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Not all gert lush

What is an asset management firm worth these days?

That's a particularly tough question to answer if the firm in question is Somerset Capital Management, the specialist emerging market fund house co-founded by Conservative MP Jacob Rees Mogg.

Rees Mogg founded the firm with, among others, Dominic Johnson, who has recently been given a government position by Liz Truss and who will therefore shortly receive a peerage. We will leave individual readers to judge the wisdom of that decision.

Nonetheless this has meant Johnson has stood down as Somerset chief executive and prompted the firm to be put up for sale, since it will mean (according to the FT) that half of the equity in the business will be held by partners who are no longer involved in the day-to-day running of the firm.

So we thought the time seemed right for a bit of analysis into the firm to see if we could provide some insight.

It's obviously been a brutal time for emerging market investors (in no small part due to King Dollar), which has dented Somerset's assets under management.

According to the company's own factsheets, this sat in the region of $4bn at the end of September (using the exchange rate on September 30, that's £3.8bn). 

Asset management companies usually sell for between 1 and 2 per cent of AUM, give or take variables such as key man (or woman) risk and profitability.

On that basis, suitors interested in Somerset Capital would be looking at a price of £38-76mn.

Even at the top end that’s a long way from the £90mn Artemis bid for the business in 2019.

That was rejected by Somerset, much to the relief of some at Artemis, no doubt.

One of Somerset's problems is that one fund accounts for about 83 per cent of its assets - the £3.1bn Somerset Global Emerging Markets fund run by Edward Robertson (the firm's third founding partner).

Another problem is that £279mn sits in the St James's Place Global Emerging Markets fund, which the wealth manager recently placed on its watchlist due to underperformance (indeed the fund was about £900mn in size when SJP awarded Somerset the mandate in 2020).

If SJP decides to take its ball and play with someone else, Somerset's reliance on one fund will only grow.

As we have discussed before, this is a dangerous position for fund houses because managers of individual funds can get jobs elsewhere, set up on their own or, well, retire. A buyer will surely take this key man risk into account.

The only Somerset fund that has ever been held by any of the allocators we cover is Somerset Emerging Markets Dividend Growth.

At the start of 2020, this fund was about £850mn in size but it now only manages £322mn.

Once upon a time it was held by five DFMs, which would have put it towards the upper end of mid-table among the most popular emerging market funds we cover.

But the last of the DFMs on our database sold out of this fund in the first quarter of this year.

Bottom quartile performance in three of the past five years probably hasn't helped here.

Will anyone take a punt on Somerset? Probably. But the DFMs in our database now seem to look to the big boys for their emerging markets exposure (Fidelity, BlackRock, Baillie Gifford and JPMorgan run some of the most popular funds, with Redwheel Global Emerging Markets a notable exception).

This does make you wonder what the future holds for specialist emerging market boutiques.

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