Funds Hub
Money managers under the microscope
from Global Investing:
We’re all in the same boat
The withering complexity of a four-year-old global financial crisis -- in the euro zone, United States or increasingly in China and across the faster-growing developing world -- is now stretching the minds and patience of even the most clued-in experts and commentators. Unsurprisingly, the average householder is perplexed, increasingly anxious and keen on a simpler narrative they can rally around or rail against. It's fast becoming a fertile environment for half-baked conspiracy theories, apocalypse preaching and no little political opportunism. And, as ever, a tempting electoral ploy is to convince the public there's some magic national solution to problems way beyond borders.
For a populace fearful of seemingly inextricable connections to a wider world they can't control, it's not difficult to see the lure of petty nationalism, protectionism and isolationism. Just witness national debates on the crisis in Britain, Germany, Greece or Ireland and they are all starting to tilt toward some idea that everyone may be better off on their own -- outside a flawed single currency in the case of Germany, Greece and Ireland and even outside the European Union in the case of some lobby groups in Britain. But it's not just a debate about a European future, the U.S. Senate next week plans to vote on legisation to crack down on Chinese trade due to currency pegging despite the interdependency of the two economies. And there's no shortage of voices saying China should somehow stand aloof from the Western financial crisis, even though its spectacular economic ascent over the past decade was gained largely on the back of U.S. and European demand.
Despite all the nationalist rumbling, the crisis illustrates one thing pretty clearly - the world is massively integrated and interdependent in a way never seen before in history. And globalised trade and finance drove much of that over the past 20 years. However desireable you may think it is in the long run, unwinding that now could well be catastrophic. A financial crisis in one small part of the globe will now quickly affect another through a blizzard of systematic banking and cross-border trade links systemic links.
Just take the euro zone for a start. HSBC economists on Friday said the costs of a euro zone breakup would be "a disaster, threatening another Great Depression" and far outweighed the costs of repairing the flawed fiscal backstops to the monetary union -- especially given the wealthier creditor countries within the union tend to ignore the benefits they've reaped from the euro over the past 12 years. Aided by the "entangling effects" of the euro, it showing that cross-border holdings of capital have exploded from about 20% of world GDP in 1980 to stand at more than 100% now (global GDP was estimated by the IMF to be about $62 trillion last year). By contrast, the first wave of globalisation in the late 19th and early 20th century saw cross-border holdings peak at 20% of world GDP before WW1 reversed everything.
"A euro break-up would be a disaster, threatening another Great Depression," wrote HSBC chief economist Stephen King and economist Janet Henry. " Cross-border holdings of assets and liabilities within the eurozone have risen dramatically, leading to a tangled web of mutual financial dependency. With the re-introduction of national currencies, disentanglement would proceed at a rate of knots, undermining financial systems, generating massive currency moves, threatening hyper-inflation in the periphery and triggering economic collapse in the core."
That tangled web of trade and finance, however, goes well beyond the euro zone. One of the reasons the fast-growing emerging markets look, for the second time in four years, set to succumb to the western financial crisis is that western banks -- European banks in particular -- provide them with so much finance. RBC economists, citing data from the Bank for International Settlements, shows outstanding European bank lending to emerging markets at some $3.4 trillion -- almost 10 times that of the U.S. banks and more than three times Japanese bank lending.
JP Morgan, meantime, reckons a one percentage point decline in western real domestic spending growth (GDP less net exports) leads to a 2.7 percentage point drop in exports from emerging economies as a whole. If their forecast for a recession in the euro zone and US slowdown to 1 percent annualised growth by the middle of 2012 proves correct, then that should slow EM export growth to 6% annualized in 4Q11 and just 4% annualized in 1H12 from double digit growth rates earlier this year. While that would still be far better than 2008/2009 emerging export collapse of about 20%, the projected pace of export growth would still be weaker than at any point in the expansion of the 2000's save during the SARS scare.
Surfing the sector flows
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.
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).
Morning Line-Up: EMI, “dodging the real problem”, NYSE Euronext
News and views on the asset management industry from Reuters and elsewhere:
Citigroup eyes EMI sale - New York Post
Investors lambast report in banks’ practices – Daily Telegraph
NYSE Euronext shareholders skeptical of Nasdaq, ICE bid- Reuters
The Naked Truth
By Ed Moisson, Head of UK & Cross-Border Research at Lipper
Do independent asset managers perform better than bank-run funds?
Lipper was recently approached to analyse the difference in performance between funds operated by broader financial services companies (banks and insurers) and those managed by ‘pure play’ asset managers.
This research came in the wake of comments made by Peter Hargreaves, founder of IFA Hargreaves Lansdown, who said in September that many funds in the UK run by banks were “seriously crap”.
With the temperature apparently rising, it might be a little foolhardy to enter such a debate. Yet objective analysis is surely where independent fund researchers can best provide a useful contribution. Besides, it might be gettin’ hot in here, but I for one will not be takin’ off my clothes.
For those wanting the details of my approach, please scroll to the foot of this article. For those with shorter attention spans, we can cut to the chase and reveal that for ‘pure players’, or what are sometimes called independent asset managers, the greatest proportion of funds were most commonly in the first and fifth quintiles (the worst and best relative performers), presenting a u-shaped curve for the distribution of these groups’ fund returns. This pattern was most pronounced for 3- and 5-year performance, while over 10 years the differentiation between quintiles is smaller.
Click here for the charts for UK-domiciled funds: http://r.reuters.com/ren77r
Morning Line-Up: PAI auction, buy-out study, US banks results
News and views on the asset management industry from Reuters and elsewhere:
PAI Partners auctions Compagnie Européenne de Prévoyance – FT
Utilities vs banks: The evidence
Alpesh Patel caused quite a stir on Britain’s Radio 4 this morning. The CEO of boutique investment house Praefinium Partners argued that Bob Diamond was on “a suicide mission to bring down capitalism”. No word yet from the Barclays CEO on that one.
Maybe that was just the line his PRs had promised to the BBC producers to get him on air, though, and there is more logic to Patel’s more substantial point about value creation in the banking sector in relation to bonuses and pay.
“What concerns me is higher salaries for what? In 14 years they have managed to add absolutely zero to the share price of Barclays… you’d think someone in banking would know which direction a share price is supposed to go in.”
Perhaps Patel’s most enticing comment was to suggest that utilities CEOs would make better banking executives, saying that Diamond should call on BG Group’s boss Frank Chapman to step in “to run [the] business properly and help those share prices go in the right direction because it helps pensioners and it helps consumers who might be shareholders.”
So just how well are those utilities chiefs doing against the.. err… morally-complex banking execs? One of our graphics gurus has knocked up the below to show how total returns match up in a few sectors. Draw your own conclusions.
No.. well maybe. I’d have to check.
But I think we we’re offering some evidence on the issues Patel raised without endorsing them — we posted the chart to allow readers to draw their own conclusions. He probably does have a point about value creation vs pay, but his point about utilities CEOs making better bankers is clearly more provocative than practical. That said, it would be kinda fun to see what Bob Diamond would do with BG Group…
Morning line-up: Calpers/Goldman, bank bail-out taxes, Tourre’s City licence
News and views on the fund industry from Reuters and elsewhere:
US top pension fund scrutinises Goldman’s business practices - Daily Telegraph
Goldman’s Tourre stripped of City licence - Guardian
Lansdowne builds up Lloyds stake - Reuters
Banks face new taxes to future bail-outs - Reuters
From Reuters TV: Shorts target financials
Citi is among the players facing pressure as the stock threatens to breach key support levels, while CIT Group has seen some 22 percent of its float in the hands of shortsellers, according to Reuters Specialist Editor Dan Burns.
from Summit Notebook:
Private banking: you may be worth it
Those who tend to avoid posh restaurants in Geneva’s expensive Rue du Rhone district and famed private banks because they believe they are not rich enough may be given a second chance at century-old wealth manager Julius Baer.
The Swiss private bank, which has made its name thanks to the services it offers to the ultra-rich, believe its powerful high-end brand may be keeping potential clients away.
“It’s a bit like the nice chic restaurant on Rue du Rhone you walk by 10 times and think: “I am not so sure I can go in there, it might be a bit sophisticated,” Boris Collardi, Chief Executive of Bank Julius Baer, told the Reuters Wealth Management Summit in Geneva.
“And then you end up going in there and you have a wonderful meal.”
Private banking services at Julius Baer start at around 1 million Swiss francs.
Worth trying?
The morgue after Christmas
He said at the Reuters Restructuring Summit in London that by the end of the year banks will issue “in patient”, “out patient” or “morgue” judgements as they go about the business to decide who gets much needed loans and who does not.
A tough time for all of us then. If companies stop paying suppliers it will almost inevitably be all the small companies that are pushing into insolvency. I can see a much needed focus on credit control this Christmas for smaller companies!
