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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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Coinbase: digital marketing | Financial Times

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Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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This thread is closed to comments due to a history of posts on this subject that breach FT user guidelines



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US stocks make gains on Fed message of patience over monetary policy

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Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.



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Fed needs to ignore ‘taper tantrums’ and let longer rates rise

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The writer is chief executive officer and chief investment officer of Richard Bernstein Advisors 

The Ferber Method, a sleep training technique, teaches babies to self-soothe and fall asleep on their own. It’s as much a training technique for new parents to ignore their baby’s crying as it is for the child to learn to cope by themself. 

The US Federal Reserve should consider Ferberising bond investors and ignore future “taper tantrums” like the market disruption that occurred when the central bank signalled tighter monetary policy in 2013. The long-term health and competitiveness of the US economy may depend on bond investors’ self-soothing ability to cope with reality.

The slope of the yield curve is a simple model of the profitability of lending. Banks pay short-term rates on deposits and other sources of funds and receive longer-term rates by issuing mortgages, corporate loans, and other lending agreements.

A steeper curve, therefore, is a simple measure of better bank profit margins, and has in past cycles spurred greater willingness to lend. Historically, the Fed’s Survey of Senior Bank Lending Officers shows banks have been more willing to make loans to the real economy when the yield curve has been steeper.

A chart showing how banks have been more willing to lend with a steep yield curve. As the slope on the US treasuries  10-year-less-2-year yield curve has steepened, so the net percentage of banks reporting tighter lending standards has fallen

With that simple model of bank profits in mind, textbooks highlight the Fed’s control of short-term interest rates as a tool to control lending. The Fed reduces banks’ cost of funding and stimulates lending when it lowers interest rates. But it increases funding rates and curtails lending when it raises short-term rates. Coupling lower short-term rates with a steeper yield curve can be a powerful fillip to bank lending. 

However, policies in this cycle have been unique. As US short-term interest rates are near zero, the Fed has attempted to further stimulate the economy by buying longer-dated bonds and lowering long-term interest rates. Those actions have indeed lowered long-term borrowing costs in the economy, but banks’ willingness to lend has been constrained because lending margins have been narrow and risk premiums small.

Banks in past cycles might have been willing to lend despite a relatively flat yield curve because they could enhance narrow lending margins by using leverage. However, regulations after the financial crisis now limit their ability to use leverage.

This policy and regulatory mix has fuelled some of the growth in private lending. Private lenders are not subject to regulated leverage constraints and can accordingly lend profitably despite a flat curve. The growth in private lending effectively reflects an unintended disintermediation of the traditional banking system. This has meant liquidity destined for the real economy has largely been trapped in the financial economy.

The yield curve has started to steepen, and the Fed should freely allow long-term interest rates to increase for monetary policies to benefit the real economy more fully. Allowing long-term rates to increase would not only begin to restrain financial speculation as risk-free rates rise, but could simultaneously foster bank lending to the real economy. 

Thus, the need for the Fed to Ferberise bond investors. Banks’ willingness to lend is starting to improve as the curve begins to steepen, but some economists are suggesting the central bank should continue its current strategy of lower long-term interest rates because of the potential for a disruptive “taper tantrum” by bond investors. The Fed needs to ignore investors’ tantrums and allow them to self-soothe.

The investment implications of the Fed allowing longer-term interest rates to rise seem clear. Much of the speculation within the US markets is in assets such as venture capital, special purpose acquisition vehicles, technology stocks and cryptocurrencies. These are “long-duration” investments that have longer-time horizons factored into their valuations. They underperform when longer-term rates rise because investors demand higher returns over time. Capital would be likely to be redistributed to more tangible productive assets.

Investors and policymakers should be concerned that monetary policy is fuelling speculation rather than supporting the lending facilities needed to rebuild the US’s capital stock and keep the country’s economy competitive.

Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves. Short-term financial market volatility might cause some sleepless nights, but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.



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