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Money managers under the microscope

Surfing the sector flows

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By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own. PARIS, April 13 (Reuters) – A successful asset management strategy requires a thorough reading and consistent analysis of macroeconomic events and cycles for fund managers to identify sources of performance and capture them at the right time via appropriate asset allocation. An approach which analyzes the performance and flows of different sectors in light of market events and anticipations, is a concrete example that can be undertaken with Lipper data. There are 20 listed equity sector-based Lipper classifications, which correspond as of the end of February 2011 to a universe of 946 primary funds (2,030 share classes in total) domiciled in Europe and invested worldwide. Analyzing the performance realised and the flows captured or lost by these categories during the last five years provides an insight into trends which have dominated investment thinking. It is worth noting that the sectors favoured by investors year after year are very volatile and do not necessarily reflect the best performers, with the exception of funds invested in natural resources. Since 2006 these funds have had the best figures among the Lipper categories in terms of inflows (+11.83 million euros for 2006, +19.86 million euros for 2007, +6.013 billion euros for 2009, and +1.815 billion euros for 2010). The only negative year was 2008, when outflows of 4.491 billion euros were recorded in the aftermath of the subprime crisis and on lingering fears of global recession. During that same year 2008, all equity sector-based Lipper classifications (with one exception) experienced massive outflows – 12.62 billion euros in total – reflecting a widespread feeling of uncertainty. Funds invested in gold and precious metals were the only ones benefiting from the situation; they were used by investors as an investment haven after the crisis and collected 488 million euros for 2008. But interest in these funds declined severely in 2009 – with outflows of 55 million euros – despite the fact that they recorded the best performance over the year – up nearly 57 percent. Favoured instead were sectors such as natural resources (inflows of 6.013 billion euros), real estate (inflows of 1.113 billion euros), and banking and financial services (inflows of 304 million euros). TECH FLOWS Unsurprisingly, the banking sector has been particularly abused since 2007, following the bursting of the subprime bubble with outflows of 1.297 billion euros for 2007 and outflows of 264 million euros for 2008. The trend was reversed in 2009, reflected by inflows of 304 million euros, as investor confidence was rebuilt. This upbeat sentiment faded abruptly in 2010 on the difficulties encountered by some euro zone countries in managing their debt and on mounting fears of an eventual spillover. It is interesting to note that funds invested in information technology are on the road to recovery in light of encouraging results since 2009. Continual and massive outflows were recorded after the bursting of the tech bubble (still hitting 1.386 billion euros for 2008), but the trend reversed, with 182.5 million euros of inflows for 2009 and 1.080 billion euros of inflows for 2010. This was accompanied by a turnaround in performance; down 43.15 percent for 2008 turned into a gain of 51.78 percent for 2009 and a return of +22.30 percent for 2010. The pharmaceuticals and healthcare sector is struggling to evolve as a defensive sector as illustrated by the disappointing returns and significant outflows recorded during the last five years. In 2007, for example the health sector was the only so-called defensive sector that did not attract inflows (1.567 billion euros of outflows), compared with the 1.498 billion euros of inflows into utilities funds and the 1.258 billion euros of inflows into funds invested in noncyclical consumer goods and services. Funds invested in real estate posted the strongest outflows – from 6.173 billion euros of inflows for 2006 to 2.313 billion euros of outflows for 2007. The year 2008 was also catastrophic, with more than 3 billion euros of outflows. Since then, real estate funds have managed to claw some of that back with 1.113 billion euros of inflows for 2009 although 2010 saw only 77 million euros of net inflows. Focusing on last year, the funds invested in cyclical sectors were the most successful. The fear of a global recession had dissipated, thanks to the dynamism of emerging economies, including China. The sectors that topped the rankings were the cyclical goods and services consumers sector (automobile, luxury, household goods), with an positive return of 33.76 percent on average and 1.216 billion euros of inflows. The general industry sector (aerospace, electronic equipment), posted positive returns of 29.50 percent on average and 7.73 million euros of inflows. Since the beginning of this year, the market has witnessed an important sector rotation, with the acclaimed sectors of the previous year lagging behind. During the first two months of 2011, the cyclical goods and services consumers sector lost 0.68 percent and posted 135 million euros of outflows, while the gold and precious metals sector decreased 6.00 percent and recorded 110 million euros of outflows. Investors are more exposed to the natural resources sector (2.557 billion euros of inflows), the information technology sector (880 million euros of inflows), and the banking sector (247 million euros of inflows). The beginning of 2011 has been very eventful, making it difficult to comment with certainty on the development of sectors for the remainder of the year. The uncertainty about oil prices given political turmoil in the MENA region and the real danger of contagion, the unremitting difficulties of the peripheral euro zone countries to meet their sovereign debt obligations, the awareness of nuclear risk, and the inflationary pressures in emerging economies — hitherto the main driver of global growth — are key factors to watch carefully. In this uncertain economic environment it seems judicious to focus on noncyclical sectors such as food processing, tobacco, and information technology. Gold, which has been neglected by investors since the beginning of this year, is likely to attract important flows. Instability in the MENA region will push up the oil price and thus support the oil sector. The pharmaceutical sector is one to monitor because of the eventual impact of the development of generic drugs and the drastic reductions in public spending, while the utilities sector could be affected by the increased profile of nuclear risk. (Editing by Joel Dimmock) ((merieme.boutayeb@thomsonreuters.com; +33 (0)1 49 49 50 56))

By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own.

A successful asset management strategy requires a thorough reading and consistent analysis of macroeconomic events and cycles for fund managers to identify sources of performance and capture them at the right time via appropriate asset allocation.

from Jeremy Gaunt:

Don’t invest in gold?

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Bit of fun, this -- and might raise some issues about returning to the Gold Standard. The S&P 500 stock index priced in gold (thanks to Reuters graphics whiz Scott Barber):

Equities - SP 500 priced in dollars and gold

Risk revolution

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By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own. LONDON, April 6 (Reuters) – The evaluation of an investment is measured by its potential performance and risk, and historically, investors have given more importance to the former than the latter. Recent events in the market, however, have challenged the hierarchy, placing risk at the heart of investors’ thinking. It is little short of a revolution in the investment industry. While performance is associated with opportunities, risk is linked with danger and the switch in thinking is prompting investors to take a more defensive approach. There have been several factors behind that change. The market is more volatile and given to quicker and more abrupt downturns; there is a polarization of economic growth outside core western economies; demographic change has led to the growing importance of liability management; and regulatory constraints have put extra pressure on institutional players to limit risky investments. Up to 1996, we enjoyed smooth growth trends in markets, with steady periods of drawdown and recovery. Over the past 15 years, however, the nature of market cycles has changed. Periods of exponential growth have been followed by deep crises, creating opportunities for hedge-fund style managers but a nightmare for long-only managers trying to protect assets. Both institutional and retail investors have had a hard time during these two crises with significant consequences on their risk appetite. For a chart detailing the recent trends, click: http://r.reuters.com/gef88r Data from Lipper shows 10.18 percent average annual growth of the MSCI World TR in dollar terms between 1970 and 1980, 16.3 percent the following decade and 15.92 percent in the 1990s. The figure stood at only 1.77 percent during the last decade due to the two major downturns — the bursting of the internet bubble and the credit crisis. When we look closely how performance was distributed for the past 15 years, we have a cumulative performance of 101.86 percent over the four years to end-1999, followed by a short but severe downturn of -50.74% from 2000 to 2002. From 2003 to 2006, the market rose a cumulative 52.93 percent in 4 years and then dived 37.24 percent in 2008 to emerge again with cumulative growth of 46.9 percent in 2009 and 2010. POLARIZED GROWTH Investors cannot time the market, much as they might try. Strong downturns are prejudicial for portfolios and over the past couple of years, the risk management component has been given a far higher rating in the evaluation of managers before investment mandates are attributed. Investors are also concerned about the polarization of growth in emerging countries. Although there are now many brokers offering their services in the region and information is more fluid, investors remain cautious due to the risks — geopolitical, transparency and geographical — associated in investing in emerging countries. They therefore tend to modify their allocations to give more accent to tactical allocation than to strategic, long-term investment. Indeed, while investors poured $25 billion into emerging market equity funds in 2010, they have removed nearly $2 billion in the first two months of this year. Another consequence of the aftermath of the credit crisis is an acknowledgement of the inadequacy of investment yields in light of the liabilities faced by insurers and pension schemes as longevity increases. Asset Liability Management (ALM) is forcing managers to look for alternative ways of increasing yields without taking too much risk. As a consequence of the credit crisis, asset allocation has been largely reshuffled away from equities as investors scrambled to get a handle on their investment risk. Alternative investment managers running hedge funds or hedge-fund style absolute return funds have been solicited by pension schemes but trustees are conscious that between ex-ante volatility promises and ex-post crisis volatility there is a big difference. As such, annualized standard deviation for hedge funds from 2004 to 2006 stood at 11.76 percent but this figure almost doubled to 22.77 percent in 2008. Regulatory measures contained in Basel III and Solvency II will also limit bank and insurers exposures to equities and create a framework where risk is at the centre of investment decisions, helping to foster a top-down approach for risk management. Institutional players and individual investors alike are putting a premium on protecting assets as well as growing them and are eyeing the market with suspicion. The shift is ubiquitous. And successful fund managers will be those who accept risk criteria are emerging ahead of future returns in post-credit crisis portfolio management. (Editing by Joel Dimmock) ((dunny.moonesawmy1@thomsonreuters.com; +33 1 4949 5009))

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.

The evaluation of an investment is measured by its potential performance and risk, and historically, investors have given more importance to the former than the latter. Recent events in the market, however, have challenged the hierarchy, placing risk at the heart of investors’ thinking. It is little short of a revolution in the investment industry.

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