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Fund managers speak out after crypto funds crackdown

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Managers of cryptocurrency investment products have hit back at the UK regulator’s warning to consumers against putting money into the high-risk investments.

The UK’s Financial Conduct Authority has banned the sale of cryptocurrency-related derivatives, including exchange traded notes, to retail investors. It also renewed last week its warning that anyone investing in crypto assets “should be prepared to lose all their money”.

However, industry figures say the ban and warning are short-sighted because they are likely to increase risks for retail investors and run against wider market demand, with institutional investors increasing investment in cryptocurrencies.

Hector McNeil, co-founder of HANetf, which distributes Bitcoin Exchange Traded Crypto, an exchange traded commodity, said: “The FCA’s decision has basically pushed retail investors from a regulated product on a regulated exchange to the wild west underlying crypto markets.”

Mr McNeil said the regulator was moving UK investors from “a regulated environment on to unregulated markets and market infrastructure where abuse, fraud and errors will be significantly increased”.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Townsend Lansing, head of product at Coinshares, which manages the XBT range of ETNs, agreed, saying: “The FCA’s initiative will do little to hinder digital asset adoption overall, but represents significant disadvantage for UK investors.”

He added: “We believe that although digital assets are indeed innovative, wrapping them into exchange traded products is a fairly normal extension of the industry’s unique ability to offer exchange traded access to a diverse set of underlyings.”

Adrian Whelan, global head of regulatory intelligence for investor services at Brown Brothers Harriman, said: “There is an amount of cognitive dissonance in the regulatory space on crypto at the moment.

“On the one hand, regulators are moving quickly to implement a solid foundation of laws and regulation for crypto investing, while at the same time they have taken enforcement actions and banned some corners of the crypto market.”

The UK ban comes into place after rapid growth in cryptocurrency investment products over the past year.

European mutual funds, ETNs, ETCs and ETPs investing in cryptocurrencies saw assets under management increase fivefold in 2020, rising from €470m to €2.3bn over the year, Morningstar data show.

Companies offering cryptocurrency products predict that growth will continue despite this volatility.

“I think [the sector] has turned a corner,” said Mr McNeil.

“Institutional use will increase [and] this will also bring better price discovery and stability, and ultimately reduce volatility. However, that will take time . . . and all product providers need to work hard on investor education,” he said.

UK fund house Ruffer recently revealed that it had invested in bitcoin through an investment trust and its multi-strategies funds.

Ruffer said it viewed bitcoin as “a small but potent insurance policy” and its exposure was “primarily a defensive move”.

“We believe bitcoin is poised for a wave of mainstream institutional adoption,” the company added.

Christopher Bendiksen, head of research at Coinshares, said the rise of cryptocurrencies represented “the emergence of a new asset”.

“For any asset to rise from zero to a multitrillion-dollar total valuation — all via the noisy action of the free market — it would simply be impossible to avoid some volatility along the way,” Mr Bendiksen said.

However, Finance Watch, a Brussels-based consumer group, backed the FCA’s action.

The UK regulator’s initiative was “a drastic but justifiable step to protect the general public from harm as long as the regulatory and supervisory frameworks for issuing, selling and trading these instruments is still work in progress”, according to Christian Stiefmüller, senior research and advocacy adviser at Finance Watch.

“While the differences between a classic cryptocurrency, such as bitcoin, Facebook’s Libra/Diem, and an algorithmic stablecoin may be perfectly obvious to sophisticated institutional investors, we should not blithely assume that this is the case for a majority of retail customers,” he said.

The returns of cryptocurrency products with longer records have been volatile over recent years.

Tobam’s Bitcoin Fund has risen 270.7 per cent over the past year, while its annualised return over the past three years is 42.2 per cent, according to Morningstar data to the end of January 18.

The XBT Provider Bitcoin Tracker Euro ETN has generated a return of 301.6 per cent over the past year, although its annualised return is 47.4 per cent over three years. The firm’s Ether Tracker Euro ETN has posted a 750.7 per cent return over one year and annualised performance of 10.4 per cent over three years to January 19.

Mr Stiefmüller said: “With memories of earlier bubbles in 2000 and 2008 receding, many retail investors may also be driven, once again, by a fear of missing out.”

“In the absence of common terminology, standardised disclosures and minimum safeguards for investors, even asset managers and financial advisers who take their duty of care towards these investors very seriously remain exposed, both legally and reputationally,” he added.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

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Oil price jumps above $70 after attacks aimed at Saudi oil facilities

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Oil prices jumped above $70 a barrel for the first time in 14 months after Saudi Arabia, the world’s top oil exporter, said its energy facilities had been attacked on Sunday, targeting “the security and stability” of global supplies.

A drone attack from the sea on a petroleum storage tank at Ras Tanura, one of the largest oil shipping ports in the world, took place on Sunday morning, the kingdom said.

In the evening, shrapnel from a ballistic missile fell in Dhahran, where state oil company Saudi Aramco has its headquarters and near where thousands of employees and their families live.

While Saudi Arabia’s ministry of energy said the attacks “did not result in any injury or loss of life or property”, and a person familiar with the matter said no production had been affected, the attacks have still unsettled oil markets that have rebounded strongly in recent months.

Brent crude, the international benchmark, rose 2 per cent to a high of $71.16 a barrel while West Texas Intermediate, the US benchmark, rose by a similar amount to a high of $67.86 a barrel.

Yemen’s Iran-allied Houthi fighters claimed responsibility for the attacks and said they had also focused on military targets in the Saudi cities of Dammam, Asir and Jazan.

A Houthi military spokesperson said the group had fired 14 bomb-laden drones and eight ballistic missiles in a “wide operation in the heart of Saudi Arabia”.

Amrita Sen at Energy Aspects emphasised that while a direct hit on oil supplies appeared to have been avoided, the threat to the market would still be taken seriously by oil traders.

“The oil price was already on a strong footing after Saudi Arabia and Opec’s decision last week to keep restricting production,” she said.

Brent crude, the international oil benchmark, has risen close to $70 a barrel since the cartel and allies outside the group, including Russia, decided not to unleash a flood of crude on to the market.

Amid uncertainty about the oil market outlook as the coronavirus crisis continues to have an impact on crude demand, the group decided against raising production by 1.5m barrels a day from April.

Given the supply curbs, while the kingdom has the extra production capacity to tap into, “geopolitical threats to supply will add a premium to the price”, Sen added.

The kingdom’s state media outlet said earlier in the day that the Saudi-led military coalition confronting the Houthis had intercepted missiles and drones aimed at “civilian targets” without indicating their location.

The Eastern Province, where Dhahran is located, is where much of Saudi Aramco’s oil facilities are located. The attack is the most severe since September 2019.

At that time the kingdom was rocked by missile and drone fire that hit an important processing facility and two oilfields, temporarily shutting off more than half of the country’s crude output.

The Houthis have ramped up assaults on Saudi Arabia through airborne attacks and explosive-laden boats and mines in the Red Sea, laying bare the vulnerability of the country’s energy infrastructure despite the kingdom’s production prowess and its hold over the oil market.

“The frequency of these attacks is rising, even if the impact on energy infrastructure appears limited,” said Bill Farren-Price, a director at research company Enverus. “We know the capacity to cause serious damage exists, so this will boost the risk premium for oil.”



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Rio Tinto set to start negotiations over Mongolian mine

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Rio Tinto is set to start face-to-face negotiations with the government of Mongolia as its seeks to complete the $6.75bn expansion of a huge copper project in the Gobi desert. 

The Anglo-Australian group is sending a team of senior executives to the capital Ulaanbaatar to try and hammer out a new financing agreement so that the development timeline can be maintained and underground caving operations can start later this year.

The discussions will focus on a number of issues including tax, a new power agreement and benefit sharing, according to people with knowledge of the situation.

Some government officials want Rio to pay more than $300m of withholding taxes on income it has received from Oyu Tolgoi LLC, the Mongolian holding company that owns the mine. 

Rio receives a management service fee for running Oyu Tolgoi’s existing open pit and the underground project as well as interest on money it has lent the government to fund its share of the development costs.

However, the officials say it is “very difficult, if not impossible” to engage constructively on the issue because the payments are the subject of arbitration in London.

For its part, Rio believes the issue of withholding taxes is dealt with in the separate investment and shareholder agreements that cover its operations in the country.

The underground expansion of Oyu Tolgoi ranks as Rio’s most important growth project. At peak production it will be one of the world’s biggest copper mines, producing almost 500,000 tonnes a year.

Although Rio runs the existing operations and is in charge of the underground expansion project it does not have a direct stake in the mine.

It’s exposure comes through a 51 per cent stake in Turquoise Hill Resources, a Toronto-listed company. TRQ in turns owns 66 per cent of Oyu Tolgoi LLC, with the rest controlled by the government of Mongolia. 

The project has been beset by difficulties and is already two years late and $1.5bn over budget. The government said earlier this year that if the expansion is not economically beneficial to the country it would be necessary to “review and evaluate” whether it can proceed.

To that end the ruling Mongolian People’s party and its new prime minister Luvsannamsrain Oyun-Erdene are trying to replace the Underground Development Plan with an improved agreement.

Signed in 2015, this sets out the fees that Rio receives for managing the project as well as the interest rates on the cash Mongolia has borrowed to finance its share of construction costs.

However, it was never approved by Mongolia’s parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits.

Rio, which recently appointed a new chief executive, has told the government it is prepared to “explore” a reduction of its project management fees and loan interest rates as well as discuss tax.

However, analysts are sceptical that the two sides will be able to put a new agreement in place by June when a decision on whether to start caving operations must be taken if Oyu Tolgoi is to meet a new target for first production in October 2022.

Rio is also at loggerheads with TRQ on how to fund the cost overruns at Oyu Tolgoi. Last week, TRQ’s chief executive resigned after Rio said it planned to vote against his re-election at its annual shareholders’ meeting.

In a statement, Rio said it was committed to working with TRQ and the government of Mongolia to enable the successful delivery of the Oyu Tolgoi Project

“Aligning and co-ordinating our joint efforts to resolve the concerns of the Government . . . going forward is of the highest priority,” it said.



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Value investor John Rogers sees an end to Big Tech’s stock market dominance

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The veteran value investor John Rogers predicted the US is headed for a repeat of the “roaring twenties” a century ago that will finally encourage investors to dump tech stocks in favour of companies more sensitive to the economy.

The founder of Ariel Investments told the Financial Times in an interview that value investing “dinosaurs” like him stood to win as higher economic growth and rising interest rates took the air out of some of the hottest stocks of recent years.

Rogers, who has spent a near four-decade career focused on buying under-appreciated stocks, said the frenzied buying of special purpose acquisition companies, or Spacs, signalled frothiness in parts of the market, even while a coming economic boom underpinned other share prices.

“This will be a sustainable recovery. I think there’s going to be kind of a roaring twenties again,” Rogers said, adding that the strength of the economic recovery would surprise people and challenge the Federal Reserve’s ultra-dovish monetary policy.

The US central bank is “overly optimistic that they can keep inflation under control”, he said, and higher bond market interest rates would reduce the value of future earnings for highly popular growth stocks such as tech companies and for the kinds of speculative companies coming to market in initial public offerings or via deals with Spacs.

“Spacs are a sign that growth stocks are topping. A signal that the market is frothy,” said Rogers, a self-styled contrarian and famed for his Patient Investor newsletter for clients that debuted in 1983.

Value investing is based on identifying cheap companies that are trading below their true worth, an approach long espoused by Warren Buffett. Value stocks and those sensitive to the economic cycle boomed after the internet bubble burst in 2000, but the investment strategy has been well beaten over the past decade by fast-growing stocks, led by US tech giants. 

“We’ve been looking like the dinosaurs for so long,” said Rogers. “We’ve been waiting for that booming economic recovery since 2009.”

Proponents of value investing believe that the combination of expensive growth stock valuations and a robust recovery from the pandemic will cause a significant switch between the two investing approaches.

Higher bond market interest rates reduce the relative appeal of owning growth stocks based on their future earnings power.

When 10-year bond yields rise, “growth stocks look way, way too expensive versus value,” said Rogers. “Value stocks are going to come out of the recovery very strong, they’re going to have a tailwind from an earnings perspective. Their earnings are going to be here and now, not 20, 30 years down the road.”

The Russell 1000 Value index outperformed the equivalent growth index by 6 percentage points in February, rising 5.8 per cent versus a drop of 0.1 per cent for the growth index. That was the biggest outperformance for value since March 2001, according to analysts at Bank of America.

“Although rising rates triggered the rotation, we see a host of other reasons to prefer value over growth,” the analysts wrote last week, “including the profit cycle, valuation, and positioning that can drive further outperformance.”

Rogers said he expected higher overall stock market volatility from rising interest rates this year but value should reward investors as it did “20 years ago once the internet bubble burst”. Ariel is bullish on “fee generating financials” and Rogers said preferred names included KKR, Lazard and Janus Henderson, while it was also bullish on traditional media, including CBS Viacom and Nielsen.

Chicago-based Ariel is one of the few large black-owned investment companies in the US, with $15bn of assets under management. It manages the oldest US mid-cap value fund, dating from 1986. 



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