The global economy and the financial industry is still reeling from the bankruptcy of Lehman Brothers six years ago. However for Baring Asset Management there were some positive outcomes.
At the beginning of 2007, Barings owned both domestic and overseas equities for a total allocation of 60%, which was drastically reduced at the end of the second quarter of 2008 to about 20%.
Marino Valensise, Baring Asset Management
Marino Valensise, head of multi asset group at Barings, told Markets Media: “I think this was the right thing to do as when Lehman happened in September and October 2008 we were in the right place at the right time and had the chance to buy when things were cheap. We began buying in December 2008, when everybody was telling us that we were crazy, and by March 2009 when the markets began to rally we were already at 40% to 45%.”
Valensise said that the firm remained strong during the financial crisis as the systems that signalled the move out of equities before Lehman collapsed, indicated when Barings should get back in.
“We have an analytical framework, but we are not quant managers,” he Valensise. “The system that we developed in-house, around 2004 or 2005, measures equity risk premia in various markets and gives a starting point for our discussions.”
Barings has been through many ups and downs since it was founded in London before America declared independence, in 1762, as a firm of merchants and merchant bankers. In 1803 Barings undertook a transaction of “the utmost magnitude and importance” in financing the Louisiana Purchase from the French, which doubled the size of the United States. So it seems appropriate that Barings is now part of the MassMutual Financial Group which acquired the global investment management activities of Barings nearly a decade ago.
Barings’ UK asset management business was established in 1958 and in the US in the late 1970s. These activities were combined into a single division, Baring Asset Management, in 1989.
In 2005 the US financial services group acquired Baring Asset Management’s global investment activities from ING Group. The Dutch bank had famously rescued the Barings business, which then included an investment bank, in 1995 for £1 plus a capital investment of £835m after rogue trader Nick Leeson racked up £800m in trading losses. ING merged the investment bank with its own operations but had kept the Baring name in asset management.
Barings now operates in 11 countries with professionals from 40 different nations, including 124 investment professionals, and €37.3bn in assets under management. At the time of the MassMutual acquisition Barings managed $32bn.
We have an analytical framework, but we are not quant managers - Valensise
Valensise said Barings has built its business on two main pillars. “The first is multi-asset investing which is all about getting the top decisions right,” he added. “The second pillar is what we would define as security selection in an efficient market and specialist equity which includes emerging markets and small caps. We are not trying to be everything to everyone.”
Management Changes
At the time of the financial crisis in 2008 Valensise was chief investment officer of Barings, a role he had taken on the previous year. Valensise had joined Barings in 1999 as head of credit. Prior to Barings, the Italian spent five years with Commerz International Capital Management in Frankfurt where he was head of fixed income portfolio management.
At Barings Valensise remained CIO until September 16 this year when Ken Lambden, formerly global head of equities at Schroders, took over the position. Lambden is based in London and reports to chairman and chief executive David Brennan.
Brennan said in a statement at the time: “We are pleased to welcome Ken to the firm as we continue to strengthen and develop our investment capabilities. It is a natural fit for Marino to assume leadership of our multi-asset franchise ensuring continuity of investment approach and insight across the portfolios.”
The reorganisation came after Percival Stanion, formerly head of the multi asset group, left Barings, together with senior colleagues Andrew Cole and Shaniel Ramjee, to join rival Pictet Asset Management. Valensise moved to a significant investment role as head of multi asset group, reporting to Lambden, and became lead manager for the Baring Dynamic Asset Allocation fund which used to be managed by Stanion. At the same time Valensise became chairmanship of the strategic policy group.
“Stanion’s departure has not changed our process,” Valensise said. “Although I was not head of multi-asset, I was part of the strategic policy group which decides on asset allocation so for me this product and people were a known quantity.”
At the end of August, FT Adviser reported that assets in Barings’ retail multi-asset fund had dropped from £1.03bn to £672m citing data from FE Analytics.
“The UK product, where Stanion was the main fund manager, was where we had to do a lot of hand-holding with clients and consultants. We have gone out to tell our story which I believe is one of continuity and consistency,” Valensise stated.
He added that the Asian and the US products are untouched because their managers remain in place.
"In multi-asset, after the recent changes we will have to consolidate what we have got and from 2015 start addressing the geographical diversification strategy in Asia and in the US,” he said.
Barings would also like to consolidate its presence in emerging markets. “We have a strong Asian heritage, with an important office in Hong Kong, so everything which rotates around Asia and China is a priority,” Valensise added.
Emerging Markets
In emerging markets Valensise said investors need to stop thinking about a pool of countries that are uniformly rich in land, labor and resources but instead, think of entering a new productivity phase where only some countries will emerge as winners.
“I think there will be more differentiation within emerging markets, because what Brazil is doing, and China, and India, and Indonesia is completely different,” he said. “These countries will have policies which are going to be so distinct that this will generate a lot of dispersion of returns from a country-by-country perspective.”
Hayes Miller, Baring Asset Management
The MSCI Emerging Markets Index fell 3.5% during the third quarter of this year in US dollar terms, although gains are 2.4% for the year-to-date, according to Lazard Asset Management’s October outlook on emerging markets. The report said that despite market volatility and geopolitical tensions, fund flows into the global emerging markets have been positive overall as institutional inflows have made up for retail outflows.
“From an institutional point of view, the appetite for emerging market has not gone away and has remained throughout the period of under-performance. I think the retail space has been a bit disappointing where investors have been quite risk-averse in the last two to three years and we might see a change there,” Valensise added.
In June, 55% of UK financial advisers in the quarterly Baring Asset Management Investment Barometer believed their clients should increase their exposure to emerging market equities, the highest sentiment towards the emerging markets asset class in the previous year.
Hayes Miller, head of asset allocation for Baring Asset Management in North America, told Markets Media that Barings’ model, which includes 10 factors to measure multiple momentum and long-term trends, shows that emerging markets have a dramatic under- or over-performance versus developed markets in four to seven year cycles. “We are just finishing a four to five-year period that favoured developed markets but there is not yet any momentum to emerging markets,” he added.
Miller said that in emerging markets Barings has moved from underweight to neutral and it will take some time to change that position. “Four of five good institutions have forecasting models for asset classes over the next seven to 10 years and everybody, including us, expects developed markets to provide the real return. So it is hard to see when investors will return to emerging markets and there is scepticism on what is the right entry point,’ he explained.
Barings launched a frontier markets fund in 2013 run by senior investment manager Michael Levy.
"Two years ago we recruited one of the few managers who was managing frontiers money five to six years ago. We feel we are well-equipped and look forward to replicating the success of the emerging markets,” added Valensise.
As in emerging markets, Valensise explained that investors should not think of frontier markets as a homogeneous pool of countries. Barings invested in North African countries, down to the Gulf and Pakistan and in listed equities in sectors such as extraction, telecoms, banks and supermarkets. “There is a great consumer story which is going to go on and on for a long time,” he added.
Valensise said the frontier markets fund is still small but the concept excites both institutional and retail investors. Another product that is exciting investors is the equity-thematic agriculture fund that Barings launched about seven years ago. “Obviously agriculture products have not been in favour in the last few years, but the fund has done well and it is personally one of my favourite asset classes,” he added.
Barings has been investing in European small-cap equities for more than 30 years and the Europe Select Trust has above £1bn in assets under management.
“We also have an international small cap product in the States for institutional investors which is a younger and smaller product but performed very well and we look forward to proposing it to clients and consultants,” Valensise added. “This has been a market niche where we have captured more than our fair share of flows.”
U.S. Market
Miller said the US market is less familiar with multi-asset strategies than the UK.
“Global tactical asset allocation has been split into two groups: all-weather funds including risk parity which build portfolios that are robust to multiple outcomes and weather prediction funds where investors position themselves for the next year,” Miller added. “There is more scepticism towards weather prediction models but risk parity funds are built on leverage, and as bonds are approaching the end of a 30-year bull market, we should have a level playing field.”
Investors looking at hedge funds ought to be looking at global tactical asset allocation - Miller
In the US Barings does not run hedge funds so misses out on endowment and foundation clients.
However in September Calpers, the largest US public pension fund, announced it would eliminate its Absolute Return Strategies program of 24 hedge funds and six hedge fund-of-funds valued at approximately $4bn. Ted Eliopoulos, Calpers interim chief investment officer, said in a statement: “Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at Calpers’ size, the ARS program is no longer warranted.”
Miller said Calpers’ move has focused attention on fees for investors and there is a slow shift from expensive alternatives to more liquid funds. “Investors looking at hedge funds ought to be looking at global tactical asset allocation which achieves the same beta but at much less expense,” he argued.
Investors are more likely to use a multi-strategy to protect themselves against a market downturn, which currently looks unlikely. “We went down to 20% in equities in 2008 which propels the marketing story for the next five years,” Miller said. “The US business launched in June 2010 and it has been all blue skies for equities so we have yet to go through a full cycle.”
Asset Allocation
In the UK the multi-asset strategy has just over 50% in equities and there are countries it favors. “We have a significant allocation, in the area of 10%, to Japan and are strong believers that the music has changed in Japan,” Valensise added.
In addition to US equities, the firm holds UK equities which are seen as an efficient way of taking global risk as FTSE 100 companies have the vast majority of their earnings generated overseas. In emerging markets the two main exposures are to Taiwan and Korea who are more integrated into global trade.
“The allocation that really loses out is Europe where we have had strong feelings for quite a long time. Last year was a missed opportunity because the market did extremely well but we have not capitulated,” Valensise said. “We remain with our extremely light exposure which has been confirmed to be right in the last one or two months as Europe is sliding back into uncertainty.”
Valensise added that if the Euro weakness continues, there will be a time when it makes sense to buy a European portfolio of exporters.
Both Hayes and Valensise are nervous about the corporate bond market. Valensise said Barings is extremely light in bonds. The firm holds mainly US government bonds and some UK gilts and very little investment-grade paper. In early summer Barings completely sold out of its very large position in high-yield corporate bonds.
Miller said investors are currently receiving a nice premium for the risk they are taking in the high-yield market but that could turn at any time. “There will be a rush for the exit creating an illiquidity problem and investors could lose their extra 400 basis points in one day,” he added. “We invest in high-yield through ETFs and out of the 124 bonds in the index only seven to eight trade on a daily basis so issuers will have to raise cash to pay out redemptions.”
Valensise said the firm still favors equities. He said: “We still think equities are the asset class of choice as there is a great US story from a macro perspective equity risk premia are not expensive. So there is no reason to panic or slash that allocation significantly.”
Featured image via alarus/Dollar Photo Club
