Funds Hub
Money managers under the microscope
Absolutely Fabulous?
Among the side-effects of the financial crisis, the importance for European wealth managers and other intermediaries of both managing investors’ expectations and understanding fully what those expectations are, has been underlined.
This is not entirely new. The rise of absolute return products largely reflects intermediaries’ efforts to deal directly with client expectations that, for many, have taken a severe blow. It is worth looking back at the level of inflows to funds seeking absolute returns before and after 2008 (the nadir for the industry in terms of sales activity) to see how this has evolved.
To view the chart, click here.
The data not only show the relative level of in- and out-flows for absolute return funds in Europe since 2005, but serves as a means to illustrate how activity has shifted in Europe.
Up to the middle of 2007, investors in Italy, Switzerland and France were strong supporters of absolute return. However the failure of many of these funds through 2007-2008 sent investors running for the door. The best example of this is enhanced money market funds, primarily bought in France, where 31.6 billion euros of sales in 2005-2006 were followed by redemptions of 39 billion in 2007-2008 and essentially no activity since.
As the fund sales trends suggest, many investors were less than impressed with their funds’ performance as the effects of the credit crisis rippled through the financial markets. By early 2008 the banking ombudsman in Lausanne had already received complaints about absolute return products.
The previous year had seen the arrival of the Eligible Assets Directive (EAD), providing legally-binding guidance on which financial instruments could be included in cross-border Ucits funds, following the expansion of their investment capabilities with the implementation of Ucits III in 2003.
Are marathon runners trying to sprint?
“The long is short. Investment choice, like other life choices, is being re-tuned to a shorter wave-length.” So stated Andy Haldane of the Bank of England in a speech last month.
If one of the key features of a mutual fund is that it is a long-term investment, then concerns that money is being managed over decreasing time horizons should be treated seriously.
This concern was made all the more potent as it followed soon after a European Commission green paper also pointed to this issue with this comment: “It appears that the way asset managers’ performance is evaluated and the incentive structure of fees and commissions encourage asset managers to seek short-term benefits.”
So what insights can be elicited from Lipper’s data?
Portfolio turnover of mutual funds in the UK provides insights both in the range of holding periods for different funds, as well as how typical holding periods have varied over time.
Among 1,142 actively managed equity funds for which annual accounts have been published and analysed in order to calculate portfolio turnover (the lesser of purchases and sales divided by a fund’s average assets over one year), the median turnover is 59.2 percent.
How widely portfolio turnover varies can be seen by analysing this data by decile, revealing that the least active, or most long-term funds, had a rate of 18 percent or less (the bottom decile), while the most actively managed funds achieved a rate of 170 percent or more (the top decile). Around 40 percent of funds (accounting for 483 funds) had a rate of 50 percent or less, while just over one quarter (nearly 300 funds) posted a turnover rate of 100 percent or more.
Hedge funds vs mutual funds
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 took some heat from the credit crisis as liquidity and transparency became critical factors in investment decision-making. It’s fair to say hedge funds continued to deliver decent returns to investors, but how do they compare to mutual funds if we focus on performance and risk alone?
In 2008, the average return for mutual funds stood at a negative 22.91 percent. At the same time, hedge funds posted average returns of minus 8.37 percent. We might have expected a stronger rebound for mutual funds in 2009 and 2010 than for hedge funds, yet the data shows better average returns for hedge funds in both years. Positive returns in the sector stood at 22.36 percent and 18.08 percent respectively against 21.16 percent and 10.23 percent for mutual funds.
If we look at performance over a longer time frame, mutual funds posted annualized returns of 2.07 percent over 3 years and 1.85 percent over 10 years while hedge funds recorded returns of 8.81 percent and 3.77 percent respectively.
We have a different story on the risk side. Part of the appeal of hedge funds is that they seek to actively manage volatility, but managers struggled to keep volatility under control during the credit crisis. The 3-year annualized standard deviation was higher than mutual funds (19.19 percent against 16.65 percent) and the 10-year figures showed similar results (16.80 percent against 12.44 percent).
If we go deeper into the data, we can note that volatility is strongly linked to the asset class for mutual funds while at the same time performance and volatility are positively correlated. As a simple example, a bond category will tend to have lower volatility and lower performance than an equity category. And likewise, an aggressive diversified fund will likely to have higher performance and volatility than a conservative diversified fund.
To view a graphic of the performance data, click on this link.
Risk revolution
By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.
The evaluation of an investment is measured by its potential performance and risk, and historically, investors have given more importance to the former than the latter. Recent events in the market, however, have challenged the hierarchy, placing risk at the heart of investors’ thinking. It is little short of a revolution in the investment industry.
While performance is associated with opportunities, risk is linked with danger and the switch in thinking is prompting investors to take a more defensive approach.
There have been several factors behind that change. The market is more volatile and given to quicker and more abrupt downturns; there is a polarization of economic growth outside core western economies; demographic change has led to the growing importance of liability management; and regulatory constraints have put extra pressure on institutional players to limit risky investments.
Up to 1996, we enjoyed smooth growth trends in markets, with steady periods of drawdown and recovery. Over the past 15 years, however, the nature of market cycles has changed.
Periods of exponential growth have been followed by deep crises, creating opportunities for hedge-fund style managers but a nightmare for long-only managers trying to protect assets. Both institutional and retail investors have had a hard time during these two crises with significant consequences on their risk appetite. For a chart detailing the recent trends, click: http://r.reuters.com/gef88r
Data from Lipper shows 10.18 percent average annual growth of the MSCI World TR in dollar terms between 1970 and 1980, 16.3 percent the following decade and 15.92 percent in the 1990s. The figure stood at only 1.77 percent during the last decade due to the two major downturns — the bursting of the internet bubble and the credit crisis.
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
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…
RAB fund still paying the price
RAB Capital’s struggling Special Situations fund looks to have recorded a positive return in 2009, but after a bumper year for the industry it is still paying the price for the investments it made in illiquid assets before the credit crisis.
Having seen their investment lose around half its value in 2008 while much of the fund’s money was in hard-to-sell assets, the fund’s investors agreed in autumn ’08 to lock up their money for 3 years in return for a cut in fees.
Today’s update from the listed feeder fund shows a gain of 6.5 pct for the first 11 months of 2009, helped by a strong November.
However, the update also shows an interesting divergence in performance, which seems to reflect the demand by investors across the board for liquid assets, whilst many still shun illiquid holdings.
Whereas the fund’s listed investments (just over half of net assets) are up 122.6 pct in a boom year for most assets, the private portion (more than a third of assets) has dropped 38.7 pct.
As investors have found to their cost during the credit crisis, a 50 pct loss on an investment requires a 100 pct return subsequently just to get back to where you were before.
K1 performance chart shows steady gains
We hear German hedge fund K1 and its boss Helmut Kiener have attracted the attention of prosecutors, so it’s worth dipping into the hedge fund performance numbers to see what all the fuss is about.
Below is a chart from the K1 website showing the serene progress of Kiener’s “K1 Fund Allocation System” until the financial crisis sparked an unprecedented wobble that was quickly righted. The total return since inception though, is still comfortably above 800 percent.
@finflaneur.. interesting stuff at that link above… but are we sure that Kiener is actually Mike Myers?
