Rees-Mogg’s Somerset Capital prepares for second act

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Three years after Somerset Capital Management rejected a bid of up to £90mn it is in sale talks again at a mooted valuation a fraction of what Artemis Investment Management had offered.

The fall illustrates the challenges facing small fund managers, which are grappling with rising costs, and, for emerging markets specialist Somerset, an investor sell-off that has contributed to its assets under management halving from a $10bn peak in 2018.

While many boutique fund managers running a few billion dollars operate largely under the radar, Somerset’s high-profile political connections mean it enjoys no such luxury.

The firm was started 15 years ago by the Eurosceptic business secretary, Jacob Rees-Mogg; Dominic Johnson, a former vice chair of the Conservative party; and fund manager Edward Robertson. The three had worked together at Lloyd George Management, an emerging markets fund manager in Hong Kong and London.

Somerset is now at a critical juncture. Rees-Mogg left in 2019 and this week Johnson told clients he was stepping down as chief executive, to be replaced by chief operating officer Robert Diggle. The change means around half of the equity in the business will be held by retired partners who are not involved in the day-to-day running of the firm, leaving Somerset grappling with how to incentivise the next generation.

“It’s been a terrible time for emerging markets and all fund managers in this space have suffered,” said Crispin Odey, founder of Odey Asset Management. “Somerset’s unique asset has been Dominic at the helm.”

The firm is now in discussions with potential buyers, including emerging markets boutique Emso Asset Management. A management buyout is also being considered.

“Why is [Emso] pursuing Somerset? Because they’re also in a bad situation and small houses want to consolidate,” said one person close to Somerset.

The sale talks and management changes come as Somerset finds itself at the nexus of two negative trends. Emerging market assets are deeply out of favour with investors, and rivals in the space, such as Ashmore, Abrdn and Genesis Investment Management are also struggling.

Of the five Somerset funds for which data is publicly available, four are down by an average of more than 15 per cent this year and substantially below their benchmarks. They also underperform on a three- and five-year basis.

Secondly, small investment houses, particularly those with lacklustre investment performance, have been under particular pressure as they battle to compete.

To add to Somerset’s difficulties, a push into China has not gathered momentum, while the firm has been viewed as behind on environmental, social and governance investing, a crucial growth area for the asset management industry. It lost its head of sustainable investing to Redwheel in March after two years in the role.

Clients are taking notice. Wealth manager St James Place awarded Somerset a £930mn mandate in 2020 and a share in a multi-manager allocation this year but has now placed the firm on a watchlist for poor performance. “They got the mandate not long ago and are now expected to lose it. It’s quite embarrassing,” said someone with knowledge of the situation.

Swedish national pension fund AP1 had been a client for the better part of a decade, but said it no longer has investments with Somerset after retendering those mandates at the end of last year.

Others seem prepared to stay the course, however. Omnis Investments gave Somerset a £322mn emerging market equities mandate in mid-2021.

Bar chart of Total returns (five year, GBP) showing Most Somerset funds underperformed in the last 5 years

Some anticipate the departure of Johnson may pave the way for him to move deeper into politics, after years of involvement with the upper ranks of the Conservative party as an administrator and a donor. He was appointed to the board of the Department for International Trade in November 2020.

One senior Conservative close to Johnson said: “He has incredible connections in the UK and emerging markets, but he’s been moving away from the business over time. He’s really got stuck into his role at the Department for International Trade.” The person added that “it’s quite sensible he steps back” given the state of emerging markets.

Meanwhile at Somerset, the spotlight is falling on fund manager Robertson, the only remaining co-founder, who will be the crucial figure in deciding the firm’s future. He must weigh up whether to push ahead with a sale to Emso, instigate a management buyout or resurrect talks with Artemis — or indeed join forces with another rival.

But while a sale or merger might make financial sense and relieve some pressure on Somerset’s cost base, it is not a guaranteed saviour. In practice, fund management mergers are notoriously tricky to pull off without alienating clients or staff. One person close to Somerset said through any kind of deal, “they need to keep clients and talent . . . but that’s not necessarily guaranteed”.

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