Funds Hub

LIPPER: Equine vs equity investing

Is betting on horses very different from picking stocks? Can understanding a gambler’s approach and mentality give a better understanding of fund managers?

In searching for answers to these questions, I spoke to Paul Moulton, a professional gambler who originally worked in the fund management industry. He then set up a fund research company (Fitzrovia International, which he eventually sold to Reuters), although his working life began with an attempt to become a professional chess player.

Most of the fraternity of professional gamblers who make a living from horse racing are what Moulton describes as ‘traders’ or ‘chisellers’.

This group do not really look at horses at all, but look at market movements, hedging back their bets, and aiming to make tiny but regular profits with much less risk. They remain tucked away in their homes in front of an array of computer screens.

Moulton sees himself as part of a second, smaller group of professional punters, those he refers to as ‘judges’, some of whom look at horses in the paddock to assess their physical condition and thus their chances, while others are more reliant on assessing form based on previous races.

Some of them may even be conscious of the FSA’s warnings on funds’ past performance, which is deemed to be no guide to future returns. Although past performance does tend to shorten a horse’s starting price.

As part of this approach, Moulton has gathered vast amounts of data on all aspects of racing (jockeys, trainers, pedigrees, speed figures and so on) in a database that covers all horses in all races in the UK and Ireland since January 2005.

LIPPER: Are ETFs in trouble?

By Detlef Glow,  Head of EMEA Research at Thomson Reuters fund research firm Lipper. The views expressed are his own.

Exchange traded funds (ETFs) have found themselves under ever more scrutiny from regulators and market participants this year and expectations are that new rules for the sector are just a matter of time.

It’s tempting to think of ETFs as unwilling victims of new regulation, but to my mind, ETFs have much to gain.

The point is that it isn’t just regulators who are seeking improved transparency on fund holdings and on the use of derivatives by mutual funds, crucially it is end-investors too. And once the fog has cleared, they might come to see ETFs — with daily published portfolios and clearer statements on the use of derivatives in general — as a role model for all kinds of mutual funds.

The discussion surrounding ETFs could leave you with the feeling that they are unregulated products; that fund promoters can go wild when creating new products and with the use of derivatives in the portfolios. In reality though, ETFs follow the same local and/or international legislation of any other mutual fund; the EU UCITS regime for example.

So, why all the fuss around ETFs? In my opinion, there is nothing uniquely wrong with these products as they are using the same tools and techniques used by other funds under the UCITS regime. Some authorities, however, have raised questions as ETFs grow in popularity among professional investors. A deeper look into the questions posed shows that the points made by the critics are not only applicable to ETFs, but to any mutual fund.

CONCERN

from Global Investing:

What if the euro collapses?

Even after the EU summit last weekend, asset managers seem not to have completely dismissed the idea of a possible euro zone breakup.

A closely-watched survey from Bank of America Merrill Lynch out on Tuesday showed a near 50-50 split among fund managers expecting a country possibly leaving the 17-member currency bloc.

And some of our participants at the Reuters Investment Summit last week put a high 70-75 percent chance of some countries leaving the euro zone next year.

Swiss wealth manager Sarasin reckons the impact will be a meteor striking the earth and offers following scenarios:

• A run on the banks by savers keen to put their money into a core euro country would bring down the banking system of the departing country overnight.
• Companies and private households would not have access to loans, nor would they be able access any more cash.
• The state, which in this situation should support the banks, would be bankrupt as well. Financial markets would deny it access to funding.
• The new currency, once it is introduced, would depreciate by between 30% and 50%, which would multiply the government’s debts.
• The depreciation would lead to imported inflation and trigger trade union demand for compensation, setting off a hyperinflationary spiral.
• The bankruptcies of banks in Southern Europe would bring about the downfall of their northern counterparts because the latter have lent them large sums of money in the belief that monetary union would last forever.
• Anticipating an appreciation, huge capital flows would drive up the new Deutschemark. Many medium-size companies would become uncompetitive overnight.

"There are thousands of venues for how a meteor could approach earth and there are thousands of conceivable but unlikely scenarios how the euro could collapse which would substantially alter investors’ optimum positioning... Investors should know that there is no refuge from a euro collapse," Sarasin's chief economist Jan Poser says.

GLG: Italy and Greece deserve a central bank

Guest contributors Bart Turtelboom and Karim Abdel-Motaal run the Emerging Market strategy at Man GLG. The views expressed are their own.

History is written by the victors. That is what emerging markets discovered after their currency crises of the 1990s, and it is what will happen when the annals of the euro crisis are compiled. Treatment of this crisis has varied, but in all its forms the basic premise is already set: Germany and the world are the undeserving victims of Peripheral European excess.  The Periphery spent and borrowed too much causing the current crisis.  Add to this the cultural imagery of Greek pensioners retiring at the tender age of 55 on exotic Aegean islands at German savers’ expense and the colourful chapter on this historical saga is written.

If Emerging Markets is any guide, the problem with this narrative is not just that it is wrong, but downright dangerous in its policy implications.  The tyrannical hold of this perspective on European policy making is pushing the continent down the path of a historic pro-cyclical fiscal contraction almost as the be all and end all of crisis response.  There is already a mountain of evidence that this has not worked, whatever the merits of debt reduction and ideological divisions on its pace and timing.  The missing ingredient has always been and remains today, quite different.  Italy and Greece lack a central bank.  More importantly, they deserve one, desperately.

For an economy where paper money is the medium of exchange and fractional reserve banking exists where a bank transforms a unit of deposits into a multiple of that in loans, a central bank is essential.  This is as true of Switzerland as it is of Greece.  It performs a function of lender of last resort to prevent a rapid run on an otherwise solvent bank (a liquidity crisis) from turning into a solvency one for that bank or for the entire banking system.  When Italy and Greece signed onto the Euro, they had a legitimate right to expect that the Central Banks they were giving up would be replaced by a common Eurozone one, which would in effect perform the same function for their economies.  What they got instead was a Central Bank which is constrained by mandate, and German objection to its modification, from performing that function for anyone but Germany.

In the Eurozone, not only are the ECB’s clients the member state banks, but also the sovereigns.  We are in the advanced stages of a full blown and contagious run on both, with the ECB for all intents and purposes on the sidelines.  Whatever support it has provided so far in the guise of purchases of distressed member state debt and bank liquidity provision has been trivial in relation to the size of the run, and communicated in such a tentative way as to aggravate it, by signalling impotence.  The ECB’s absence, whatever its legal justifications, has effectively reduced Italy and Greece, not to mention the Eurozone, to the status of a barter economy.

Italians and Greeks can and should justifiably ask for redress.  They did not give up their Liras and Drachmas to be put through a fiscal vice as the cost of the most basic central banking services being provided them, any more than U.S. states did for the same service from the Federal Reserve.  The lender of last resort function is a relatively uncontroversial one, which has little to do with ideological debates about the desirability or effectiveness of active monetary policy or with Weimer Republic-induced phobias of hyperinflation and money printing.  The idea, that in the middle of a full-blown bank/sovereign run, a central bank’s intervention would be made conditional on preceding actions, fiscal or otherwise, that are subject to political vagaries, is extraordinary and dangerous.

A confidence crisis is precisely that; it cannot wait and must be dealt with decisively and conclusively if the vicious cycle is to be arrested.  This is not to say that the fiscal and debt problems which challenged confidence to begin with should not be addressed; they should.  However, in this European version of the Emerging Markets archetype, we are in now well beyond the phase where a medium term fiscal adjustment announced by technocratic governments in Greece or Italy will have any effect.  It maybe part of the solution, but it is certainly not sufficient, or the most urgent issue.  The ECB needs to act and act big.

GCC fund firms face structural flaws: Lipper

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in Western Europe, the Middle East and Africa. The views expressed are his own.

Spare a thought for the fund managers trying to make their business work in the Middle East and north Africa (MENA) this year.

Those investing in home markets have faced the uncertainty and drama of the Arab Spring and the wear and tear on affected markets. The Egyptian Stock Exchange was closed for several months while in the Gulf Cooperation Council (GCC) countries, all markets ended the first half in the red (even if the Abu Dhabi index and the Saudi Tadawul All Shares resisted well, down 0.57 percent and 0.67 percent respectively.)

Moreover, the fund industry in the region faces some deep structural flaws.

Taking the GCC alone, there are 101 fund management companies in the region managing $28.5 billion of assets between them, according to Lipper data. Those firms run a total of 337 funds with average assets under management at $84 million; taking a median figure to iron out the inflating effect of a few bigger funds that figure is just short of $20 million. To see a graphic showing AuM by asset class in the GCC, click here.

The six biggest funds in the region had cumulated assets of $10 billion and represented over a third of the market at the end of September. To see a graphic of the top funds, click here.

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.

from Global Investing:

We’re all in the same boat

The withering complexity of a four-year-old global financial crisis -- in the euro zone, United States or increasingly in China and across the faster-growing developing world -- is now stretching the minds and patience of even the most clued-in experts and commentators. Unsurprisingly, the average householder is perplexed, increasingly anxious and keen on a simpler narrative they can rally around or rail against. It's fast becoming a fertile environment for half-baked conspiracy theories, apocalypse preaching and no little political opportunism. And, as ever, a tempting electoral ploy is to convince the public there's some magic national solution to problems way beyond borders.

For a populace fearful of seemingly inextricable connections to a wider world they can't control, it's not difficult to see the lure of petty nationalism, protectionism and isolationism. Just witness national debates on the crisis in Britain, Germany, Greece or Ireland and they are all starting to tilt toward some idea that everyone may be better off on their own -- outside a flawed single currency in the case of Germany, Greece and Ireland and even outside the European Union in the case of some lobby groups in Britain. But it's not just a debate about a European future, the U.S.  Senate next week plans to vote on legisation to crack down on Chinese trade due to currency pegging despite the interdependency of the two economies.  And there's no shortage of voices saying China should somehow stand aloof from the Western financial crisis, even though its spectacular economic ascent over the past decade was gained largely on the back of U.S. and European demand.

Despite all the nationalist rumbling, the crisis illustrates one thing pretty clearly - the world is massively integrated and interdependent in a way never seen before in history. And globalised trade and finance drove much of that over the past 20 years. However desireable you may think it is in the long run, unwinding that now could well be catastrophic. A financial crisis in one small part of the globe will now quickly affect another through a blizzard of systematic banking and cross-border trade links systemic links.

Just take the euro zone for a start. HSBC economists on Friday said the costs of a euro zone breakup would be "a disaster, threatening another Great Depression" and far outweighed the costs of repairing the flawed fiscal backstops to the monetary union -- especially given the wealthier creditor countries within the union tend to ignore the benefits they've reaped from the euro over the past 12 years. Aided by the "entangling effects" of the euro, it showing that cross-border holdings of capital have exploded from about 20% of world GDP in 1980 to stand at more than 100% now (global GDP was estimated by the IMF to be about $62 trillion last year). By contrast, the first wave of globalisation in the late 19th and early 20th century saw cross-border holdings peak at 20% of world GDP before WW1 reversed everything.

"A euro break-up would be a disaster, threatening another Great Depression," wrote HSBC chief economist Stephen King and economist Janet Henry. " Cross-border holdings of assets and liabilities within the eurozone have risen dramatically, leading to a tangled web of mutual financial dependency. With the re-introduction of national currencies, disentanglement would proceed at a rate of knots, undermining financial systems, generating massive currency moves, threatening hyper-inflation in the periphery and triggering economic collapse in the core."

That tangled web of trade and finance, however, goes well beyond the euro zone. One of the reasons the fast-growing emerging markets look, for the second time in four years, set to succumb to the western financial crisis is that western banks -- European banks in particular -- provide them with so much finance. RBC economists, citing data from the Bank for International Settlements, shows outstanding European bank lending to emerging markets at some $3.4 trillion -- almost 10 times that of the U.S. banks and more than three times Japanese bank lending.

JP Morgan, meantime,  reckons a one percentage point decline in western real domestic spending growth (GDP less net exports) leads to a 2.7 percentage point drop in exports from emerging economies as a whole. If their forecast for a recession in the euro zone and US slowdown to 1 percent annualised growth by the middle of 2012 proves correct, then that should slow EM export growth to 6% annualized in 4Q11 and just 4% annualized in 1H12 from double digit growth rates earlier this year. While that would still be far better than 2008/2009 emerging export collapse of about 20%, the projected pace of export growth would still be weaker than at any point in the expansion of the 2000's save during the SARS scare.

Envy, desire and basis points

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.

The following chart illustrates these economies of scale in action for funds sold across Europe. But although the disproportionately high expenses borne by the smallest funds does mean that average total expense ratios (TERs) fall as assets rise, crucially, such economies of scale do not continue through further asset rises among larger funds.  View the chart by clicking here.

ECONOMIES OF SCALE

When comparing the UK to continental Europe there appears, at first, to be a different approach. But on closer scrutiny one can see that the apparent lack of economies of scale being passed on to investors largely reflect the fact that the smallest funds in the UK tend not to let expenses get out of control and create disproportionately high TERs.

Luke Ellis: 2011 volatility is no repeat of hedge funds’ tough 2008

Guest blogger Luke Ellis is head of the multi-manager business at Man Group, the world’s largest listed hedge fund manager.

The views expressed here are entirely the author’s own and do not constitute Reuters’ point of view.

The late summer’s toxic blend of sovereign debt solvency fears and slowing economic growth wrong-footed some of the biggest and best-known hedge funds. So it would seem natural to assume that August was a terrible month for hedge funds generally – just as it was for the equity markets.

Yet for every hedge fund that lost, say, 12%, another made money. Not bad in a month when the MSCI World Index (hedged USD) of leading stocks fell -7.0%.

Indeed August showed just how suited hedge funds are to today’s febrile financial markets. If, as seems likely, the West’s indebted economies have entered an era when they lurch between slow growth and recession, then hedge funds appear far more capable of generating returns for investors than straightforward equities or bonds.

Rude health, and a changing of the guard?

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

The European exchange-traded-fund (ETF) industry has shown some resilience in the face of questions about management practices raised by market observers like the Financial Stability Board (FSB) and regulatory bodies like the FSA in the UK.

The segment grew by 7.74 percent over the first seven month of 2011, with assets under management up by 17.20 billion euros to reach 239.37 billion.

This has come as some critics have characterised ETFs as a systemic risk for financial markets, due to the use of swaps to replicate the underlying index. Another risk that has been highlighted was the liquidity of some securities accepted as collateral to secure the positions in derivatives and for security lending strategies. Also raised was the outstanding short volume in some ETFs.

But as the ETF industry is fully regulated by market authorities and uses typical techniques for derivatives and securities-lending strategies, the risks highlighted are already known. In addition, the assets under management of the global ETF industry are still less than ten percent of the total, and the issues might be better raised with respect to all funds, instead of pointing the finger at one market segment.

Despite publicity surrounding these issues, and in contrast to the expectations of some market observers, the industry has shown a pretty normal growth pattern in terms of newly-launched funds, with 167 new products hitting the market during the first half of 2011. Most of those were equity funds (102), with commodity funds a significant minority (22).

To see details of the new ETF launches click here and here.