Funds Hub
Money managers under the microscope
Risk Management: Did fund managers learn their lesson?
By Detlef Glow, Head of EMEA Research at Lipper. The views expressed are his own.
In the last decade investors and fund managers faced two major crises in the stock markets, the popping of the technology bubble in 2001 and financial crisis starting in 2006.
Portfolio managers suffered average losses of about 50 percent in the wake of both crises, leading investors to question what their fund managers learned.
A Lipper and Avana Invest study on the maximum drawdown of actively managed funds found that those fund managers must have introduced new risk management tools after the bust of the technology bubble. Still, they failed to meet investor expectations on managing risk.
The changes led to smaller tracking errors, but the funds suffered nearly the same losses shown in their respective markets during the 2006-2010 financial crisis.
The study by Lipper and Avana, a German asset management boutique firm, found that portfolio managers started a risk management system that measured relative risk compared to their benchmarks instead of measuring absolute risk in terms of losses.
The new management guidelines did not meet the expectations of private investors and led to the following conclusions: Relative risk management systems are penalizing fund managers if their risk compared to the benchmark moved above a defined level. The study found that a fund manager was not allowed to hold a high percentage of his portfolio in cash or decrease the weighting of a specific industry to zero, as this would increase the risk of the portfolio relative to the benchmark.
Morning Line-up: London quant funds, end of QE, death of stock-picking
News and views on the asset management industry from Reuters and elsewhere:
London funds seek an edge in ‘quant’ market – FT
Morning Line-up: Smaller hedge funds, state meddling and board diversity
News and views on the asset management industry from Reuters and elsewhere:
Average fund of hedge funds size drops by half – Financial News
Rising state meddling in EM companies irks investors – Reuters
Morning Line-up: Investors get picky with emerging markets, BlackRock sets sights on U.S. retail
News and views on the asset management industry from Reuters and elsewhere:
Warier investors seek specialized emerging market funds – Wall Street Journal
Morning Line-up: Hedge funds flatline, investors vet banker pay
News and views on the asset management industry from Reuters and elsewhere:
Hedge funds failing to handle choppy markets – Reuters
Spain’s bank rescue hits headwinds – WSJ
Investors turn spotlight on bank staff paycheques – Reuters
Morning Line-up: Japanese ETFs, UK non-doms, Swiss hedge fund
News and views on the asset management industry from Reuters and elsewhere:
U.S. investors place record wager on Japanese funds – New York Times
UK wealth industry relief at new rules on non-doms – Reuters
That’s all folks
The mood at this year’s Fund Forum, if not exactly upbeat, has been less sombre than last year’s introspective summit, with a few more cocktail parties around the stands, but asset managers remain on the whole subdued.
The continuing market volatility has a lot to answer for, with renewed worries about a double-dip recession overshadowing events. But if nothing else, the recession has forced exhibitors in the Forum’s trade hall to be a bit more imaginative in their freebies this year.
Service provider Bowne had some intriguing foldaway brushes and brightly coloured baggage tags that attracted many a delegate whilst the return of an ice cream cabinet went down a storm in the oppressive heat.
Older asset managers may remember the notorious Rome Fund Forum where the arrival of the ice cream cart once a day would trigger a mobbing round the stand from rival exhibitors melting in the non air-conditioned trade hall. Thankfully the Grimaldi is somewhat better equipped.
The entertainment on offer has also strayed beyond the norm, from fund industry band The Derivatives performing at Kneip’s opening White Night party, to the giant Japanese zither-type instrument that serenaded delegates on Wednesday evening.
But for asset managers hoping the recovery would strengthen from here, the return of the tiny side plates for the buffet lunches for a second year was a worrying portent.
Perhaps there is a shortage of full-size dinner plates in Monaco, or maybe the Grimaldi Forum is just concerned about fund managers’ waistlines. Either way, it necessitated tiresome repeat visits to the food tables for hungry delegates.
Piggy in the middle
Fitch’s annual review of the European asset management industry dished out some home truths for fund firms hoping they can begin to put that horrible financial crisis behind them.
Unveiling highlights from Fitch’s upcoming report at a briefing this week, Manuel Arrive, a senior director at Fitch Ratings, said he expects assets under management to rise more slowly and pressure on revenues to continue as investors shift to lower margin products. “Asset managers remain vulnerable to a renewed market downturn,” he said.
Asset managers slashed costs by between 10 and 15 percent through the recession and Arrive said they could not reduce costs further without compromising their franchises. Those who weathered the downturn the best tended to be the big diversified managers and specialists with good track records in the asset classes that were in demand.
But Arrive was critical of fund firms occupying the middle ground, arguing that the crisis had revealed a lack of focus and specialisation with “misplaced” innovation reflected in ‘product of the month’ launches. “ Managers need to decide if they are are a cost leader (selling passively-managed products cheaply in bulk) or a high value added provider. Being stuck in the middle is not the best place to be. Tougher decisions need to be taken in respositioning,” he said.
But despite pressure on fees from institutional investors, on average, asset managers have stayed profitable, suggesting there will be little impetus to take those tough decisions if the markets stay bouyant. “Margins are still high and asset managers don’t need growth to survive,” said Aymeric Poizot, regional head, EMEA, at Fitch.
from Summit Notebook:
Time private bankers got professional
It's hard to imagine that a banker who represents multimillionaires would be anything but professional - but a top executive at a leading global bank thinks that's precisely the wealth management industry's problem.
"There is so much mediocrity in the industry we have to raise the bar here," said Gerard Aquilina, vice chairman of Barclays Wealth, at the Reuters Global Wealth Management Summit in Geneva.
To Aquilina's way of thinking, private bankers need the same "institutional rigor" as investment bankers in the way they operate. To this end the bank is looking to pursue only top-quality hires.
"Our strategy is not to be the hoover that comes and hires willy-nilly, we want to be much more selective," said Aquilina -- perhaps an ironic view given Barclays acquired thousands of investment bankers from the ashes of the fallen Lehman Brothers last year.
But he and his colleagues are so sure of their position that he said they are working on developing MBA-level courses with some unnamed top universities on private banking, especially as they see fewer and fewer interns turning up their noses at the prospect of a three-month rotation in the private banking shop.
