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Money managers under the microscope

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March 29, 2011

A new song has emerged in the European funds industry, born in the midst of the financial crisis. It is called “let’s all do a Carmignac”. It may not be quite as catchy as the Conga, and maybe not quite as much fun, but it has certainly gained a number of followers.

The fund performance and distribution strategy at Paris-based Carmignac warrant more column inches than are available here. But more broadly, it is well worth looking at some of the numbers that have led others to dance to its historically-unfashionable tune of mixed asset, balanced investing, as well as examining wider industry activity to see what insights can be gleaned.

The largest mutual fund in Europe – Carmignac Patrimoine – has generated net sales of around 10 billion euros ($14.05 billion) in each of the past two years. In both of these years this one fund attracted more than 50 percent of all sales activity across Europe (including those funds suffering redemptions) in its Mixed Assets sector. And even if only those funds generating inflows are compared, the fund drew in around 30 percent of sales in the sector.

Not only has this fund hoovered up huge quantities of investors’ money, but it has happened at a time when other, apparently similar, funds have been largely out of favour. Patrimoine’s ability to generate positive returns in recent dramatic market downturns is clearly crucial in attracting this level of loyalty, particularly as it is not from the new breed of unconstrained ‘absolute return’ funds. It has put its relative success down to well-timed overweight allocations to emerging markets.

But this high concentration of client flows is not just a one fund story, and there are lines of dancers hanging on to the coat-tails of successful party-going peers across asset classes.

I have crunched some numbers looking at the concentration of sales for equity funds across Europe each year since 2002, a universe that has increased from around 10,000 to 12,500 funds. The ten most successful equity funds (in terms of net sales) in 2010 attracted a quarter of all sales activity for the asset class, the highest proportion since 2002, excluding 2007-8 when the asset class was in net outflow.

When this is filtered to look solely at those funds with inflows, the figure is 8.4 percent. The latter proportion has varied from 6.8 to 10.6 percent over this period.

To view a chart detailing the concentration of sales since 2002 click: http://r.reuters.com/qeh78r

NEW LAUNCHES

So this phenomenon is not new. However, significant variations will occur for different sectors as investing fashions, or market conditions, change. Emerging market debt funds enjoyed net sales in Europe of a staggering 39.2 billion euros last year and 51 percent of these sales came to just ten funds.

This phenomenon is not restricted to continental European funds. Just 1 percent of mutual funds in the UK (i.e. 22 funds out of a universe analysed of 2,178 funds) attracted net sales of 22.6 billion pounds ($36.20 billion), which is 56 percent of the industry total last year. The most successful fund (in terms of net sales) was Standard Life’s Global Absolute Return Strategy with inflows of 4.4 billion pounds, compared to 6.7 billion generated by all funds in the IMA Absolute Return sector. With so much focus of late on ‘absolute return’ funds in the UK, this statistic alone should give pause for thought for Standard Life’s rivals, and indeed new launches in this sector continue to gather pace in the UK.

These data points are crucial for fund companies looking to launch new funds in order to understand whether apparent opportunities — when investors look to be favouring a certain sector or are expected to do so — are real or illusory. It is tempting to chase the asset flows, but companies risk being accused of launching a ‘me too’ fund which adds little to the plethora of funds crowding onto the market.

At the same time, the concentration of sales activity helps to explain why the number of funds in Europe continues to rise – despite the brief reduction in 2009 – and why predicting a further rise this year does not involve sticking my neck out very far.

Of course most reasonably sized cross-border fund companies will not launch a new product in isolation. Relations with distributors, the gatekeepers to investors, are crucial. There will certainly be cases where the largest fund companies will have little choice but to launch funds in order to meet distributors’ expectations that they are able to offer a wide array of products that meet different investment needs at different times. Those expectations will only rise in the shadow of a Patrimoine-style heavyweight showcasing apparent demand, and this contributes to the rising number of funds.

Before launching funds in successful sectors, fund companies have to take a view on different aspects, such as how long interest in that sector will last, whether the company has the relevant investment capabilities in-house, and whether their fund can be marketed differently from apparently similar products. This analysis of the concentration of flows raises the question of whether new products in popular sectors really have a chance of attracting reasonable sales; the trouble is of course, once a catchy song has taken hold in your head it’s a tough task to stop yourself from dancing. ($1=.7117 Euro) ($1=.6243 Pound) (Editing by Joel Dimmock)

((ed.Moisson@thomsonreuters.com; +44 20 7542 3218))

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