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Funds Round-Up February

Stephen Harris

WealthBriefing

2 March 2006

Worldwide investment fund assets rose 5,8 per cent during the third quarter of last year to €14,4 trillion ($17,16 trillion), according to the European Funds and Asset Management Association and the Investment Company Institute, in a report covering 41 countries. The report shows that net cash flow to all funds globally was a €250 billion compared with €132 billion in the second quarter, the largest increase being 8.2 per cent added to equities, taking the total to €6.4 trillion. This was after a subdued second quarter for equities. Equity fund flows grew €20 billion in the third quarter to €72 billion. Net inflows in Europe of €39 billion were singled out by the report as being “particularly strong”. Bond fund assets grew 4 per cent to just shy of €2.9 trillion. Assets in balanced/mixed funds increased by 6 per cent to around €1.3 trillion, and money market fund assets rose 3 per cent to €2.6 trillion. European UCITS assets rose by 7 per cent compare with a 4.7 per cent asset increase in American mutual funds during the third quarter. Swiss funds grew 19 per cent in 2005 to SFr530.7 billion ($408.3 billion), according to the Swiss Funds Association. Equity funds rose the fastest, buoyed by the strong performance of the local stock market, rising 25 per cent to SFr164.9 billion. Bond funds grew 24.6 per cent to SFr145.6 billion. However, money market funds fell 4 per cent in the year to SFr72.9 billion – most of the decline was in the first half. Overall, new money inflows comprised 15 per cent of last year's increase in fund assets, while performance accounted for 85 per cent. Investors withdrew SFr10.8 billion from money market funds, while other types of funds attracted SFr23.4 billion of new money, led by bond funds with SFr16.2 billion. Multi-manager products will outperform single funds over the long term, according to three quarters of intermediaries polled by Credit Suisse Asset Management. A similar proportion also thought that multi-manager funds will dominate investment sales in the next five years. Around 50 per cent of those intermediaries polled said that investor demand for cautious managed products has increased over the last 12 months. Forty per cent said that multi-manager funds play an essential role in portfolio planning, with fund diversification and spread of risk being the major drivers. "The results of our recent survey highlight how important multi-manager funds have become to the intermediary market with three quarters of them acknowledging that these will be the best selling funds over the next five years. Cautious funds also appear to be firmly on the intermediaries' radar screens with more and more of their clients wanting the security of a lower risk portfolio,” said Gary Potter, director of Credit Suisse multi-manager services. Soft closure and size capping of retail investment funds are one of the most significant trends in the fund management industry, according to Richard Philbin, head of funds of funds at F&C Asset Management in London. Speaking at a recent seminar, Mr Philbin said that he believes that the practice is likely to become more widespread as the most talented fund managers try to protect their ability to outperform by limiting the amount of money they manage. Although open-ended retail funds, such as unit trusts and OEICs, have not been able turn new investors away, in recent years a number of funds managed by top performing managers have effectively discouraged new entrants, called “soft closure”. This has been done by ceasing marketing, removing the funds from products such as ISAs and fund supermarket platforms, raising the minimum investment levels and withdrawing deals to reduce initial charges. Under recent rules, funds can now be launched which formally set limits on size. “Whilst there clearly are some managers who have continued to run successful funds with assets of over a billion pounds, many other fund managers have less scaleable processes. This can be a particular problem if the manager’s focus is at the smaller end of the market cap spectrum or their management style involves a particularly active level of trading,” said Mr Philbin. Mr Philbin pointed to Framlington Equity Income, JOHCM UK Growth and JPM UK Dynamic as three examples of funds which have recently closed the door on new investors. F&C multi-manager have holdings in each of these funds. Credit Suisse has responded to increased demand for socially and environmentally responsible investing by restructuring its ethical multi-manager fund. The bank said it is optimistic for the relative performance of ethical funds this year versus non-ethical. The Credit Suisse Multi-Manager team has also introduced a new investment theme within its four ethical investment categories: “Ethical by Nature”, which could include funds with an environmental bias or a focus on healthcare. According to recent figures from the UK-based Investment Management Association, assets under management for ethical funds in the fourth quarter of 2005 reached £4 billion ($7 billion), an increase of 18 per cent on the same quarter in 2004. Credit Suisse has introduced its own positive and negative investment criteria. Typically, positive criteria will include environmental benefits from technology, and a positive and responsible attitude to corporate governance. Credit Suisse intends now to explore the performance potential of the long duration growth stocks that such funds tend to have greater exposure to. The Credit Suisse fund, which formerly was managed by Artemis, will invest in solar power, wind power and insulation businesses. Robert Burdett, director, Credit Suisse multi-manager services, said in a statement: "Recent news stories, such as the Kyoto treaty, the non-smoking legislation, and a variety of environmental issues, have increased environmental and ethical awareness. This in turn has led to an increase of companies and individuals displaying a social conscience.” Last October Datamonitor, the research group, revealed that more and more high net worth individuals in the UK were looking to invest in ethical financial products. Accordingly, private banking providers have been reviewing their products and services in order to adapt to these changing needs. Credit Suisse has also launched a global total return fund for the Swiss market that is designed to achieve a positive return, regardless of market conditions. Credit Suisse Fund (Lux) Total Return Global (Euro) enables investors to achieve a return of 3 -month-Euro-LIBOR rate plus 350 basis points over a three to five-year economic cycle. The approach is based on a model developed by Credit Suisse, which applies relative investment views instead of traditional model portfolios. The fund has the flexibility for assets to only be invested in asset classes that, in the view of the managers, promise a positive return. Investments are sold immediately they show signs of performing negatively. The resulting income is then re-invested in vehicles with a greater potential for return. Risk is concentrated at asset class level, so only indexed investment vehicles, such as futures and exchange traded funds are used. The fund will invest in a variety of instruments drawn from the equity, bond and money market segments of industrialized and emerging markets. Up to 15 per cent of the fund's assets may be invested in futures on raw materials and commodities indices. Wachovia, the fourth-largest bank in the US by assets, is offering wealthy investors the chance to sink money into a wider range of funds of hedge funds, controlled by its alternative strategies division. Wachovia Alternative Strategies has nearly doubled its options to about 27 funds that invest in hedge funds, private equity funds and other strategies. To invest, individuals need a net worth of at least $1 million to $5 million depending on the fund. Institutions need $5 million to $25 million. Wachovia Alternative Strategies manages about $1.2 billion in assets, according to a filing with the Securities and Exchange Commission last year. It employs about 30 people in Charlotte and Boston. Evergreen Investments, Wachovia's asset management arm, has $250 billion under management. Fund of funds assets increased 10 per cent in 2005 to $395 billion, according to Chicago-based Hedge Fund Research. Shore Capital, the UK-based investment manager, is launching a fund which the firm says offers investors a double your money opportunity through a combination of a generous tax break when placing qualifying capital in a venture capital trust with the rest tucked into a fund of hedge funds. UK tax laws allow individuals to invest up to £200,000 ($237,000) in VCTs and qualify for tax relief up to 40 per cent. The minimum investment in the fund has been set at £10,000. The Puma Venture Capital Trust also provides investors with a break from the normal distribution charging associated with hedge funds. By investing in venture capital double charging, for instance, is removed. The distributions made by the VCT are tax free and Shore Capital promises returns of 12 per cent. Chris Ring, managing director, private client broking and investment management at Shore Capital, told WealthBriefing: “We have structured the VCT to wind up after 5 years and the upfront costs are low, only 2 per cent, whereas VCTs normally cost about 4 or 5 per cent.” The qualifying element of the fund will hold investments in relatively low risk small UK companies, including AIM, Ofex and private companies, where Shore says it can rely on extensive experience as a small cap/VC fund manager AIM broker and market-maker. “There are certain rules we are working around prudently; for instance at least 70 per cent has to be invested in venture capital. Over three years we plan to earmark 75 per cent and the balance we will invest in our fund of hedge funds. These are non-volatile and delivered a sturdy net return over 2005,” Mr Ring said. The non-qualifying assets will be invested in a diversified portfolio of hedge funds including property vehicles. “We should be able to double your money without having to do a heck of a lot with it,” Mr Ring added. Standard Life, the Edinburgh-based life assurer, aims to net £800 million-worth ($1.4 billion) of business by becoming one of the three largest players in the lucrative offshore investment market by 2008. Standard Life has set its sights on taking a 20 per cent share of the £4 billion UK offshore sector, and about 5 per cent of its group's overall sales. The firm is targeting the market after a strategic review that saw it perform a U-turn on its mutual status and focus on securing more profitable single-premium business, such as self-invested personal pensions and investment bonds. Offshore investments sold back into the UK amounted to £3 billion in 2004, a figure expected to have risen to £4 billion last year. Main players in the offshore sector for UK investors include Axa, Skandia, Canada Life and Scottish Equitable International, each of which commands around 20 per cent. Standard Life believes that, historically, the competition has been less fierce in the offshore market, the business tends to be at a higher net worth level and people are more prepared to pay for the kind of flexibility and choice available. The offshore arm will have a dedicated ten-strong workforce in its first year of operation and will be based at new offices in St Stephen's Green in the heart of Dublin. It aims to employ 30 staff within the next three years. The firm has just launched its first product - an international bond - which it hopes will bring the offshore market into the investment mainstream and plans are afoot to launch a second product, a portfolio bond. Michael Spencer, one of the City of London’s wealthiest men with an estimated fortune of £372 million ($649 million), is using some of his money to invest in fund management businesses, according to the Daily Telegraph. Mr Spencer is believed to have invested in one of the City’s most successful fund managers, New Star Asset Management. According to the report, the chief executive and founder of money broker ICAP, also backed the start-up of Origin Asset Management, a boutique fund management business set up by a team from Investec to run long-only equity funds for pension schemes. In June he took a stake of undisclosed size in Alternative Investment Solutions, a New York-based hedge fund administrator, where he sits on the board, according to the report. Guernsey-based Collins Stewart Fund Management has launched an emerging markets property fund product to exploit opportunities in urban areas in Turkey, Romania, Ukraine and Bulgaria. The Eastern European Property Fund will be domiciled in Guernsey and traded on London’s Alternative Investments Market. It will invest in a mix of office, retail, industrial and residential properties, and aims to close within 18 months. The fund’s initial focus will be on office and retail properties. It will be managed by Collins Stewart Property Fund Management. A new independent property advisory firm, established by Keiran Gallagher and Oliver Cadogan, will act as investment advisor helping Collins Stewart build a network of local contacts in each country. “We are seeing many multi-national businesses entering Turkey, Bulgaria, Romania and Ukraine, despite them receiving less attention than their Central European counterparts. With recent strong economic growth and structural reforms there, we believe there are good investment opportunities available,” said Mr Gallagher.