from the rest of Invesco, but Ms Butcher says that better integration is under way.

“There are benefits that can be gained from leveraging the wider Invesco platform and developing stronger partnerships within the business,” she says, adding that her entire team remains committed to Invesco’s core principles.

“We are a long-term, valuation driven active manager and we are absolutely focused on doing what is right for our clients. That will not change,” she says.

Stephanie Butcher’s CV

Born November 1971 Amersham

Education

1990-1993 MA History, University of Cambridge

Total pay not disclosed

Career

1993-1997 Graduate trainee and then US fund manager, Lazard AM

1997-2003 European equity fund manager, Aberdeen AM

2003-2020 European equity fund manager, Invesco

January 2020-present Chief Investment Officer, Henley Investment Centre, and European equity fund manager

Invesco

Founded 1978 (creation of US company)

Assets $1.2tn

Employees 8,702

Headquarters Atlanta, US

Ownership NYSE-listed



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US regulators launch crackdown on Chinese listings

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US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.



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Wall Street stocks climb as traders look past weak growth data

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Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.



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Man Group posts tenfold gain in performance fees

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Man Group PLC updates

Man Group, the world’s largest listed hedge fund manager, reported first-half performance fees 10 times higher than a year ago, in the latest sign of the industry’s robust rebound from the coronavirus pandemic.

Strong commodity and equity markets helped take performance fees at the London-based company to $284m in the six months to June, up from $29m a year before when March’s huge market falls hit many fund returns, and the highest level since at least 2015. Performance fee profits were 50 per cent above broker consensus forecasts.

Man also posted $600m of net client inflows in the three months to June, its fourth consecutive quarter of inflows, although the figure was lower than analysts had expected. However, $6bn of investment gains in the second quarter helped lift assets under management to a record high of $135.3bn.

Column chart of Half-yearly performance fees ($) showing Man Group cashes in on market rebound

Man’s results highlight how strongly the $4tn hedge fund industry has bounced back after a turbulent 18 months for markets, including a huge sell-off last spring, as well as sharp market rotations and retail investor-driven rallies in meme stocks that some funds were betting against.

Last year, hedge funds, which have long been criticised for mediocre returns and high fees, made 11.8 per cent on average, according to data group HFR, their best calendar year of gains since 2009 in the wake of the financial crisis.

Investors have taken notice. After three years of net outflows, the industry has posted $18.4bn of inflows in the first half of this year.

Chief financial officer Mark Jones said the hedge fund industry was now benefiting from a tailwind after strong gains last year. “You saw hedge funds deliver exactly what clients wanted,” he told the Financial Times.

“Clients need new sources of return,” he added. They “are trying to reduce their bond exposure, and most have as much equity exposure as they can stomach”.

This year Man has made strong gains at its computer-driven unit Man AHL, named after 1980s founders Mike Adam, David Harding and Martin Lueck, which tracks trends and other patterns in markets.

Its $4.6bn AHL Evolution fund, which bets on trends in close to 800 niche markets, has gained 10.2 per cent so far this year and contributed $129m of the performance fees in the first half. The fund is shut to new money but Jones said that late last year it opened briefly to new investment, raising $1bn in a week.

Man’s first-half profits before tax came in at $323m, well above analysts’ forecasts. The company also said it would buy back a further $100m of shares in addition to the $100m announced last September. Broker Shore Capital said the company had posted “blowout” figures.

Man’s shares rose 2.4 per cent to 196 pence, their highest level in three years.

Last month, Man announced that chief investment officer and industry veteran Sandy Rattray would leave the company. Meanwhile, Jones is set to step down from the board and take on the role of deputy chief executive, overseeing the computer-driven AHL and Numeric units.

laurence.fletcher@ft.com



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