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Somerset Capital Management hit by loss of its largest client

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Somerset Capital Management, the boutique fund manager co-founded by Tory MP Sir Jacob Rees-Mogg, has lost more than two-thirds of its assets after the firm’s largest client severed ties, according to people familiar with the situation.

The decision by wealth manager St James’s Place to terminate its relationship with Somerset was a blow to the London-based firm, and called into question its future, some of these people said.

Somerset, which specialises in investing in emerging markets, managed assets worth $3.5bn at the end of October.

But this figure has fallen to about $1bn after SJP, the UK’s largest wealth manager, transitioned about £2bn in assets away from Somerset, effective November 20. At its peak in 2018, Somerset had $10bn in assets under management.

Somerset was running an almost £600mn global emerging markets fund and a roughly £1.4bn emerging markets equity fund on behalf of SJP. 

SJP Global Emerging Markets is managed by Somerset co-founder Ed Robertson.

In the 12 months to November 30, the fund has lost 7.1 per cent. It is down 24.8 per cent over three years, and down 21.6 per cent over five years. The fund’s performance places it in the fourth quartile among peers for all three periods.

The fund had been overweight China and this had hurt performance as markets moved against it, said people briefed on the matter.

The SJP Emerging Markets Equity fund is managed by a team of Somerset managers.

In the 12 months to November 30, the fund has gained 2.4 per cent. It is up 1.2 per cent over three years and 48.2 per cent over five years.

It is in the top quartile of performers for all of three periods, but a person familiar with SJP’s thinking said the decision to end Somerset’s management of the fund reflected a desire to offer lower-cost strategies to the wealth manager’s customers.

Since SJP told Somerset it was ending its relationship, the firm has been speaking to its other large investors, according to people briefed on the communications.

After SJP, Somerset’s biggest clients include the State Board of Administration of Florida and the Civil Service Superannuation Board of Manitoba in Canada, these people said.

Somerset’s fortunes illustrate the business risk of having such a large amount of money concentrated in the hands of one investor. When a fund manager loses a large client it can prompt others to pull their money because they may be concerned about the risk of being too big a share of the firm’s asset base. 

Somerset was founded in 2007 by Rees-Mogg, Robertson and Dominic Johnson.

The three had previously worked together at Lloyd George Management, an emerging markets fund manager. 

Rees-Mogg, who was a minister in the governments of Boris Johnson and Liz Truss, left Somerset in 2019 and is a passive minority shareholder in the firm.

Johnson stepped down as Somerset chief executive last year, and is currently minister for investment in Rishi Sunak’s government. Of the three co-founders, only Robertson remains at the firm.

Somerset has found itself at the nexus of two negative trends. Emerging markets have been out of favour with investors, while small boutiques, particularly those with lacklustre performance, have been grappling with rising costs of doing business. 

Somerset and SJP declined to comment.

The Financial Times reported last year that Somerset was exploring strategic options, including a sale, merger or management buyout.

However none of these has come to fruition. In the past Somerset has held discussions with potential buyers including boutique firms Emso Asset Management and Artemis Investment Management. 

About half of the equity in Somerset is held by retired partners who are not involved in the day-to-day running of the business.

This has left Somerset with the challenge of how to incentivise the next generation, a question that many asset managers are grappling with. 

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