Unstructured Finance

10 years of fund industry evolution: Lipper

“A game of two halves” is a footballing cliché in the UK, but was particularly apt for the European funds industry in 2011. The stock market falls that began in July not only ended the healthy sales activity that had started the year, but triggered a wave of redemptions that rolled through the industry. While these outflows ebbed slightly in the final quarter of the year, there were few who did not feel the cold chill of investors withdrawing from mutual funds by the year-end.

Net sales of long-term funds (i.e. excluding money market funds) in 2010 (305.8 billion euros) exceeded not just those of 2009 (257.7 billion), but also the level achieved in pre-crisis 2006 (265.9 billion). Expectations were therefore high when the first half of 2011 saw inflows of 96.1 billion euros, but this was followed by outflows of 155.9 billion, so that the year as a whole ended in the red (-59.8 billion) for only the second time in a decade (the 2008 total was -391.4 billion euros).

Giving investors the motivation and confidence to move money out of deposits and into funds amid the ongoing political and economic maelstrom remains a crucial challenge for asset managers.

But a longer term view is also useful in fully understanding the current status of the industry and the dynamics that have been at work to shape its current structure.

PRODUCT DEVELOPMENT

2011 saw a slight contraction in the number of funds for only the second time in the past decade. The last time this happened (in 2009) the net reduction was 801, while the latest figure was a mere 43. In recent years there have been about the same number of fund launches in both halves of the year, but in the latest year there was an unsurprising tail-off (1,687 over the first half; 1,291 in the second) partly the result of some planned launches being shelved. Just as 2009 did not herald a new dawn of product rationalisation across the industry (there was a net increase of 871 funds in 2010), so it seems very unlikely that 2011 will either. Instead market conditions will largely dictate where product development priorities lie.

How much do UK investors care about costs?

As the debate on fund charges heats up, the appeal of having a barometer to gauge investors’ attitudes to fund costs has risen. Ideally this would go beyond opinion polls and show not just what investors think, but what they actually do.

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.

Jim Saft: Monkey business

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.

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.

Here’s lookin’ at you KIID

The vexing question of how much to tell retail investors about what exactly they are buying has been exercising industry participants at the Reuters European Funds Summit. Although the sentiment is for more transparency and simplicity, as exemplified by the EU’s new two page marketing document, some managers feel this won’t fully reflect the risks and processes involved in a product.

The Key Investor Information Document (KIID), to be rolled out under UCITS IV, will replace the little loved ”simplified” prospectus as the primary document via which fund promoters communicate with prospective clients – something that makes some managers very uneasy.

Noel Fessey, managing director of Schroder Investment Management in Luxembourg, admitted he had a bee in his bonnet about KIID, which requires managers to be very concise in their descriptions. “Under UCITS IV the fund prospectus becomes the subordinate document but that’s the main document in which you can set out all the risks.”

Sovereign Funds sextuple down

They may be placing smaller bets, but sovereign wealth funds were back with a vengeance in the third quarter.

Global corporate mergers and acquisitions activity involving sovereign wealth funds jumped sixfold to nearly $22 billion in the quarter, with 37 deals completed. Global announced M&A volumes involving state investment vehicles stood at $21.8 billion, up from $3.6 billion in the second quarter, according to our data.

The number of deals more than doubled from 17 in the April-June period. Only two weeks into the fourth quarter, there were five pending or completed deals with a combined value of $164.7 million. At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.

R.I.P. Salomon Brothers

It’s official: Salomon Brothers has been completely picked apart.

Citigroup’s agreement to sell Phibro, its profitable but controversial commodity trading business, to Occidental Petroleum today puts the finishing touches on a slow erosion of a once-dominant bond trading and investment banking firm.

When Sandy Weill (pictured left) staged his 1998 coup – combining Citicorp and Travelers, Salomon Brothers was a strong albeit humbled investment banking and trading force. Yet little by little, a succession of financial crises, Wall Street fashion and regulatory intervention has whittled away at the once-dominant firm.

Not long after the Citigroup was formed, proprietary fixed income trading –  once the domain of John Meriwether, was shut down after the Asian debt crisis fueled losses that Weill could not stomach.

Did he say IPO?

Speaking in New Delhi, General Electric CEO Jeffrey Immelt said “Discussions are ongoing whether it is an IPO or another partnership,” in response to a question on whether GE was talking to Comcast to sell a stake in the fourth-placed TV network and movie studio. With Vivendi possibly just a couple weeks away from unloading its 20 percent stake in the NBC venture, and all the talk this week about Comcast gathering coins to add the content trove to its cable mix, it might seem as if Immelt is trying to conjure something like a rabbit from a hat – or a peacock from a beret.

GE and Comcast are discussing a deal under which the largest U.S. cable firm would take control of 51 percent of NBC Universal with GE, which has the right of first refusal to pick up Vivendi’s stake if the French company exercises its annual option to sell, taking the rest. “The capital markets have definitely improved,” Immelt said. There is reason to see stability and some optimism for the future,” he said.

Set aside for a moment that the sickly advertising market that NBC already faces. The market for IPOs is picking up nicely right now, but is still in an early stage of recovery, making do with a ragtag bunch of real estate investment trusts and Chinese new-market plays. What effect do you think a big media play splashing into that pool would have on investor demand for new issues?

Isabella of Castile – the hedge fund manager

Isabella of Castile was a controversial woman.  A woman who made history for herself and her country. She has been called saint and a tyrant, but never before a hedge fund manager.

rtr25v16Fred Fruitman, managing director of Loeb Partners Corp.,  the family office that oversees the Loeb family fortune, took care to bridge that gap.

He told delegates of the Asset Allocation Summit Europe 2009  this week that Isabella, a Renaissance woman, could have taught XXI century hedge funds a thing or two.
An eye for opportunity, drive for returns, and a controversial reputation were also a trade-mark for both Isabella and hedge fund managers.

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