The Naked Truth

February 1, 2011

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:

Turning to banks and insurers, an inverse pattern was more dominant with a smaller proportion of top and bottom performers (fifth and first quintiles) and a higher proportion of second to fourth quintile funds – an n-shaped curve. Encouragingly for banks and insurers, this pattern tended to flatten over time with a more even spread of funds in different quintiles over 10 years.

In other words, although proportionately more of pure play asset managers’ funds are among the best performers, proportionately more of their funds are also among the worst performers. And the reverse is true for broader financial services groups. Having said this, the distribution patterns are not perfect and variations emerge in different markets.

The findings are broadly similar within each market using consistent return or total return data, and between 3-year and 5-year performance, but 10-year performance does generally flatten the distribution patterns otherwise established. For both pure players and banks and insurers over this longer time period the proportion of funds are more evenly spread across performance quintiles.

While it would have been nice to have found a fundamental truth about investing, instead we have come up with some new insights as well as further questions. The fact that pure play asset managers have been able to get proportionately more of their funds among the best performers is clear, but this does not mean that they have been able to avoid poor performance.

As to the questions that arise, one that stands out is why pure play managers have a greater proportion of their funds among the best performers? While our research so far has not addressed this question, part of the answer may lie in the sort of culture that different organisations foster. An interesting example here is the bond specialist PIMCO, which is part of Allianz yet has clearly managed to preserve a distinct identity and approach. Meanwhile it will interesting to keep an eye on organisations such as BlueBay, bought by Royal Bank of Canada in December, and Thames River Capital, which became part of F&C in September. Thames River’s CEO had previously made much of his company’s boutique culture so it will be interesting to see how such developments evolve.

I can hardly be alone in assuming that anything that a new parent company does to threaten a culture that a boutique developed, and which became an integral part of its success, would be viewed dimly by fund investors. Partly as a result of this, in recent years we have seen the rise of companies promoting themselves as ‘multi-boutique’ operations.

So does Mr Hargreaves have a point? Interestingly, some of our findings are most pronounced when looking at the UK funds universe, but even then the research does highlight that both types of fund business always have a spread of funds, however uneven, in different performance quintiles. In other words, investors cannot afford to rule out funds managed by a fund company just on the basis of its ownership structure.

At the same time it’s worth bearing in mind that continental European industries tend to be far more dominated by banks than the IFA-led business that is such a distinguishing feature of the UK funds industry. In turn this has resulted in funds with established performance track records generating far greater inflows in the UK, proportionately, than is the case in many other European countries, where flows have traditionally been weighted to recent fund launches. This is another reason why distribution models are being looked at ever more closely by European regulators.

Finally a little more detail on the methodology. I decided to look at four different universes of funds, those registered for sale in France, Germany, Switzerland and the UK. In each universe I looked at a slightly different range of fund classifications to reflect local activity, but in each case these included equity, bond and mixed asset funds, as well as both developed and emerging investments. Performance data was prepared over 3, 5 and 10 years, with funds ranked by quintile, assessing both total returns and Lipper’s consistent return measure, which evaluates risk-adjusted performance.

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