Financial Times Europe - 07.04.2020

8 ★ FINANCIAL TIMES Tuesday 7 April 2020

CO M PA N I E S & M A R K E T S

J O E R E N N I S O N— LO N D O N
R O B E RT A R M ST R O N G— N E W YO R K

Investors have beaten a retreat from
the $1tn US market for bonds backed
by car loans, credit cards and other
consumer lending as a sharp jump in
unemployment threatens borrowers’
ability to pay them back.

So far this year, yields on low-rated
bonds backed by car loans in the US
have quadrupled to 8 percentage points
over benchmark rates, according to
data from JPMorgan, implying heavy
sellingpressure.
Meanwhile, the flow of new bond
deals backed by consumer loans has
dwindled.
Specialists in the asset-backed securi-
ties market say weakness is likely to
intensifyasjoblossesstackup.
“I think one thing people are not pay-
ingenoughattentiontoisthatreallybad
jobless number,” said Jason Merrill, a
portfolio manager at Penn Mutual Asset
Management. The number of Ameri-
cans claiming unemployment benefits
shotuplastweek.
“If we start seeing massive unemploy-
ment that will have a very significant

implication for consumer credit,” he

said.

Previous crises show that people

struggle to pay back debts when unem-

ployment rises. During the last financial

crisis, credit card defaults coincided

with the peak in initial jobless claims in

March 2009. Auto loan defaults peaked

slightly earlier, in December 2008,

JPMorgannoted.

Some parts of the US ABS market

have proven more resilient. Yields on

bonds backed by the highest rated

fixed-rate credit card repayments,

maturing in three years, jumped from

0.26 percentage points above their

benchmark earlier this year to a peak of

2percentagepointsinMarch.

Butspreadshavesinceslippedbackto

0.8 percentage points, according to

JPMorgan.

On lower rated triple B debt, yield

spreads have halved to 1.6 percentage

pointsamidabroadreboundinmarkets

following a host of extraordinary sup-

port measures from the US Federal

Reserve.

“There is definitely concern because

consumer metrics are very much corre-

latedwiththelabourmarket,”saidAmy

Sze, an analyst at JPMorgan. “If people

don’t have jobs, then they can pay their

bills.”

One comfort for bondholders is that

deals can often withstand a high rate of

consumer defaults before inflicting

lossesoninvestors.

Triple B rated subprime auto ABS, for

example, can experience about 15 per

cent of losses on the underlying loans

before bondholders start to take a hit,

saidMsSze.

For triple A rated credit cards, the

figureisabout20percent.

Fixed income

More pain forecast for bonds backed by US

consumer loans as jobless numbers jump

ST E FA N WAG ST Y L

Private investors who lost money

through disputed margin calls in the

coronavirus market shock have started

preparing possible legal action against

banks and wealth managers in an

attempt to recover losses.

For banks active in wealth manage-

ment, including Swiss-based UBS and

Credit Suisse, as well as JPMorgan Chase

and Goldman Sachs of the US, margin

loansarestandardproducts.

The clients buy a slice of an invest-

mentwiththeirownmoney—say25per

cent — borrow the rest from the bank

and reap 100 per cent of the gain, minus

costs,ifpricesrise.

But when prices fall, the leverage goes

into reverse, sometimes with devastat-

ing effects. When the investors’ own

money — the margin — falls below

agreed levels, clients face urgent margin

calls, for cash or other assets usable as

collateral.

If they do not stump up, the bank can

normallyliquidatetheposition.

When stock markets plunged by 20

per cent and more as the coronavirus

pandemic took hold in February and

March, bankers liquidated some clients’

debt-financed positions, imposing

heavylosses.

Lawyers say bankers gave investors

too little flexibility in refinancing

investments and predict the claims

could match or exceed those generated

bythe2008globalfinancialcrisis.

Matthias Gstoehl, a banking disputes

partner at Lalive, a Swiss-based law

firm, said: “Since the markets began to

feel the full impact of the Covid-19 pan-

demic, inquiries relating to margin calls

from our investor clients have at least

quadrupled, and they continue to grow

onanalmostdailybasis.”

Andrew Wass, a litigation partner

at London-based Withers, said: “This is

a seismic event in the market. We

can say with confidence that the last

couple of months will produce a lot of

litigation.”

Investmentcontractsgivebanksclear

rightstoliquidatepositions.Butlawyers

say there still can be scope for making

claims if banks act too quickly or mis-

handle a liquidation and impose bigger

losses than would otherwise have been

crystallised.

They say there are risks that, in the

often-heated conversations that come

with a disputed margin call, things

might be said which contradict the

contractwordingandcreateopeningfor

legalclaims.

Mike Hawthorne, legal director at

Pinsent Masons, said: “The danger for

banks and brokers is that, in the course

of the potentially confrontational dis-

cussions around the margin call, some-

thing might be said which the customer

could misinterpret as an agreement to

allow more time to provide the margin

orbeforeclosingouttheaccount.”

Recent market shocks, including the

2015 depegging of the Swiss franc from

the euro and the 2016 Brexit referen-

dum result, hurt investors relying on

marginloans.

Mr Wass said: “The risks which lever-

aged investors are taking should have

beenobviousbynow.”

Asset management

Private investors prepare legal action

to recover losses over margin calls

‘Thisis a seismic event.

We can say that the last

couple of months will

produce a lot of litigation’

Yieldson low-rated bonds backed

by car loans in the US have soared

L AU R E N C E F L E TC H E R— LO N D O N
R O B I N W I G G L E S WO RT H— O S LO

Hedge fund Winton is suffering one of
its worst runs on record after its
stance against simple trend-following
appearedtobackfire.
The London-based group, a pioneer
of computer-driven investing with
around $20bn in assets, has lost nearly
13percentinitsflagshiphedgefundthis
year to the end of March, including a 7.
per cent drop last month, according to
numbers sent to investors and seen by
theFinancialTimes.
That puts the fund on track for
its worst calendar year in its 22-year
history.
By contrast, funds that latch on to
rises or falls in certain markets and seek
to piggyback on the moves have fared
better.
Winton’s sub-par performance
suggests that chief executive David
Harding’s querying of the profitability
of this strategy — known as trend-
following—mayhavebeenmisplaced.
Mr Harding surprised fellow algo-
rithm-focused investors in 2018 when
he said trend-following had become a
victimofitsownsuccess.
With too many funds all trying to ride
similarmarketmoves,returnshadbeen
squeezed,hesaid.Lowvolatilityinpost-
2008 market conditions also hampered
thestrategy.
Last year, Mr Harding told the FT that
“on its own, long-term trend-following

is scarcely good enough to run a hedge

fundon”.

TheflagshipWintonfund,whichonce

focused solely on trend-following, cut

its exposure to this strategy to about 25

percentofitsportfolio.

Instead, it built up strategies that use

macroeconomic data to trade markets

such as currencies and bonds as well as

thosetradingstocksandcredit.

But other funds stuck to the

course. Man Group’s AHL, a fund co-

founded by Mr Harding in the 1980s (he

is the “H” in the name) and now a com-

petitor to Winton, is posting some of its

strongestperformanceinyears.

Over the first three months of 2020,

its AHL Diversified fund, a trend-

follower,gainedalmost11percent.

Other trend-following funds are

enjoyingalong-awaitedrevival.

GSA Capital, which was formerly the

global statistical arbitrage desk at

Deutsche Bank before spinning out in

2005, has lost money in recent years in

its Trend fund. But this year, it is up 5.

percent.

Leda Braga’s Systematica, which lost

more than 10 per cent in 2016 and 2018,

hasgained9.4percentthisyear.

This outperformance is wide-

spread. Société Générale’s index of

trend-following funds gained 1.8 per

cent last month while the S&P 500 lost

12.5percent.

“What did best were managers doing

only trend,” said Anthony Lawler, head

ofGAMSystematic.

Its Core Macro fund, for instance, lost

a modest 3.7 per cent last month — its

trend-following strategies made money

whileotherstrategiesweredown.

While trend-followers entered the

crisis with long positions in stocks,

manyeventuallycutbackorswitchedto

bettingonfallingpricesasmarketstum-

bled. Some were able to profit from bets

against the oil price — which slumped —

and from holding bonds, which surged

asinvestorslookedforsafehavens.

Many hedge funds have had a disap-

pointing year but, by its own standards,

Winton’s recent performance has been

poor. The flagship fund, which chalked

up double-digit gains in nine of its first

11 calendar years of trading, has previ-

ously posted only four negative years,

all of them with losses of less than 5 per

cent. The latest figures mean that, since

the start of 2015, the fund has lost

almost6percent.

A separate fund, Winton Diversified,

which has around half its assets in

trend-following, is down about 7 per

centthisyear.

The range of gains and losses reflects

the savagery of the market moves as

wellastheincreasingdiversificationofa

quant hedge fund sector that once

focused mainly on trend-following but

has now developed models in a range of

newareas.

Mick Swift, chief executive at Abbey

Capital, which invests in quant funds,

said the spread of funds’ performance

was about 2.5 times bigger than on aver-

agehistorically.

Butwhilemanytrend-followersmade

moneyinMarch,theyarestillwellshort

of their heyday during the 2008 finan-

cialcrisis,whentheymademorethan

per cent on average, according to data

groupHFR.

“It does seem [managed futures]

returns were much more mixed in

March compared to the fall of 2008,”

said Akshay Krishnan, head of macro

and trading strategies at Stenham Asset

Management, an investor in hedge

funds which manages about $4bn in

assets.

However, those higher returns may

still come as the coronavirus crisis plays

out. These funds “have never been

something to rely on at turning points”,

said Mr Lawler. “March was a turning

point and now we will see how they

perform.”

Cutting exposure to a popular

investment strategy proves

costly for London-based fund

‘Long-term

trend-

following

is scarcely

good

enough to

run a hedge

fund on’

A strategy

switch by

Winton chief

executive David

Harding looks

questionable

Patrick T. Fallon/Bloomberg

Asset management.Sub-par performance

Quant pioneer Winton left

bruised after fighting trend

R I C H A R D H E N D E R S O N— M E L B O U R N E

Dividends paid to investors by big US

companies will take nine years to

recover from the downturn caused by

coronavirus, according to bets in the

futures market — marking the biggest

hit to corporate payouts since the

secondworldwar.

Companies in the S&P 500 delivered

almost half a trillion dollars in

dividendslastyear,or$56pershare.

Butcompaniesaroundtheworldhave

come under pressure to cut payouts to

shareholders and focus on keeping up

payments to workers and other stake-

holders, now that the virus has in many

caseshitrevenues.

It will take until 2028 to beat the tally

from 2019, according to the prices of

futures contracts linked to annual divi-

dendsforthebenchmark.

That compared with the three years

that dividends took to recover after the

2008-09 financial crisis and a 19-year

run from the Great Depression through

to 1949, according to data compiled

by Robert Shiller, the Yale University

economist.

Just a month ago, investors were bet-

ting that the S&P 500 would deliver a

record $61 per share in payouts this

year,saidBNYMellon.Thatexpectation

now stands at just $40, mirroring a 27

per cent fall in US stock prices since the

peakinFebruary.

The lacklustre outlook for payouts

reflects the pain facing the global econ-

omyfromthecoronaviruspandemic.

The dip will hurt investors who rely

on steady income from stocks, such as

pensionfunds.

“The reason you own a stock is you

want to own a share of the profits of the

business,” said John Velis, director of FX

and macro strategy at BNY Mellon.

“This will make holding stocks a less

attractiveoption.”

Dividends are a marker of financial

stability for listed companies that try to

raise payouts year after year, and which

are typically penalised by investors

when they fail to do so. “You don’t want

to cut dividends because it’s a really bad

signal,” said Mr Velis. “Once you’ve

established your dividend, you only cut

inextremecircumstances.”

The outlook for dividends is further

clouded by the US government’s $2tn

spending package to buffer the eco-

nomicshockfromthepandemic.

Companies that receive direct assist-

ance face extra pressure to reduce both

dividendsandbuybacks,saidMrVelis.

Boeing, the US aircraft manufacturer,

and Delta, the US carrier, last month

announced suspensions to payments on

dividends and buybacks. But large US

banks intend to continue paying divi-

dends,arguingthatsuchpaymentsarea

powerfulsignaloffinancialstrength.

Equities

S&P 500

shareholders

face 9-year

squeeze on

dividends

‘You don’t want to cut

dividends because it’s a

bad signal, you only cut in

extreme circumstances’

Winton’s flagship fund suers tough year amid market rout

Year-to-date performance ()

Sources: HFR; FT reporting

Trend-followers

Hedge fund industry

Merger arbitrage funds

Market-neutral funds

Winton

Equity hedge funds

- - -  

FastFT

Our global

team gives you

market-moving

news and views,

24 hours a day

ft.com/fastft

APRIL 7 2020 Section:Markets Time: 6/4/2020 - 18: 38 User: stephen.smith Page Name: MARKETS1, Part,Page,Edition: USA, 8, 1