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Funds Round-Up July 2006

Stephen Harris

WealthBriefing

2 August 2006

Assets in the UK’s fund management industry rose to a record £3.45 trillion ($6.4 trillion) at end-2005, up 7 per cent on the previous year, driven by rising equities and demand for alternative assets, according to a report published by research group International Financial Services London. Around one quarter of all assets come from foreign investors and the figures confirm the UK as the third-largest fund management market after the US and Japan. The report draws on figures from trade bodies and fund providers. Of the total, £276 billion were held by private clients and around £2.27 trillion are institutional. Around £530 billion is held by retail clients and £374 billion is held in alternative investments including private equity and hedge funds. Fund management contributes 0.75 per cent of the UK GDP and employs 40,000 people, according to the report. The combined fund management business in Hong Kong grew 25 per cent last year to HK$4.53 trillion ($582 billion), according to a Hong Kong Securities and Futures Commission survey. Licensed corporations are the major players, with HK$3.46 trillion in assets under management and advisory businesses. A further HK$38 billion of assets were found to be managed in real estate investment trusts. Combined, they represented 77 per cent of the total. Registered institutions accounted for the remaining 23 per cent, or HK$1.031 trillion. According to the survey, 53 per cent or HK$1.73 trillion of the total non-REITs assets under management, were managed onshore. Hong Kong’s fund management business is equivalent to 55 per cent of its stock market capitalisation according to the survey. Total net sales for European funds in May were 70 per cent down on April’s figure at €14 billion ($17.7 billion), according to Feri Fund Market Information. The MSCI World index lost 5 per cent of its value in May, leading to massive withdrawals from equity funds of around €10 billion. Fixed income products also declined in May with €1 billion being redeemed in May, according to Feri. This represents the highest redemption level for two years. The research suggests that structured product providers have been unable to capitalise on recent corrections in the funds markets with no suitable new offerings available to capture the money investors were withdrawing from equity funds. According to Feri, investors have turned to money market products instead. London-based property investment manager Arlington Securities has launched its Eurozone Fund, the first sub-fund in its fund of funds product for international investors and pension funds. The fund will be managed by Karin van der Sluijs, from Arlington’s Amsterdam office. Arlington’s new fund of funds structure will give investors the flexibility to invest in up to three distinct sub-funds. The Eurozone Fund will be joined by a UK fund along with a more aggressively styled fund to offer a range of risk and return profiles. The fund will target return of 10 per cent per annum over the life of the fund, and will comprise a number of euro denominated specialist sector focused funds. These funds will invest in one specific area of the property market on a national or international basis with the majority being focused on investments in the Eurozone. Arlington has £7.7 billion ($14 billion) under management, and is part of Australian listed Macquarie Goodman Group. Pacific Continental Fund Management has introduced a sterling share class for UK investors in its Skylight Capital Build-Up Fund. The fund now offers sterling and US dollar share classes. Skylight invests primarily in residential property in the North of England, specialising in distressed property opportunities. From a sterling perspective it has delivered 12.99 per cent in the 12 months to 30 June 2005. The fund had been denominated in US dollars since its launch, but as its investments have all been made in the UK there has been a currency risk for sterling investors. Reporting the fund's returns in US dollars added an unnecessary layer of complication for sterling investors which will be swept away by the new sterling share class, said Pacific. Barclays has added four more protected funds to its roster: the five-year protected FTSE, the three-year protected FTSE plan and the six-year minimum return plan. The FTSE super tracker fund has a higher level of risk built into it but offers potentially five times the returns of the FTSE100 index. These funds, which are available until 31 August, offer access to FTSE 100 firms. While the core range mitigates risks, the super tracker five-year fund has been designed for investors with an appetite for more risk, said Barclays. Barclays Capital is offering a Protected Asian Real Estate Income Note, to compliment its first Asian Real Estate Income Fund, to generate a gross yield of 7 per cent quarterly after fees. The note selects from the Bloomberg Asia Pacific Real Estate Index; S&P/ASX 300 Property Trust Index and the Bloomberg Pacific Real Estate Trust Index. Selected real estate stocks are equally weighted and rebalanced quarterly. Each year the process is re-run and the stocks re-selected. Barclays estimates that 4.75 per cent per annum will be derived from the portfolio of 20 stocks, which will add up to a 6 per cent annual return once options have been sold on the underlying REITs held in the Asian Real Estate Income Fund. Henderson Global Investors, the independent asset manager with £67.7 billion ($125 billion) assets under management, has changed the identity of it Henderson Independent Income Portfolio to the Independent Income & Growth Portfolio. The switch will become effective on 1 August 2006. The change is part of the ongoing enhancements to the Henderson Multi-Manager range, following the arrival of Bill McQuaker as director of multi-manager 12 months ago. Mr McQuaker said: "This name change adds clarity to the different objectives of each of the funds in the multi- manager range, this should help clients better choose the portfolio which meets their needs. "The soon to be renamed Income and Growth Portfolio has performed extremely well over the last year and is currently overweight in equities, overweight in cash and underweight in bonds. Geographic allocation hasn't changed, and we remain overweight Europe and underweight US." Principal Global Investors, the fixed income specialist, has been prompted by the current environment of low interest rates and a return to rising inflation to launch a diversified fixed income fund. The fund, which was launched two years ago in Australia, will be tailored to UK and continental European investor needs through hedging it into local currencies. Grant Forster, Principal Global Investors Europe’s chief executive, told WealthBriefing: “Portfolio manager Rob Da Silva set this up in Australia in demand for yield. Generally sophisticated investors accept the logic of looking further afield for this. “Fixed income in isolation may look risky but by combining fixed income securities and finding a selection which are not correlated that highly, a blend can be created that can lower volatility. In addition we can shorten the duration, in some cases using derivatives to shorten it.” The duration range will generally be managed between 0 and 1.5 years, with an upper limit of three years in order to target low volatility. The fund aims at returns of 3 per cent per annum gross in excess of three-month LIBOR interest rates over rolling three year periods. New Star International has received authorisation for nine sub-funds of New Star Global Investment Funds for distribution in the Netherlands. The Dutch registration is part of New Star's international expansion in response to the growing demand from European investors for high alpha funds. Sub-funds of the New Star Global Investment Funds are also registered in Sweden, Finland, France, Denmark, Malta, Spain, Switzerland and the UK. In the last year, New Star has received significant fund inflows from private banks, fund of funds managers and insurance companies across Europe. Cobus Kruger, director of mutual funds at New Star International said: "We have seen an increase in demand for New Star funds throughout Europe, including Holland. We are now in a position to offer investors access to New Star's investment expertise through our authorised Dublin OEIC." Speaking at a recent investment conference in Monaco, John Duffield, chairman of New Star Asset Management, has expressed serious concerns about the problems the arise when long only fund managers launch hedge funds. Mr Duffield said that long-only fund managers who also have hedge funds to run must be continuously scrutinised to ensure that no conflicts of interest arise between the two funds. “When a fund manager is running a long-only fund alongside a hedge fund the temptation is absolutely obvious,” he told the conference. What worries Mr Duffield is the issue of fund managers front running their long-only funds with hedge funds. Others in the industry are concerned that, given the aggressive incentives for hedge managers, people who manage both types of vehicle are likely to concentrate their efforts on hedge funds. “When a long only manager starts a hedge fund we look very carefully at the specific performance of the long only fund,” Rob Burdett of Credit Suisse Asset Management told WealthBriefing. “We take a case by case look at issues such as the remuneration structure, the balance sheets and asset profile across the two vehicles. Long only managers taking on hedge funds is by no means all bad. Some managers are structured to reinvest hedge fund profits back into the long only funds, and we often see long only managers becoming more sensitive to market conditions after running hedge funds.” As Mr Burdett points out, there are only so many hours in a day, so there is always an underlying risk that one or other of the funds will be neglected in favour of the other. Northern Trust has set up a private equity fund administration team to offer services to funds domiciled in Dublin. The administration services include, financial reporting services, investor services and corporate governance services for funds, fund of funds, limited partnerships and companies. Paul Guilbert, head of private equity fund administration at Northern Trust, said: "Northern Trust is a first mover in Dublin in terms of officially declaring the formation of a dedicated, full-service private equity fund administration team. "By replicating the range of services we have been offering in Guernsey for over 20 years, our aim is to capitalise early on opportunities opening up in the Dublin market. We are already serving private equity clients in Dublin and are seeing a lot of interest in our market-leading solutions." Northern Trust, through its acquisition of Barings Financial Services Group in 2005, has had an established centre of private equity fund administration expertise in the offshore market of Guernsey since the mid-1980s. Dublin is now also becoming a more popular domicile for private equity and private equity related funds because it has the benefits of being an offshore centre whilst still being within the European Union, the latter being seen as beneficial by some investors given the drive towards tax harmonisation between the EU countries. Apex Fund Services, the Bermuda-based fund administration provider, has been granted approval to operate in the Dubai International Financial Centre. Apex, which is the first fund administrator to set up shop in the burgeoning DIFC, joins the 15 or so international asset management firms already active in Dubai. The move coincides with the passing of the Dubai’s Collective Investment Law 2006, the first regulatory framework for investment funds in the Middle East. Dubai's future as a global financial hub serving the Middle East looks bright, as it competes with other offshore rivals such as Bahrain, Saudi Arabia and Qatar. The number of high net worth individuals in the region is expected to continue growing until 2009 at the rate of 9.1 per cent per year, making it the world’s fastest growing high net worth area. Merrill Lynch Investment Managers has launched the Merrill Lynch International Investment Funds India Fund in the UK, to tap into India's outsourcing bonanza. Extensive infrastructure investments in India are likely to support strong growth which in turn will fuel domestic demand for basic materials and capital goods, said MLIM. The fund seeks to take full advantage of these developments and has positioned itself in order to benefit from the themes of infrastructure investments, domestic consumption and outsourcing. Richard Royds, head of UK retail for MLIM, said: “One of the key factors in managing a specialist fund is to make use of local talent and knowledge, for cultural awareness is an important factor in a market which is not comprehensively covered by investment research. By leveraging our joint venture with DSP Merrill Lynch Fund Managers in India, we have extensive ‘on the ground’ presence which allows superior insights into the market.” Indian equity markets have been volatile during this month and have fallen on low stockmarket trading. Unwinding of leveraged positions by retail investors have added to the volatility. In addition, MLIM said that it would ensure the portfolio is diversified at any point in time to reduce company specific risk. MLIM said it believes that most of these leveraged positions has largely been unwound, so that while further volatility in the near term cannot be ruled out, long term investors can be confident of the strong economic and corporate fundamentals. Mr Royds added: "We expect to see renewed buying interest in the near term and remain bullish on Indian equities.” The MLIIF India Fund will invest at least 70 per cent of its assets in equities and equity-related securities of issuers domiciled in India.