Archives » 2006 » Issue 45 (November)

By investing in the correct geographical areas and global investment themes, you are on to a winner. Why are some still dragging their heels?

Citibank and Schroders have joined forces to launch new multi-manager solutions for European investors. The new multi-manager range – which will be actively managed by Schroders – will include alternative investments such as private equity and hedge funds, available for the first time to Citibank clients. The portfolios, which have different risk-return characteristics, will be initially offered to investors in Germany, Greece, Italy, Spain, UK and Jersey.

New Star Asset Management is to launch a passive hedge fund index tracker, designed to replicate industry performance better than other instruments currently available.

— Cleary: treating markets as a whole

Focus Capital, a new London-based emerging markets boutique, has launched the first specialist emerging markets fund of funds, according to John Cleary, the company’s founder.

Mohamed El-Erian, manager of Harvard University’s $29bn (e23.bn) endowment, has rebalanced the school’s portfolio. This will not go unnoticed, especially in the family office community.

— Pinçon: Switzerland is our number one goal for fund distribution

CAAM may be the biggest player in the French market, but building its brand in other European countries has proven a challenge. Yuri Bender speaks to head of foreign distribution, Jean François Pinçon on how he aims to diversify the range of products on offer

Grabbing market share is not just about established, European markets: it is also about making the most of the new ones. And the big names in private banking are all looking to Eastern Europe.

Private banks and wealth managers seeking to increase in size are combining acquisition with organic growth. However, while mergers may be all about setting your sights on the right target, asset gathering is a complex fusion of sophisticated products, staff retention and a new ‘holistic’ approach that is currently so fashionable. Elizabeth Cripps reports

loosening the constraints

Investment managers face many different constraints, usually in the form of investment guidelines. Some constraints are necessary and desirable, like having a risk budget for an investment mandate. Others are less desirable such as those imposed by the markets themselves.

Perhaps the most restrictive of these various constraints is the no

shorting rule, as it dramatically reduces a fund managers opportunity set for investment.

It is likely that investors can realise a potentially large alpha benefit by relaxing the long-only constraint, i.e. no shorting in an equity portfolio. This benefit arises from the market-cap weightings of standard equity benchmarks and the long-only portfolio manager’s inability to profit from negative views on companies with low index weights.

Bank and asset allocation companies have undergone sweeping changes in the way they work, reponding in a tailored and sophisticated manner to client demands. Elisa Trovato reports

— John Curry, Barclays Global Investors

More and varied enhanced cash funds have come to the marketplace in recent years, aiming to offer clients with more stable cash balances the opportunity to increase returns. Investors must consider the risks being taken to achieve higher returns and the current issues when comparing available products

Alternative investments, for all their growth and increased acceptance into the mainstream, still have their doubters. Worries about transparency and the conservative attitude of more traditional investors and managers have, however, helped these asset types to evolve into more sophisticated instruments

A low volatility profile combined with positive returns during turbulent stockmarket periods have led to senior bank loans being given allocations ahead of high-yield securities in investors’ portfolios. But what are the characteristics of this asset class, and what are the available investment opportunities?

There is still a cautious sense of optimism in the high yield market, after three solid years, as many predict a benign economic

environment which will benefit the sector. However, one fear is a potential slowdown in the US economy. Simon Hildrey reports

“While lower bond yields seem to suggest that inflationary concerns are receding and that the economy is slowing, stronger equity prices suggest that economic growth remains at least reasonably healthy. Our view is that economic growth is slowing, driven by the slowdown in housing price, but the overall economy remains fundamentally healthy. In September we didn’t change the fund selection or asset allocation and our portfolio remains overweight in equities relative to bonds.”

“Equities have taken a brighter view of the future, as the headwind from oil prices and interest rates abates. There are concerns that the slowdown in US housing could spread more widely. However, lower energy prices boost consumer incomes, as well as reducing the risk of central banks raising rates to combat inflation. This should allow economic growth to continue at comfortable levels. Although it could take some months for the inflation and growth numbers to give full reassurance about the outlook for 2007, equity valuations and merger activity remain supportive factors.”

“Our portfolio is fairly balanced between bond and equity. In the euro area the investment in the mid-long maturity government bonds has been increased against funds with a total return approach. The equity component of the portfolio remains quite conservative. Our preferences go again towards defensive funds or funds with a value approach although some aggressive themes, technology for example, still remain in the portfolio.”

“The US economy is on track for a housing and consumer-led mid cycle slowdown but we believe the probability of a recession is marginal. The Fed is likely to cut rates in 2007. We favour a defensive stance on equities and have a rather balanced style mix. On the fixed income side, we had increased our exposure and therefore benefited from the interest rate environment. We are now more on the way to slightly reduce this stance as the risk reward has become less appealing.”

“Markets conditions have not really changed, except for an improvement in the appetite investors have for risk. This has led most of the major markets to new highs, and notably to an all time high for the Dow Jones Industrials. We have increased our exposure to US large caps via a Merrill Lynch fund, as well as to European large caps, yielding above average dividends, via funds managed by Ecofi and Edmond de Rothschild AM. Going forward, large, high quality companies should keep on being a major part of the equity portfolio.”

“We use our own fund of hedge funds for the alternatives allocation and we were not affected by the declines in Amaranth as we sold our position in this fund over a year ago, due to a number of concerns. We have 10 years experience in hedge fund selection and have developed a detailed due diligence procedure. The main concerns we had with this fund were: management focus on asset gathering rather than asset management and a change in the investment process away from a convertible arbitrage background toward a multi-strategy trading business.”

“Falling oil prices and a further Fed pause helped the rally from the May lows continue through September. The US led the way, with Europe showing well too and, within bonds, our portfolio’s best returns were from Mellon Global rebounding well from a difficult period earlier in the year. Japan lagged but our selection of the JPMF Tokyo Alpha Plus outperformed. Elsewhere, Findlay Park did well as did JO Hambro in both the UK and on the Continent.”

"Our portfolio has remained unchanged, letting us fully participate in the excellent development of all our positions. The equity as well as the bond portions have proven our re-allocation decisions of August/September to have been right. The same is true about our alternative investments and our asset class mix as a whole. At the moment we follow the old rule: let your winners run.”

“Over the month, our balanced portfolio has benefited from several bets such as European equities, corporate and emerging high yield and global government bonds. Our bets taken for diversification purposes on gold and other commodities have negatively contributed in the context of soft landing expectations.

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

— ‘It is really a scale driver that leads people to an outsourcing solution rather than buying in the expertise’ - Jervis Smith, Citigroup

A new survey has revealed that many banks and asset management firms are under-spending on STP initiatives in the back and middle-offices. However, many industry practitioners claim that the speed at which the area has developed has made it more efficient to outsource. Elisa Trovato reports