Funds Hub
Money managers under the microscope
How much do UK investors care about costs?
One way of measuring this is to look at the assets invested in index tracking funds (where minimising costs is a core part of the product) and compare this to funds of funds (where the importance of professional fund manager selection entails an additional cost).
With 30.5 billion pounds invested in the former and 56.6 billion pounds in the latter as of November 30 2011, it would seem that retail investors in the UK are almost twice as likely to pay more for active management and fund selection than to minimise costs and seek to mimic the returns of an index. A similar picture is revealed for sales activity in 2011.
Having been researching this subject since 1999, I continue to believe that transparency and awareness of the ‘drag’ of charges on returns are crucial for long-term investors. Of course cost awareness cannot guarantee investors’ happiness and neither will greater transparency inevitably lead to greater competition. But both are powerful selling points for the mutual funds industry.
Other comments on the current debate:
· Fiduciary responsibility. This concept is acknowledged in the UK – to act in the best interests of investors – but it has not been extended to the oversight of fees. This surely needs further consideration.
A choice between risk and return?
By Dunny P. Moonesawmy. Head of Fund Research for Lipper in Western Europe/Middle East and Africa. The views expressed are his own.
Hedge funds have delivered decent risk-return results over the past ten years. And as transparency and liquidity increased post-credit crisis, they have regained their appeal as providers of absolute return opportunities for investors. In addition, an increasing lack of market visibility globally has played to hedge funds’ supposed strengths, with total industry assets under management now exceeding the $2 trillion, according to Hedge Fund Research.
There is a divide, however, with the industry split between single hedge funds — totaling more than 11,000 in the Lipper database — and some 867 funds of hedge funds (FoHFs). The general perception is that single-manager hedge funds are the more risky investment and to cushion that risk, some investors prefer to diversify their portfolio by investing in FoHFs instead. But is it worth it?
An analysis of single hedge funds and FoHFs during the past ten years shows interesting results in terms of performance and risk. Indeed, whether on a cumulative basis over 3-, 5- or 10-years or accounting for calendar years in 2008, 2009 and 2010, single manager hedge funds performed significantly better on average than FoHFs.
For details of performance, click on this link.
Outperformance of single-manager hedge funds is clear during these periods but since the beginning of the year both single managers and multi-managers have performed poorly, in euro terms, with a little advantage for multi-manager funds.
On a risk level, we have an opposite situation. Funds of hedge funds demonstrated better resistance to the downturn, with a maximum drawdown over 3 years of -19.42 percent against -24.55 percent for single hedge funds. If we take their volatility into account, we have similar results, with FoHFs showing smoother performance pattern over 3, 5 and 10 years. We have here the mirror image of the performance factor, with FoHFs demonstrating strong risk-management compared to single hedge funds.
Morning Line-Up: ‘Pay complexity’, New Media fund, CD&R deal
News and views on the asset management industry from Reuters and elsewhere:
City urges end of ‘pay complexity’- FT
JP Morgan eye new-media fund – WSJ
Morning Line-Up: Thoroughbred, fees, fixed-income funds
News and views on the asset management industry from Reuters and elsewhere:
Investors in Thoroughbred fund granted early exit – NY Times
Yes, you can lose money in fixed-income funds – WSJ
Who’s who in the latest insider trading arrests – Reuters
The incredible shrinking fee – WSJ
Smaller hedge funds to enjoy inflows – Financial News
Shocking.. Toxic.. Nasties.. Devastating.. Leeches..
.. Some select phrases from this morning’s Daily Mail pop at greedy fund managers who rake in fees whether or not they’re beating the market. It might read a bit like an advertiorial for passive managers like Vanguard (which gets an unusually high number of prominent name checks) but it won’t be comfortable reading for other asset management execs.
The paper’s salvo gives a kicking to firms like Axa and Henderson and makes much of the secretive pay packages earned by the fundies and the marketeers. It also, somewhat bizarrely reckons the grey-suited long-only managers looking after your ISA are responsible for most of the yachts bobbing gently in the Marina at Monte Carlo.
It has been a long-running war of words since the financial crisis and it’s fair to say that active managers who fail to deliver do look increasingly isolated. It has been an immensely difficult market to call and more than ever outperformers have a patina of luck around their achievements. People like ‘safe-hands’ Philip Gibbs have stumbled and Neil Woodford’s jammy sale of BP at the end of last year has been the engine behind a rally back from ho-hum performance.
For balance, the Mail does note that index funds will, by definition always tend to underperform the benchmark once fees are taken into account, but nevertheless, the passive houses have reaped the benefits and have even started to devise ways to hold onto the money which gravitated their way in the market’s darkest days.
Some active funds, meanwhile, have sought to re-align themselves with their skittish customers by shifting the weight of charges towards performance fees, earned on positive returns, while some brave souls have allowed clawback of fees in down years.
Our own funds research firm Lipper has run the rule over the evolution towards performance fees and has produced a report which I’ve copied below. Their conclusion is pretty clear: performance fees in themselves do not solve the problem; if you really want to win back the clients, then you have to become a client.
In other words, stick your own money in, and manage it like your life (actually) depended on it.
Smith attacks hedge funds’ 2 and 20
Here’s the link to Terry Smith’s blog attacking the “unsupportable” practice of hedge funds charging their clients fees of 2 and 20 (2 percent annual and 20 percent performance).
Smith compares the maths that show a $1,000 investment in Berkshire Hathaway in 1965 (when Buffett began) would last year be worth $4.3 million, with a hedge fund charging 2 and 20.
Apparently, of the $4.3 million, $4 mln would belong to the manager and only $300,000 to you…
Morning line-up: Fees, realities and Aussies
News and views on the fund industry from Reuters and elsewhere:
Back to life; back to reality – FT
Terry Smith: fund manager – Guardian
Good fees? bad fund… – MarketWatch
Morning Line-Up: Hedgies attack euro, cling to fees
News and views on the hedge fund industry from Reuters and elsewhere:
Big hedge funds shorting the euro - Wall Street Journal
Hedgies seek clarity on new Singapore regulations - BusinessWeek
Ex-director of ops for Madoff charged - Reuters
Hedge funds resist cutting fees - Financial Times
IOSCO publishes systemic risk data requirements - Hedgeweek
Morning line-up: Banks find love in the hedgies, and heroes in our midst
News and views on the hedge fund industry from Reuters and elsewhere:
Big league hedgies buy banks – Reuters
Saving the world, one trade at a time – Economist
The quant fund in need of a renaissance – FT
Message to FoHFs: Work harder; cut fees – Reuters
Gulf cash set to flow? – Bloomberg
