‘Disaster capitalism’ revisited – the case of Somerset Capital

“I’m shocked, SHOCKED, that an emerging markets fund co-founded by Jacob Rees-Mogg is taking advantage of lower equity prices to buy shares in, er, Brazilian healthcare companies and South African chemist chains. This SICKENING behaviour, er, (cont. p94)…”

(with apologies to the Private Eye’s Dave Spart)

I’ve written before about the lazy narrative of ‘disaster capitalism’. Various conspiracy theorists made a meal of often tenuous links between a few prominent Brexit supporters or backers of Boris Johnson on the one hand, and investment funds with short positions in UK equities or sterling on the other. These stories were subsequently debunked by every serious financial commentator. Now the usual suspects are at it again. If anything, they are even wider of the mark.

In particular, the Sunday Mirror led (on 5th April) with ‘Jacob Rees-Mogg’s investment firm set to make fortune from the coronavirus crisis’. Despite the ‘exclusive’ tag, the basis for the story was the fund’s own promotional material which had already reported elsewhere (such as this more serious piece in Hedge Week).

In brief, Somerset Capital Management, a specialist emerging markets fund, is ‘building positions in Brazil and South Africa in a “once-in-a-generation” opportunity for EM stocks following the recent global market downturn’. The fund was co-founded by Jacob Rees-Mogg (which is the only reason for the Mirror’s interest), but he is no longer actively involved.

I’ve no inside knowledge of Somerset Capital’s strategy or positions. But a simple glance at the investment philosophy on the fund’s website suggests that it is a long-term stock picker (“we like businesses that have the ability to earn an attractive and sustainable return on capital over the business cycle”), running ‘long only’ portfolios of emerging market equities.

It’s therefore a reasonable assumption that the fund will have lost money so far during the crash. The fund’s managers are now looking to make some of this money back by buying undervalued stocks. What on earth is wrong with that?

Well, the Mirror quotes Keir Starmer as saying ‘nobody should be seeking to take advantage of this crisis. We should all be asking ourselves what we should be doing for our country and each other’.

Quite what this generic statement (presumably bashed out by someone in the new Labour leader’s office) has to do with the activities of an emerging markets fund is a mystery. But I’d have thought investing in Brazilian healthcare companies, South African chemist chains, or a firm involved in testing face masks in China (all examples given in the Mirror article), is actually something we should be welcoming.

John McDonnell doubled down (of course!), saying ‘this is about as sick as it comes. Profit seeking from suffering is nearly as low as he can get. When we get through this we need a tax on profiteers’. Again, what is he going on about?

If anyone in the hedge fund industry comes out at the end of this crisis with a profit (which is not guaranteed, despite the Mirror’s presumably unintended puff piece), they will pay tax on those profits in the usual way. (If you have any evidence that anybody here is dodging their taxes, please let HMRC know, not me.)

In any event, what do critics think these funds should be doing? Do we really not want them to be buying equities at this point? Do we not care about the implications of falling asset prices for everybody’s pensions, or the ability of companies to raise capital?

Ironically, these funds are usually criticised for short selling, but we still seem to be waiting for any of the usual suspects to praise Somerset Capital for buying instead. (Over to you, Molly Scott Cato…) And almost every other long-term investor is identifying buying opportunities at this point, without being vilified for doing so. The confected outrage in this case is ridiculous.

The call for windfall taxes on profits made during the coronavirus crisis is also a classic throwaway line that was echoed on social media, including by some people who really should know better. It’s unhelpful too. For example, how would we decide which profits were generated in socially acceptable ways, and which were not?

What if a fund simply rebalances a mixed portfolio from bonds to equities in line with its investment mandate, and then benefits from a subsequent stock market rally? Is this also beyond the pale, or is it only more active managers that should face a retrospective tax hike?

What about investors who’ve made ‘windfall gains’ from buying safe-haven assets, such as government bonds or gold? Should they pay a higher rate of tax as well? If not, why not? What about online delivery companies? Or internet retailers? And what sort of perverse incentives would the threat of punitive taxes create?

In summary, it is hard to think of a more socially responsible thing for a hedge fund to be doing now than investing in undervalued companies. Today more than ever, responsible commentators and politicians should not be spouting nonsense purely in an attempt to score cheap points against their opponents.

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