Funds Hub
Money managers under the microscope
10 years of fund industry evolution: Lipper
“A game of two halves” is a footballing cliché in the UK, but was particularly apt for the European funds industry in 2011. The stock market falls that began in July not only ended the healthy sales activity that had started the year, but triggered a wave of redemptions that rolled through the industry. While these outflows ebbed slightly in the final quarter of the year, there were few who did not feel the cold chill of investors withdrawing from mutual funds by the year-end.
Net sales of long-term funds (i.e. excluding money market funds) in 2010 (305.8 billion euros) exceeded not just those of 2009 (257.7 billion), but also the level achieved in pre-crisis 2006 (265.9 billion). Expectations were therefore high when the first half of 2011 saw inflows of 96.1 billion euros, but this was followed by outflows of 155.9 billion, so that the year as a whole ended in the red (-59.8 billion) for only the second time in a decade (the 2008 total was -391.4 billion euros).
Giving investors the motivation and confidence to move money out of deposits and into funds amid the ongoing political and economic maelstrom remains a crucial challenge for asset managers.
But a longer term view is also useful in fully understanding the current status of the industry and the dynamics that have been at work to shape its current structure.
PRODUCT DEVELOPMENT
2011 saw a slight contraction in the number of funds for only the second time in the past decade. The last time this happened (in 2009) the net reduction was 801, while the latest figure was a mere 43. In recent years there have been about the same number of fund launches in both halves of the year, but in the latest year there was an unsurprising tail-off (1,687 over the first half; 1,291 in the second) partly the result of some planned launches being shelved. Just as 2009 did not herald a new dawn of product rationalisation across the industry (there was a net increase of 871 funds in 2010), so it seems very unlikely that 2011 will either. Instead market conditions will largely dictate where product development priorities lie.
With new fund launches such a significant part of asset management companies’ activity, it is worth providing further insights here. Looking back over the past ten years it is possible to see the proportion of growth in the industry that relates to these new launches. Over the first five years (2002-2006), the 79 percent growth in industry assets was attributable to both new launches (60 percent) and existing funds (40 percent).
Are marathon runners trying to sprint?
“The long is short. Investment choice, like other life choices, is being re-tuned to a shorter wave-length.” So stated Andy Haldane of the Bank of England in a speech last month.
If one of the key features of a mutual fund is that it is a long-term investment, then concerns that money is being managed over decreasing time horizons should be treated seriously.
This concern was made all the more potent as it followed soon after a European Commission green paper also pointed to this issue with this comment: “It appears that the way asset managers’ performance is evaluated and the incentive structure of fees and commissions encourage asset managers to seek short-term benefits.”
So what insights can be elicited from Lipper’s data?
Portfolio turnover of mutual funds in the UK provides insights both in the range of holding periods for different funds, as well as how typical holding periods have varied over time.
Among 1,142 actively managed equity funds for which annual accounts have been published and analysed in order to calculate portfolio turnover (the lesser of purchases and sales divided by a fund’s average assets over one year), the median turnover is 59.2 percent.
How widely portfolio turnover varies can be seen by analysing this data by decile, revealing that the least active, or most long-term funds, had a rate of 18 percent or less (the bottom decile), while the most actively managed funds achieved a rate of 170 percent or more (the top decile). Around 40 percent of funds (accounting for 483 funds) had a rate of 50 percent or less, while just over one quarter (nearly 300 funds) posted a turnover rate of 100 percent or more.
Jim Saft: Monkey business
By Jim Saft
HUNTSVILLE, Ala., March 10 (Reuters) – Patience, particularly in investing, is one of those virtues everyone praises but for which no one seems willing to pay.
An investment manager given money to manage is going to do the same thing with it pretty much every time: put the money to work.
This is true almost always and almost without reference to how attractive the alternatives are. Partly this is because the fund manager reasons that you would not have given him money if you wanted him to keep it sitting idle in a liquidity account, but also because most fund managers spend most of their time managing a specific kind of risk: career risk.
Even if they may be personally convinced that the markets they follow do not represent good value, the decision to stay in cash is personally risky for them. People don’t get fired for trailing the index by a point or two, but they do often if they miss a big rally.
That leaves most money managers with a perverse incentive; look like everyone else, take a few small bets away from the index you track and live to pay off your mortgage and fully fund your kids’ educations.
It is also, I would argue, psychologically hard for primates like us to refrain from activity; big cats do well out of waiting for their moment but monkeys usually make a living through ceaseless activity.
Trimming equities in the summer freeze…
Leading investors around the world barely changed their exposure to assets in August, trimming equities slightly in favour of bonds, where they loaded up on top-notch corporates, Reuters polls showed on Tuesday.
Watch the video by clicking the link below:
K1 performance chart shows steady gains
We hear German hedge fund K1 and its boss Helmut Kiener have attracted the attention of prosecutors, so it’s worth dipping into the hedge fund performance numbers to see what all the fuss is about.
Below is a chart from the K1 website showing the serene progress of Kiener’s “K1 Fund Allocation System” until the financial crisis sparked an unprecedented wobble that was quickly righted. The total return since inception though, is still comfortably above 800 percent.
@finflaneur.. interesting stuff at that link above… but are we sure that Kiener is actually Mike Myers?
USS’s enterprise
The 23 billion-pound Universities Superannuation Scheme (USS) is boldly going where few investors are prepared to go at the moment and upping its allocation to hedge funds.
Despite last year’s record poor performance from the hedge fund industry, Britain’s second-biggest pension fund is sticking with a mission to double its allocations to hedge funds and private equity to 20 percent.
Pension funds were faced with a major problem after 2008 – do you buy or sell hedge funds?
If your equities are down 40 percent and your hedge funds down 20 percent, do you invest more in hedge funds because they performed better?
Or do you pull money out because they didn’t make money and because they’re now actually a bigger part of your portfolio than you’d originally bargained for, so you have to rebalance?
USS’s move backs up what some hedge fund firms have been telling me recently - that some institutions are very gradually putting money in.
Plenty of investors are pulling money out as fast as they can, either because their hedge fund investments disappointed their expectations of positive returns in all markets, or simply because some hedge funds offer a quicker means of accessing cash than some of their other investments.
