Funds Hub

Envy, desire and basis points

I would like to tell you a story. It’s one about the tempestuous relationship between fund managers and their investors, a tale of envy, desire and basis point negotiations. You may have spotted by now that this is not the plot for this season’s latest blockbuster.

My story has recently gained a little extra spice with two old-fashioned heroes riding into view. One from the West – Omaha - and the other from the East - well, his father hailed from Russia – with both willing to make a little less money in order to help their fellow citizens. Warren Buffett and Stuart Rose are not alone; others in France and Germany are also saddling up. These horsemen seem to be heading in the opposite direction from those in the European funds industry.

There is one aspect that I’d like to look at to explore this: the fees generated by funds in relation to their assets. And in this case Europe and the US look pretty different.

One of the implicit benefits of investing in a mutual fund is that investors enjoy lower annual charges as a result of a fund’s success in increasing assets, in other words that costs fall as more investors join – economies of scale.

The following chart illustrates these economies of scale in action for funds sold across Europe. But although the disproportionately high expenses borne by the smallest funds does mean that average total expense ratios (TERs) fall as assets rise, crucially, such economies of scale do not continue through further asset rises among larger funds.  View the chart by clicking here.

ECONOMIES OF SCALE

When comparing the UK to continental Europe there appears, at first, to be a different approach. But on closer scrutiny one can see that the apparent lack of economies of scale being passed on to investors largely reflect the fact that the smallest funds in the UK tend not to let expenses get out of control and create disproportionately high TERs.

Morning Line-Up: Buffett, JP Morgan in Brazil, EU hedge fund rules

News and views on the asset management industry from Reuters and elsewhere:

 Warren Buffett’s latest pick – Reuters

JP Morgan in Brazil deal-WSJ

EU’s new hedge fund rules – Reuters

Northern Rock’s boss to quit? – Sky

Morning Line-Up: CIC told to buck up; brisk bidding for Buffett

News and views on the hedge fund industry from Reuters and elsewhere:

China SWF put under pressure to post better returns - Reuters

Pictet unveils High-Dividend Selection portfolio - Fund Strategy

Buffett lunch bid tops $900,000 - Reuters

Which Investment: Commodity futures or producers? - Morningstar

UBS faces Lux probe over Madoff funds - Reuters

John Paulson gains Buffett’s Midas touch

Hedge fund manager John Paulson, who made a fortune currectly betting on the U.S. housing market collapse in 2007 and then the broader financial crisis last year, is starting to wield a Midas touch long associated with Warren Buffett.

Thanks to its bearish views, Paulson & Co over the past few years vaulted to the top ranks of the world’s largest hedge fund, multiplying its assets and earning Paulson a king’s ransom.

More recently, though, Paulson has been scooping up stakes in some beaten down companies. The latest winner: CB Richard Ellis. Earlier today the world’s largest real estate services firm said it sold $100 million of stock to Paulson & Co.  Shares surged 15 percent on the news.

Investors are poring over his holdings with the same fervor they track investment moves made by Buffett, widely known as one of the world’s most successful investors.

Earlier this year, Paulson was part of an investor group that acquired failed lender IndyMac Bancorp, providing a small vote of confidence in the recovery of the U.S. banking system.

Less comforting has been his views on gold, historically a hedge against inflation. In March gold miner Anglo American announced the sale of its remaining 11.3 percent stake in AngloGold Ashanti Ltd to Paulson for $1.28 billion. In his latest SEC disclosures, Paulson also reported large new positions in SPDR Gold Trust, Gold Fields and the Gold Miners ETF.

Gold futures and mining companies have surged as many investors share Paulson’s concern about inflation risks. For all our sakes, we’ll have to hope Paulson is wrong this time.