Funds Hub

Lipper: Fighting fragmentation

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.

The first UCITS (Undertakings for Collective Investment in Transferable Securities) directive was created in 1985 with the aim to lay the foundations for a single European retail market.

Faced with regulatory gaps and other flaws, it had only limited success and a second attempt was initiated in the early 1990s, only for that project to be aborted due to major disagreements between member states.

Thereafter, a real effort of coordination and communication by the member states allowed the UCITS III Directive to emerge in 2001, the implementation of which has been an important milestone in the history of the European investment funds industry.

We have witnessed the beginnings of a unified regulatory platform, enhanced protection for retail investors and an expanded range of products and strategies.

Nevertheless, the European fund market still suffers from fragmentation, which penalizes the performance delivered to investors. Relatively lower levels of assets under management make it difficult to benefit from economies of scale.

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

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.

Agriculture funds make hay…

There’s potash in them thar hills… and maybe sometime soon we’ll be wondering aloud whether potassium carbonate (thanks: Wikipedia) can push on to $2,000 per ounce. In the meantime, the buzz around fertiliser stocks has driven agriculture funds to some eye-catching outperformance.

We’ve taken a look at performance in August among equity funds available to buy in Britain. Stuart Winchester’s Thai equities fund is putting others in the shade, and a few gold funds are dotted about near the top of the rankings, but we liked the story behind the agri funds’ outperformance, riding on the back of a wave of M&A activity. You can read the story here.

There are some people here who dismiss the rationale behind the love for fertiliser stocks and the grander macro themes of wealthier emerging market populations requiring more food and meat, but Bryan Agbabian at Allianz RCM’s Agricultural Trends fund is a long term believer.

“BHP’s move echoes our longer-term fertilizer thesis as well as our belief that softening in grain prices is largely behind us,” he tells us via email. “More specifically, BHP’s offer recognizes the growing need for yield-enhancing agricultural inputs, particularly in Emerging Markets where Potash has significant exposure; Potash mines are considered to have the best potash ore with the lowest production costs. Continued population growth, urbanization, and income growth will continue to drive robust demand growth and the need to maximize the productive capacity of the world’s limited supply of arable land.”

In short, the agri funds reckon this is just the start of their grand ascent.

“While shorter-term opportunities exist, we believe agriculture funds should be viewed as long term opportunities deserving of stable allocations,” Agbabian continues.  ”Long-term, we believe global population growth and rising incomes, particularly in emerging markets (EM), has led to changes in how much, what, and how the world eats.”

“These factors are straining the world’s finite supply of arable land, setting the stage for a long-term supply/demand imbalance. We seek investment opportunities along the entire food supply chain, from companies that offer solutions to increase output per acre, to companies that process and distribute food to end consumers.”

Morning line-up

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

Will ETFs replace hedge funds?…. No – Seeking Alpha

Hintze the Prince’s philanthropist – Bloomberg

Hedgies to top stocks, bonds in 2010 – Reuters

Calpers probes hedge fund advisors – LA Times

Managed futures on the rack – Reuters

Managing for the future

One thing that the credit crisis has demonstrated is that even performing well isn’t always enough to stop investors in need of cash from taking their money out of a hedge fund.

The industry had its worst year on record last year, losing nearly 20 percent in performance terms, but not everyone lost money.

Managed futures, which bet on trends in futures markets, was the top-performing strategy with a gain of 18.33 percent, according to Credit Suisse/Tremont, helped by the big trends (mostly downwards) in a whole variety of markets last year.

Plenty of funds of hedge fund managers think 2009 will see similar trends and think this strategy could do well.

So money is pouring into managed futures?

Well, not quite. According to a Lipper Tass report, managed futures, which tends to offer good liquidity terms to investors, saw the second-biggest outflow of any strategy in the fourth quarter of 2008 at $23.95 billion.

It seems that for some investors, the focus is so much on the short-term future that king cash wins out even when positive returns are on the table.