Archives » 2006 » Issue 43 (September)

Make way pushy salesmen in exotic locations looking for a fast buck, the era of the subtle ‘advising expert’ is about to emerge

— Lombardo: activities must be integrated

Pioneer Investments is taking full advantage of its new acquisition,

German bank HVB, by targeting Eastern Europe. But its integrated model is at odds with current the multi-boutique trend, writes Elisa Trovato

The concurrent release of Scorpio Partnership’s Benchmark 2006 and MLEY CapGemini World Wealth Report 2006 (WWR) illustrated yet again the gap between how much is actually in the private banking system and how much is still potentially out there. The total market stated by the WWR is $33,300bn (e26,100bn). The total amount held by 72 of the leading private banks providing financial data on fee-based assets within Scorpio’s Benchmark is $8,500bn, which is 25.5 per cent of the WWR total.

— Eugenio Namor

The role played by foreign managers, selection of funds by distributors and the evolution of advice will be among the key subjects discussed at a PWM afternoon seminar to be held in Milan on 18 October.

— Christiaan Sterckx: ‘with us, it’s blood, sweat and tears’

KBC Asset Management’s rapid assault on Central Europe, says its head of product development Christiaan Sterckx, is down to tailoring products for distribution through the group’s bank branches to retail clients. Yuri Bender reports

KBC is clearly one of the most admired names in Europe in terms of both product manufacturing and distribution. During an interview at the SocGen tower in Paris, Bernard Desforges, the French bank’s head of structuring equity derivatives, named KBC as “big players”, alongside a handful of other European banks such as BBVA and SCH in Spain, plus the Landesbanken and Deka in Germany.

After developing six key distribution criteria for its European

invasion, Pimco claims that it now has ambitions to become one of

the largest partners in guided architecture. Elisa Trovato reports

Pimco Europe offers a diversified range of Ucits III funds, which are available in a number of currency-hedged share classes. A growing percentage of this fund complex is now owned by the institutional remarketing segment.

In the brave new open architecture world, bankers must be able to provide good advice on long-term investment trends and not engage in the big push. Indeed, they should only spend a small proportion of their time giving guidance on simple products backed by technology. Yuri Bender reports

Benefits of diversification

When constructing a portfolio, two main challenges present themselves – picking the right asset classes and then picking the best managers to run those assets.

Choosing an asset allocation strategy can help protect you from downside risk as well as helping to ensure that you maximise the benefit from potential upside. Interestingly, diversification is one of the few elements in a portfolio that is also free.

A strong investor can optimise their approach using the diversification tool. The last few weeks have exposed how quickly the direction of the markets can change, and investors’ risk appetite with it. It is moments like these that highlight the importance of protecting your client’s assets by holding as diversified a portfolio as possible.

For example, while equities remain an attractive asset class with a return premium (over cash) of around 3 per cent per annum, they carry with them an annual volatility of 15 per cent, which can make your portfolio returns highly variable.

It therefore makes sense to branch out into asset classes that don’t all behave alike, but can provide similar levels of return expectation. This is indicated by the correlation. For instance, if you add North American equity to a UK equity portfolio, the correlation is relatively high at 0.74; they behave in almost the same way (complete correlation being 1.0).

Choose global high yield bonds instead (correlation of 0.36) and there is less likelihood of the two moving in sync and more likelihood of the combination working together to yield more robust returns.

Combining multiple asset classes with a low correlation to each other has the potential to result in a more efficient portfolio, limiting your total risk and providing better opportunity for positive returns.

Cash may have been viewed as a simple solution to market volatility, but an abundance of new products to choose from has led to an increasing sophistication in the asset class, as Elisa Trovato reports

Francois Millet, head of index-linked products sales at SGAM Alternative Investments, explains how after the recent explosion of exchange traded funds, the innovative ‘structured ETFs’ can address the need for security and performance while creating new asset allocation tools

Kevin Thompson, head of money market funds at Standard Life Investments, tracks the rise of the funds over the past 10 years and how regulatory intervention interferes with their development. Also, as the products proliferate, a grey area has formed over exactly what constitutes a money market fund

The market correction that hit equities and bonds in May echoed across to emerging markets, prompting many to withdraw funds. But investors remain hopeful over the medium to long term, writes Simon Hildrey

Emerging market local currency debt offers investors access to local markets, but with several crucial differences to hard currency debt – local currency debt is less volatile and can provide investors with the upside from real currency appreciation, write Rob Drijkoningen, Martijn Oosterwoud, Bart van der Made

“The global economy condition was not impacted by interest rises and higher inflation, even if higher commodities prices and geopolitical situation in Middle East would increase the market down side risk. We believe that the positive outlook, in particular for equity investors, whilst market would become more volatile, is intact. We consider that is to too early to re-position our portfolio defensively and did not make any changes.”

“Equities proved vulnerable to continued rises in oil prices and interest rates, prompting profit taking in markets which had become complacent. The sharp volatility in May has since moderated, although it is too soon to assume that the correction is over. The inflation risk appears modest, suggesting that interest rates should not have to rise significantly further. It could take time for the inflation and growth numbers to give reassurance about the 2007 outlook, but equity valuations and merger activity are supportive factors.”

“The asset allocation of our portfolio is quite neutral between equities and bond. On the bond side, although the euro bond investment is still predominant, the portfolio is also invested in total return bond funds as well as foreign currency bond fund, in particular sterling pound and dollar fund for diversification needs.

The equity side is more invested in defensive themes or in funds with a defensive style. The only aggressive theme that remains in the portfolio is energy, as hedging towards expected raising oil prices and geopolitical uncertainty.”

“We prefer to remain rather cautious therefore to wait for more visibility before increasing our equity exposure.

However, valuations are reasonable and offer a protection against a severe downturn. We still have a positive view on equities in both absolute and relative terms. We have sold off our remaining exposure to US small caps and switch in favour of larger capitalisations.

In fixed income, the risk-return ratio has improved due to a lower probability of a large rise of interest rates.”

“The balanced portfolio is now back to its benchmark weights, i.e. close to being half invested on the equity markets. The holdings are heavily concentrated on Europe-focused fund managers, the cheapest equity market around. Also, excesses have been made in May and June which left a lot of stocks at their cheapest level in years. However, going forward, headwinds could arise, in particular due to the concurrent hawkish monetary policies all over the world. The portfolio has to be kept rather conservative.

“We have continued to slightly reduce our exposure to managers of riskier asset categories such as small caps or emerging markets and we are still increasing our holding in North America, while still remaining heavily underweight versus the MSCI World Index.

We therefore slightly increased our holdings in Wellington US Equity Research and Axa-Rosenberg US Equity Alpha and reduced our position in Henderson Pan European Small Caps and Thames River Global Emerging Markets.”

“Markets were back in positive territory in July, with some signs of possible new leadership in markets. We are making changes. In the US, we think large cap will continue to power ahead, and we increase the pragmatic Merrill Lynch fund weighting, offsetting it with a small new position in Findlay Park US Smaller Companies. In Asia we move to a more fundamental approach. Within the bond element we had a good month, but have taken the opportunity to switch Baring high Yield for the less aggressive Thames River High Income fund.”

“In the aftermath of the early summer correction, we have increased our equity exposure by 10 per cent to now 46 per cent. We have also completely shifted the style bias within our US and European exposure, moving away from high beta to more defensive funds.

Our bond portfolio has remained unchanged at 36 per cent. We still favour absolute return oriented fixed income managers. Ten per cent remain allocated to defensive hedge funds, while our cash holdings have been reduced from 22 per cent down to 8 per cent.”

“Since mid-June’s rebound, our balanced portfolio has benefited from several bets such as gold, commodities, Asian equities as well as European convergence markets, which performed strongly over the period.

Our bets on bonds taken for diversification purposes have also positively contributed as emerging and corporate spreads tightened over the last weeks. This month we have, slightly turned the allocation into a more secure direction.

We’ve decided to switch our technology bet into a European value one that should be more resilient in a downside market. We’ve also reduced our European convergence equity strategy cutting half of the holdings”

Each month in PWM, nine top European asset allocators reveal how they would spend E100,000 in a fund supermarket for a fairly conservative client with a balanced strategy

— Olsen: chopped non-profitable stocks

The talismanic fund manager Tom Stubbe Olsen has finally been beaten by the benchmark, but long-term performance is soaring, writes Yuri Bender

— Mudie: as assets grow, managers can change the way they run a portfolio

With an increasing demand for alpha generation and a more complex investment environment under open architecture, many asset managers lack essential asset allocation skills. Henry Smith looks at the lauded few

While many fund managers focus on developing their brand it is in fact short-term performance that is the main driver in fund selection, writes Elisa Trovato

— Graham: calibrating many wealth managers on to one report is lucrative

MiFID compliance is a key driver to investing in new technology for client reporting and management solutions, as demands for greater transparency and more sophisticated tools force wealth managers to upgrade. Elisa Trovato reports

There is no doubt that in an industry-wide initiative like MiFID, there is a sort of cost pass-back. “The client at the end of the chain pays for cost, either through increased commissions, fees or charges,” says Mr Wright, although these costs might be bundled up and not visible to the clients. He estimates, however, that some of the costs in which the wealth management community will incur to upgrade their systems will be passed on to the sale side. “Some of the investment banks are expected to become systematic internalisers (SI) and they will need liquidity and order flow to make their SI status worthwhile. It may well be that they would give better prices or incentives to fund and wealth managers to pass their orders to them.” This will put SI and stock exchanges in direct competition.

— Fleming: improved, faster services

The latest outsourcing deal between Aegon and Citigroup underpins a wider trend of independent asset managers off-loading to a superior technology platform in order to focus on their core business, writes Elisa Trovato