Funds Hub

Money managers under the microscope

Envy, desire and basis points

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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.

A choice between risk and return?

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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.

Knowing me, knowing you..

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For a fund company expanding out of its home market, a crucial question is whether a distribution strategy that works well locally will also work in other countries. You might call it the Abba Dilemma: Knowing me, knowing you?

The Swedish popsters’ 1977 hit single went on to suggest “there is nothing we can do”, but new research from Lipper hopes to shed some light on this issue.

Do do do…

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A new song has emerged in the European funds industry, born in the midst of the financial crisis. It is called “let’s all do a Carmignac”. It may not be quite as catchy as the Conga, and maybe not quite as much fun, but it has certainly gained a number of followers.

The fund performance and distribution strategy at Paris-based Carmignac warrant more column inches than are available here. But more broadly, it is well worth looking at some of the numbers that have led others to dance to its historically-unfashionable tune of mixed asset, balanced investing, as well as examining wider industry activity to see what insights can be gleaned.

SRI can find strength through unity

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- 14:13 21Mar11 -COLUMN-SRI: From fashion accessory to industry staple By Detlef Glow, Head of EMEA Research at Lipper. The views expressed are his own. FRANKFURT, March 21 (Reuters) – Sustainable investment, socially-responsible investment (SRI) and environmental, social, governance (ESG) approaches have been hot topics in the funds industry for what seems like a very long time. Hot, but not boiling. One aspect which serves to cool it all down is that the steadily increasing popularity of such investments has prompted portfolio managers to try and differentiate themselves by applying a host of slightly different parameters for their analysis or using different names for their investment approach. It doesn’t help that the broad sector itself can be referred to in a host of ways too: Ethical? ESG? SRI? Sustainable? This has created an expanding jungle of acronyms and names used within the industry, as well as an expanding collection of confused private investors, portfolio manager, analysts, journalists and other professionals. A number of studies have confirmed that investors are struggling to make informed decisions as they attempt to build a coherent sustainable investment strategy. In February 2009, a study by Union Investment asked 256 professional investors about their knowledge, preferences and perspectives regarding this arm of the industry. The main outcome was this: “Everyone is talking about sustainable asset management but as of yet it has not become firmly anchored in many portfolios of institutional investors such as banks, insurance companies and major corporations.” Nevertheless, the European investment industry has tried in the recent past to attract fresh money by launching new active managed sustainability funds in emerging markets or linked to hot topics like green energy. There are also new exchange traded funds (ETFs) which track indices based on sustainable or ethical selection criteria. Even if some of these developments have been driven by fashions in investment trends, these new products are in general a move in the right direction; investors do now have more choices to integrate SRI/ESG strategies into their portfolios. However, it will take more than just a few new funds to drive the development of sustainable investments further. MAINSTREAM From my point of view, one of the most interesting questions to ponder is why, if everybody wants to invest in a more sustainable way, do the vast majority of asset managers not use sustainable selection criteria within their mainstream investment processes? One reason could be the relative lack of information on the impact of these strategies in terms of performance and costs to their portfolios. On the other hand, there are a number of SRI/ESG strategies which have proven their ability to add value to regular investment management approaches. Asset managers also raise the point that they don’t want to lose investment opportunities by placing restrictions on industry sectors which may impact their ability to generate alpha. This issue could be fixed by using a best-in-class approach which allows the portfolio manager to invest in the most sustainable companies from all industry sectors. But from my perspective, it does not make sense to implement a sustainable investment approach which allows the fund manager to invest in harmful or unsustainable industry sectors. There are already a number of asset managers, after all, who have successfully integrated sustainability selection criteria into their mainstream portfolios, and which do not look like they are facing issues on this. There are obstacles, certainly, but there is also a clear route to take sustainable investment strategies from a periodically fashionable niche into a broad and commonly-used investment strategy — and it involves tackling that jungle of divergent approaches which has marked the industry’s evolution. Most studies looking at investors’ views on socially- responsible investment indicate that there is a lack of transparency which stops institutional as well as private investors from implementing SRI criteria in their portfolios. That implies that the biggest challenges for the industry are to educate clients and prospective clients, and also to focus on the development of common standards for SRI/ESG through associations like social investment forums (SIF) or multinational organizations like the UN-PRI. See http://www.unpri.org/ Combine this commonality of approach with transparent products and you will attract new assets from investors who are still sceptical of the setup and selection criteria used for funds and uncertain about the evaluation methods which are applied to allocations in their portfolios. (Editing by Joel Dimmock) ((detlef.glow@thomsonreuters.com; +49-69-7565-3518)) Keywords: COLUMN/LIPPER Monday, 21 March 2011 14:13:41RTRS [nLDE72K0EU] {C}ENDS

By Detlef Glow, Head of EMEA Research at Lipper. The views expressed are his own.

Sustainable investment, socially-responsible investment (SRI) and environmental, social, governance (ESG) approaches have been hot topics in the funds industry for what seems like a very long time. Hot, but not boiling.

Lipper: Fighting fragmentation

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By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own.

The European investment funds industry has been reshaped over the last 25 years by EU directives designed to improve efficiency, strengthen competitiveness and boost distribution. However, the latest battle to reduce fragmentation of the industry is looking like a hard one to win.

Jim Saft: Monkey business

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- 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. “Patience is also required when investors are faced with an unappealing opportunity set,” James Montier of fund manager GMO writes in a letter to clients that argues that no major asset class currently offers fair value, much less a margin of safety. See www.GMO.com “Many investors seem to suffer from an “action bias” — a desire to do something. However, when there is nothing to do, the best plan is usually to do nothing. Stand at the plate and wait for the fat pitch.” The baseball metaphor is apt; nothing gets less respect, historically, from the people who decide who gets to play baseball for a living than the walk. Batters who are willing to take pitches used to actually be thought of as lazy, even though recent statistical evidence indicates that the ability to get on base is highly correlated, amazingly enough, with scoring runs. So it is with investors; deciding not to act, not to participate when value is not there is both freeing and likely to lead to better returns over the long haul. That said, there is absolutely no doubt that sitting out overvalued markets is a career killer for investment professionals and the kind of tactic best discussed with one’s spouse well in advance. BILL GROSS’ BIG BET This brings us to the astounding bet currently being made by bond king Bill Gross and PIMCO, whose flagship Total Return Fund, the world’s biggest bond fund, has dumped all U.S. government-related securities, including Treasuries and agency debt. Gross took cash to 23 percent of the fund, up from just 5 percent a month ago. In the Unconstrained Bond Fund, which is given more latitude, cash is an unbelievable 92 percent. In part perhaps this reflects that Gross — rich, a brand unto himself and well along in years — is past the point of managing career risk. It also, though, reflects the extraordinary state of markets today. Quantitative easing has effectively rigged the markets by buying up huge amounts of Treasuries. This has prompted a rally in riskier assets and raised legitimate questions over who will be there to buy U.S. government debt when the QE program comes to an end on June 30. Gross argues that this will come as a shock to risk markets and Treasuries alike. If it does and PIMCO keeps its portfolio looking like it does now, Gross will have quite a fat pitch to hit with his bundle of cash. If not, well then … It all puts me in mind of Tony Dye, a legendary British fund manager who earned the nickname “Dr Doom” with his  correct analysis of the stock market bubble that popped in 2000. Dye, who was the dominant manager in a highly concentrated pension fund industry, was so convinced of the bubble that at one point he took his main fund to a zero weighting in U.S. stocks. Hilariously, Dye’s funds were so large that they distorted the index used to judge fund manager performance and many of his less convinced peers duly turned bearish too, managing their own careers. Dye, I hate to tell you, was bearish right until he was forced into early retirement in March of 2000, less than a month from the top of the market. (Editing by James Dalgleish) (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on [SAFT/]) ((jamessaft@jamessaft.com; Tel: +1-256 715 1303)) Keywords: COLUMN MARKETS/SAFT

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.

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