On the 27th of May an article was published in the Mail on Sunday entitled Mogg’s Moscow Millions, where it was alleged that Somerset Capital Management – an investment firm that the Conservative MP for North East Somerset Jacob Rees-Mogg co-founded in 2007 – and Mr Rees-Mogg have invested significant sums of money in Russian companies, through which they stand to profit from healthily post-Brexit. Given Mr Rees-Mogg’s prominent backbench position and his unwavering support for a Brexit that will put British business in the global driving seat, this has led many on social media to pose the question: is Jacob Rees-Mogg guilty of duplicity?
To answer that question, we must first look at what Somerset Capital Management is and what role Mr Rees-Mogg plays in the business. As per the Somerset Capital Management website, the investment firm was co-founded in 2007 by the aforementioned Mr Rees-Mogg, Edward Robertson and current CEO Dominic Johnson as an investment management firm specialising in Global Emerging Markets. Prior his election in 2010, Mr Rees-Mogg was actively involved with the investment arm of the firm, though handed over the reins to Mr Johnson upon being voted in as MP for North East Somerset. Although he is no longer directly involved with the investment arm, the Register of Members Financial Interests shows that the MP owns over 15% of the issued share capital of Somerset Capital Management Ltd, and that he receives roughly £14,500 per month in remuneration for 35 hours work on behalf of the firm, although his role does not influence investment decisions which are taken by one of four dedicated Investment Managers; Edward Lam, Mark Asquith, Edward Robertson and George Birch Reynardson.
These Investment Managers currently run seven products as of April 2018 across various sectors, but as per the firm’s core business strategy each invest in companies within emerging markets; countries currently experiencing rapid economic growth and industrialisation. This benefits investors with a higher risk appetite, as although there is often volatility within the rapidly developing market there is the potential for large short term gains to be made. One such example is the Baillie Gifford Emerging Markets Leading Companies, which between May 2016 and May 2017 grew by 55.85% – by comparison, cash left in a bank account would have gained around 0.5% in the same timeframe and would have given a negative return to investors when taking inflation into account.
Accordingly, emerging markets such as Brazil, Chile, Russia, China, India and even Qatar are currently seen as being lucrative investment propositions due to their fast-developing nature. By comparison, developed nations and regions such as the United Kingdom, Euro-area and United States are currently experiencing slower growth and high market volatility than their developing counterparts, meaning that although they are viewed as a less risky investment the capital growth is unlikely to rival that of an emerging market fund. In comparison to the Baillie Gifford fund above, the highest performing non-emerging market fund was the Old Mutual UK Smaller Companies which grew by 33.66% over the same period, though this can be partly attributed to the FTSE 250’s meteoric 20% rise after the Brexit vote in June 2016.
As the United Kingdom is already a developed economy with a slower rate of economic growth than countries targeted by the fund, it should be of little surprise that companies within the UK do not feature in the portfolios of Somerset Capital Management. The firm’s flagship fund – Somerset Emerging Markets Dividend Growth joint managed by co-founder Edward Robertson and Edward Lam – currently holds almost £1.4bn worth of assets, and invests in a diverse worldwide portfolio of emerging economies such as South Korea (18%), India (10%), Hungary (8%) and Taiwan (8%) to ensure capital growth for investors. Interestingly, the UK does feature on this list, with the fund investing almost 4% of its value within the country. The largest sectors include banking (22%), technology (13%) and food/ drug retailers (8%), sectors which often experience significant growth when an economy emerges, matures and prospers and are seen as attractive investment proposition because of this. As an economy grows and disposable income increases, consumer spending and investment increases leading to greater profits and company growth, which in turn drive up the share price, value of the fund and, by extension, the value of the investor’s stake.
Compared to the United Kingdom at present, emerging markets appear to offer a rate of return significantly higher than that of currently developed markets. Rapidly developing nations such as India and China are predicted economic growth of 7.3% and 6.4% respectively this year alone, whereas the World Bank predicts developed countries to average 2.2% growth during the same period. This growth, combined with only a slight increase in risk when outside influences such as Brexit, trade wars and fluctuations in currency are factored in to the overall picture is pushing more investors to consider emerging markets as a solid means of capital growth. In addition, the diversification of a stock or fund portfolio can often provide some basic protection against short and medium-term market volatility and, given that there is potential for yearly returns of up to and over 50%, investing into emerging markets appears to be a lucrative way to do just that. Somerset Capital Management appear to be doing nothing more than taking full advantage of the prevailing condition of the global markets, as per the wishes of their clients and investors.
To conclude, although Jacob Rees-Mogg does perform work on behalf of Somerset Capital Management and does receive a share of the firm’s success via an undisclosed dividend payment it would be entirely wrong to suggest that Somerset Capital Management’s investment choices are in any way a comment on how Mr Rees-Mogg views the Brexit process or how he sees the United Kingdom’s economy as a whole. Investment managers at the firm take decisions on which regions, companies and sectors to invest in based on the firm’s investment strategy and what they believe to be in the best interests of the clients they are duty bound to represent. As the UK is not an emerging market economy and is not predicted to experience the same rapid expansion over the next ten years as emerging economies such as India, China and Russia, it is not seen by fund managers as an attractive investment compared to faster-growing economies which have the potential to yield far more profit over the fund’s lifetime.
As it stands, the link to Mr Rees-Mogg is tenuous at best, given that investment decisions are taken by dedicated investment managers directly involved with the funds. Furthermore, the MP relinquished all control over the direct management of portfolios and funds upon his election to Parliament in 2010. With this in mind, the initial question can be answered with a simple and resounding ‘NO’. Perhaps the headline should have read: “Investment Firm Created to Invest in Emerging Markets Invests in Emerging Markets” – far less dramatic, but infinitely more correct.