Marino Valensise, chief investment officer at Baring Asset Management, gazes out of his London office and takes stock of his surroundings.
Relatively new to the role – Michael Hughes’ departure last summer left an opening for the former fixed income and credit boss – the softly-spoken Italian is in an ideal position to deliver his verdict on the market trauma of today, and the prospect of recovery tomorrow.
“I’m suspicious about where there is lots of leverage, such as property, which is a nightmare at the moment, and we’re cautious on corporate credit too with the worst still to come in terms of defaults,” he says. Asset classes which were bought on leverage will continue to suffer, and now, of course, the story is one of rapid de-leveraging.
Indeed, Barings treaded carefully through the former shining credits, such as CDO and ABS. “We were underweight credit for a long time, though perhaps bearish too soon,” he adds.
With about £25bn (€31.5bn) in assets under management, Mr Valensise likes working for what he calls “a large boutique” and likes Barings’ ‘growth at a reasonable price’ (Garp) investment philosophy which has seen it skirt around the worst aspects of credit volatility. There are no pretensions about the funds house ever becoming a Fidelity or State Street.
“We don’t want to be everything to everyone,” he says, adding that there are “no capacity issues” should Barings suddenly, but unlikely, aspire for greater scale.
A top-down investment approach is applied to enhanced index, multi-asset and fixed income products. A bottom-up stance is associated with companies operating in inefficient markets, like Russia and frontier markets in Eastern Europe.
Traditional not exotic
A split of 60 per cent in equities, 28 per cent fixed income, 10 per cent multi-asset, and 2 per cent alternatives, shows Barings to be traditional rather than exotic, though this year has seen it move into global equity 130/30 funds.
A third of clients are UK based, including a number of local authority pension funds such as Durham and Aberdeen. It also manages £5bn for US clients, including a long-short bond fund for US pension fund giant Calpers, which has reaped 100 basis points in alpha for the retirement system in past 12 months.
“We’ve a 20-year relationship with Calpers,” adds the CIO. “It’s a great name to have on your books”.
Other wins in the US include a $325m international equities mandate from the New Mexico Educational Retirement Board and a $100m global equities mandate from Denver Public Schools. “US pensions opt for our expertise in international equities, especially our emerging market exposure,” he says.
In fact, nearly half of all client assets – not just those of US pensions – were invested in emerging markets and/or Asia Pacific markets during first half 2008. “We’re most successful in global equity and international bond mandates,” he adds, pointing to unloved Japanese equities as set for a rebound. “I sense something is due to change there.”
But it is the plight of the financials which Mr Valensise sees as most challenging in terms of guessing where the market is heading.
“We’ve started to put money into bank credit and, post-Bear Stearns, we’re convinced that the banks are safe, but we’re still cautious on corporate credit,” he says.
Barings is also staying clear of high yield, its CIO believing an almighty ruction will break once LBOs find refinancing of old loans a near impossible task given the current credit environment.
“The majority of large LBOs occurred in the last few years and these guys have bridge loans due for refinancing,” explains Mr Valensise.
But who is going to give them the money? Certainly not the investment banks on current projections.
Mr Valensise believes the investment bank model doesn’t make for a particularly strong equities bet, nor support shareholder activism when it’s needed the most, like now.
“It’s a business model that doesn’t work. Most profits go to employees not shareholders but why should we, indirectly as investors, pay management so much if the stock price fails so badly?” he says.
The example of Merrill Lynch, in 2007 its share price lost 40 per cent of its value though it still paid exiting CEO Stan O’Neal $160m, is one that haunts Mr Valensise, and Chuck Prince’s $68m payout at Citi was equally galling.
“If you are a Merrill Lynch or a Citibank, no one owns you. At AGMs, the management will propose pay structures but no one shareholder has the power to veto,” he says.
And if Barings was keeping its allocation to credit fairly modest during the leveraging frenzy of five years hence, when both corporates and consumers played active roles (“where were the shareholders or regulators then?”) then this is doubly true today, given the macro economic picture.
“The rich don’t care about subprime, but if you’re a middle income in the UK or US, you’re really feeling the pressure,” says Mr Valensise.
