REUTERS/GORAN TOMASEVIC EUROPEAN FUND MARKET REVIEW 2013 …share.thomsonreuters.com/PR/Lipper/European_Fund_Market... · 2013-03-11 · EUROPEAN FUND MARKET REVIEW 2013 EDITION 7

REUTERS/GORAN TOMASEVIC

EUROPEAN FUND MARKET REVIEW 2013 EDITION

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EUROPEAN FUND MARKET REVIEW

2013 EDITION

COMMENTARY BY:ED MOISSON HEAD OF UK & CROSS-BORDER [email protected]

PRODUCT MANAGER, LIPPER FUNDFILE:JÉRÔME COUTEUR [email protected]

PRODUCT MANAGER, LIPPER SALESWATCH:BARBARA FERRARESI [email protected]

LIPPER DATABASES FEATURED:FUNDFILE - http://bit.ly/LipperFundFile SALESWATCH - http://bit.ly/LipperSalesWatch

Please note that the views expressed in this document are intended as non-consultative and do not

constitute legal advice.

This year’s front cover is our nod to the current discussion as to whether there is a ‘Great Rotation’ underway, or on its way, in the funds industry. But before addressing this issue, it is important to look at the current state of the industry and the sales activity that has characterised the past year.

Sales across Europe totalled €230.4bn for ‘long-term’ funds in 2012, the fifth best year for the industry over the last decade (behind 2005-06 and 2009-10). However redemptions from money market funds totalled -€44.5bn over the year, and when these withdrawals are included the industry’s sales shrink to €185.9bn (only the seventh best total over the past ten years).

Bond funds dominated the year’s sales to a degree not previously seen in Lipper’s records, attracting €225.2bn. High Yield bonds and Emerging Market debt funds together accounted for 40% of the net flows into the broader asset class, with the former attracting €49.7bn (across different currencies) and the latter attracting €40.9bn (across both hard and local currency funds).

By contrast equity funds suffered redemptions of -€8.8bn over the course of the year. Having said this, sales activity for equity funds has generally improved over the sixteen months since the low point of August 2011 (the month in which €32bn was withdrawn from equity funds). This trend culminated in equity funds attracting €13.1bn in December 2012. Despite this, so far one can identify “Small Oscillations” rather than a “Great Rotation” in evidence among European fund investors. Bond funds still attracted €19.4bn in December, above their monthly average for the year (€18.8bn).

The rest of this report is presented as a three course meal, with some introductory comments offered as an hors d’oeuvre, the main course of charts and tables from Lipper’s FundFile database, before ending with a dessert from SalesWatch, Lipper’s unique confidential benchmarking service that allows leading groups to track their cross-border sales and assets against competitors.

A few new ingredients have been added to the recipe that makes up the European Fund Market Review, with some articles written over the course of the year to spice up the data that forms the base of this annual feast. Most of these articles were originally written for Reuters, and so thanks are due to Joel Dimmock, Reuters’ Top News Investment Management Editor, who has clearly shown that another cook does not “spoil the broth”.

KEY DATA:

TOTAL # OF MASTER GROUPS ...............................1,914

TOTAL # OF COMPANIES........................................ 2,817

TOTAL # OF FUNDS ............................................ 35,407

TOTAL NET ASSETS ...................................€5,930.6BN

ASSET GROWTH (2011 - 2012) ........................ €644.1BN

ESTIMATED NET SALES (2012) .......................€185.8BN

OVERVIEW


4

Three groups attracted inflows into long-term funds of more than €10bn: PIMCO (€35.1bn), AXA (€24.0bn, including AllianceBernstein) and BlackRock (€14.8bn). Still attracting impressive inflows, but just failing to make it onto the medal rostrum were Prudential/M&G (€9.4bn) and Nordea (€8.8bn).

Reflecting where investors’ product preferences lay in 2012, inflows for each group were – to a greater or lesser extent – dominated by sales of these companies’ bond funds. One interesting ‘twist’ on this theme is the relative flows into BlackRock’s ETFs (iShares), where €11.4bn of inflows are almost equally split between bond and equity products.

The best-selling individual funds are highlighted in the tables below, with the importance of fixed income plain to see. Also included this year is a dedicated table for mixed asset funds to reflect the scale of some of

BEST-SELLING EQUITY FUNDS IN 2012

FUND EQUITY SECTOR SALES (€M)

M&G Global Dividend Global 2,720.9

Morgan Stanley-Global Brands Global 2,437.8

BlackRock IS Emerging Markets Index Fund Emerging Markets 2,401.9

Aberdeen Global Emerging Markets Equity Emerging Markets 2,352.0

DWS Top Dividende Global 1,801.7

FIGURE 1B

these funds’ success of late. All of the funds included here are categorised as ‘asset allocation’ products, with the individual managers able to invest across the spectrum as opportunities arise, often (but not always) with an absolute (i.e. above zero) return targeted as part of an investment objective. Interest in such funds has been strongest in the UK over the past year, but it is interesting to note that 115 asset allocation funds being sold cross-border were launched over the past year, with a further 51 launches of such products specifically targeting German investors.

Writing as the IMA’s review into its Absolute Return sector is about to be revealed, it is perhaps the way of things that this fund association will be knocked irrespective of what they announce. But the UK is just one market in Europe, and funds seeking absolute return come in different guises in different markets.

BEST SELLERS

FIGURE 1A BEST-SELLING BOND FUNDS IN 2012

FUND BOND SECTOR SALES (€M)

AllianceBernstein American Income Portfolio USD 8,234.5

PIMCO GIS Total Return Bond Fund USD 8,061.6

PIMCO GIS Global Investment Grade Credit Global Corporates 5,865.0

PIMCO GIS Diversified Income Fund Global Corporates 5,582.5

M&G Optimal Income Fund Flexible 5,138.3

BEST-SELLING MIXED ASSET FUNDS IN 2012

FUND MIXED ASSET SECTOR SALES (€M)

Standard Life Global Absolute Return Strategies Asset Allocation 5,489.7

Newton Real Return Asset Allocation 2,390.0

Baillie Gifford Diversified Growth Asset Allocation 2,255.2

Invesco Balanced-Risk Allocation Fund Asset Allocation 1,996.8

Baring Dynamic Asset Allocation Fund Asset Allocation 1,976.7

FIGURE 1C


5

As this report offers a perspective on the state of the European funds industry, it is also important to be aware of a wider global perspective. Of course as US mutual funds account for roughly half of the global assets under management, any worldwide data will inevitably be skewed to activity in that market. By contrast, European funds account for around one third of global fund assets.

This is useful context when considering fund flows in different parts of the world. Net sales of bond funds (excluding ETFs) in Europe totalled €217bn in 2012, nearly the same level as was seen in the US (€228.5bn). Furthermore, if one sets aside sales activity for money market funds and instead looks only at ‘long term’ funds, European products attracted €212.2bn, while US mutual funds saw inflows of €175.1bn. The European industry was helped here by the fact that investors only withdrew -€16.9bn from equities, whereas this totalled -€82.2bn in the US.

When money market funds are included US mutual funds enjoyed net sales of €182.5bn in 2012, compared to €168.8bn for funds in Europe. Having said this, one cannot forget that a sizeable portion of European-domiciled UCITS’ inflows come from non-European investors. Lipper SalesWatch data (highlighted later in this report) indicates that among the largest cross-border groups, 26% of assets are sourced from investors based in countries outside Europe.

FIGURE 1D INTERNATIONAL COMPARISONS

-100,000

-50,000

-

50,000

100,000

150,000

200,000

250,000

300,000

USA Europe + Intl Asia Pacific Latin America MEA

Net

Sal

es (€

m)

Bond Equity Mixed M.Mkt Others

“�Long-term�fund�sales�in�Europe�were�greater�than�in�the�US.”

INTERNATIONAL COMPARISONS


6

It is important to paint in some of the detail in the European funds landscape, most noticeably by looking solely at funds sold cross-border. The importance of the cross-border dimension of the industry is such that these funds now account for 45% (€2,662.9bn) of European industry assets. This has risen from 21% of at the end of 2001.

Cross-border funds attracted inflows of €220.7bn in 2012 (‘long term’ funds only) a sales total that is second only to the tally achieved in 2010 (€234.1bn) in our record books for the past decade. Interest in cross-border equity funds had already clearly picked up in the last four months and sales reached €23.3bn for the year, although appetite for bond funds still dominates, with their one year total reaching a whopping €182.1bn.

The relative sales for cross-border funds (i.e. those funds generating more than 20% of their assets from a second market) compared to domestic funds is well illustrated in the chart below. The impact of the financial crisis should not be underestimated here, although the seeds had been sown for a divergence in fund flows as early as 2006. This then leads to the longer-term factors that have helped boost the cross-border industry, including both organic (for example providing products not available locally) and structural reasons (the decisions of some fund companies to re-domicile their funds to Luxembourg or Ireland in order to expand their investor base).

Linked to the trend above, while it is significant that there was a net decline in the number of funds in the industry for second year in a row – truly a rare occurrence in historical terms - if local product providers come back to promoting their mutual fund businesses, it would come as no surprise that this trend will be reversed in 2013.

FIGURE 1E INDUSTRY SHIFTS TO CROSS-BORDER

SHIFT TO CROSS-BORDER

-300,000

-250,000

-200,000

-150,000

-100,000

-50,000

-

50,000

100,000

150,000

200,000

250,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Net

Sal

es (€

m)

Domestic Europe International


7

This annual review provides the opportunity to look back at longer-term trends in the industry. This year the average annual sales of fund management groups over the past decade have been analysed to get a better sense of who has been able to attract inflows throughout this period. Only groups active for at least five years have been included, with money market funds and ETFs excluded.

Master Groups are ranked by their average (mean) annual net sales and the best sellers featured in the table below, although the median annual sales figure is also included to account for situations where an asset manager’s average figure may be weighted to a shorter time period.

PIMCO tops this chart with average annual sales of €8.7bn, although Franklin Templeton and BlackRock only just miss the €8bn mark, as well as each achieving a median annual sales level in excess of €6bn.

It is interesting that the 20 companies that feature in the best sellers list for the past decade are a real mix of business types, ranging across independent or ‘pure play’ asset managers, private banks, and the arms of banking groups. In this context it is worth mentioning the other groups with a median annual sales total above €2bn, but with a lower average (mean), are Amundi, Aviva, HSBC, KBC and Union.

FIGURE 1F GROUP WINNERS OVER THE PAST DECADE

WINNERS OVER THE PAST DECADE

RANK MASTER GROUP NAT AVG ANNUAL SALES (€M)

MEDIAN ANNUAL SALES (€M)

1 PIMCO US 8,668 3,945

2 Fr Templeton US 7,824 6,321

3 BlackRock US 7,797 6,049

4 AXA/AB FR 5,386 5,297

5 Prudential/M&G GB 4,420 3,496

6 Carmignac FR 4,053 2,072

7 Pictet CH 3,907 4,324

8 BNY Mellon US 3,367 3,802

9 Schroders GB 2,763 2,260

10 Cr Suisse CH 2,616 2,896

11 GAM Holding CH 2,476 2,459

12 Standard Life GB 2,475 2,829

13 RBC CA 2,378 1,857

14 Nordea SE 2,295 2,124

15 Vanguard US 2,091 2,358

16 JP Morgan US 2,072 4,687

17 Goldman Sachs US 1,859 2,938

18 Invesco US 1,855 881

19 Investec ZA 1,782 1,443

20 Lloyds/SWIP GB 1,751 1,855


8

Monitoring fund flows each month, eyes will be looking keenly for signs of whether there really is a rotation back to equity funds. My expectation would be that the gradual, but uneven, improvement in equity fund sales will continue as 2013 progresses. But the sheer scale of flows into more adventurous bond fund sectors in recent years must mean that such a rotation is very unlikely to be swift. And with around 50% of emerging market debt funds in Europe having been launched in the past three years, certainly there are many asset managers who have been betting on continued growth in this sector.

Where there has been equity appetite, it has been focused on global (often global equity income) and emerging market funds. For long-term investors, emerging markets are still hard to avoid in a well-diversified portfolio, but expectations for growth in these markets in 2013 must be lower.

If equity markets continue in a generally upward trend, expectations must be that product development within the European industry will pick up. The pre-disposition of many fund management companies in Europe remains to launch new funds when the opportunity to do so arises.

Staying with product development, 120 new ETFs were launched in Europe in 2012 (excluding ETPs). An article later in this report explores ETF developments more fully, although even continued strong growth in terms of assets does not mean that they will form significantly more than 10% of the industry soon. Having said this, when including index tracking mutual funds too, passive funds’ combined portion of the equity fund pool of assets now stands at a healthier 16%, albeit still notably lower than the equivalent figure for the US (32%) or Asia Pacific (30%).

When considering fund sales, there must also be an awareness of the way funds are sold. The scale of the change brought about in the UK with the Retail Distribution Review (RDR) cannot be underestimated. This includes the banning of annual distribution fees (or trail commission) on new product sales, and negotiating fees directly between the investor and intermediary.

At a European level, almost by accident similar steps are being taken in various different countries. In the Netherlands a ban is being introduced on the receipt or payment of inducements for acting as product provider, intermediary or adviser in relation to new sales of financial products. Meanwhile the full implications of the Swiss Federal Court ruling last year that retrocessions received by banks for asset management services belong to the client are still being digested. Such independent moves might almost overshadow MiFID II, which may yet ban independent advisers and portfolio managers from receiving commissions — although improved disclosure seems the more likely outcome.

We hope that you find this report useful. As always, while these comments provide an overview of the key trends, the detailed numbers on activity in different markets and for different products can be found in the tables and charts that follow. Please feel free to get in touch with any feedback or questions!

THE COMING YEAR


9

Equity35%

Bond29%

Money Market18%

Mixed Assets10%

Property2%

Commodity1%

Other5%

EUROPEAN ASSETS

FIGURE 3 EUROPEAN ASSETS BY MARKET AT DECEMBER 2012 (€BN)

FIGURE 2 EUROPEAN ASSETS BY INVESTMENT TYPE (%)

RANK FUND MARKET BOND COMMODITY EQUITY MIXED MM MM ENH PROPERTY OTHER TOTAL

1 International 866.4 19.0 945.7 153.0 579.4 11.0 5.0 83.4 2,662.92 United Kingdom 163.3 0.0 438.5 114.1 33.8 1.0 19.7 7.4 777.83 France 70.8 0.5 123.4 29.8 321.7 13.9 0.0 46.6 606.54 Germany 111.5 3.8 129.9 87.9 23.1 1.5 81.8 39.8 479.26 Switzerland 107.0 25.4 108.0 31.9 32.6 0.6 4.1 5.4 315.05 Italy 153.2 0.1 50.7 56.2 27.9 2.5 0.0 12.6 303.27 Sweden 28.4 0.1 89.7 28.2 11.6 0.0 0.0 9.6 167.68 Spain 32.7 0.0 11.1 10.2 9.1 0.0 4.2 51.1 118.49 Belgium 26.6 0.0 20.7 32.3 5.9 0.2 0.0 19.9 105.610 Denmark 42.7 0.0 26.8 1.9 0.4 0.0 0.0 0.4 72.211 Norway 20.0 0.0 34.2 1.1 13.0 0.0 0.0 0.5 68.712 Austria 32.5 0.0 9.9 6.3 1.7 0.1 3.3 3.4 57.213 Netherlands 17.8 0.1 27.4 6.2 0.2 0.0 0.0 0.9 52.714 Finland 18.3 0.0 21.4 3.5 7.3 0.5 0.0 1.1 52.115 Poland 9.0 0.0 5.1 5.2 3.9 0.0 0.0 0.5 23.716 Portugal 3.1 0.0 1.5 1.9 3.6 0.0 4.1 0.4 14.717 Turkey 1.5 0.4 0.3 1.3 7.9 0.0 0.0 0.2 11.618 Hungary 1.2 0.0 0.6 0.3 4.6 0.0 0.9 1.2 8.720 Luxembourg 0.8 0.0 1.6 3.6 0.8 0.0 0.0 0.0 6.919 Czech Republic 2.1 0.0 1.0 1.0 1.4 0.0 0.1 1.1 6.821 Greece 1.8 0.0 1.4 0.9 0.9 0.2 0.0 0.3 5.422 Slovakia 0.6 0.0 0.1 0.5 1.1 0.0 0.6 0.1 3.023 Russia 0.8 0.1 1.2 0.4 0.0 0.0 0.0 0.0 2.524 Romania 1.5 0.0 0.1 0.1 0.6 0.0 0.0 0.0 2.326 Croatia 0.1 0.0 0.3 0.2 1.2 0.0 0.0 0.0 1.725 Slovenia 0.1 0.0 1.1 0.4 0.0 0.0 0.0 0.0 1.727 Liechtenstein 0.4 0.0 0.4 0.1 0.0 0.0 0.0 0.0 0.928 Malta 0.4 0.0 0.0 0.1 0.2 0.0 0.0 0.0 0.729 Estonia 0.1 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.230 Bulgaria 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.231 Latvia 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.232 Lithuania 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.133 Ukraine 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TOTAL EUROPE 1,714.7 49.7 2,052.4 578.6 1,093.9 31.6 123.8 285.9 5,930.6


10

FIGURE 4 EUROPEAN ASSET GROWTH BY MARKET IN 2012 (€BN)

EUROPEAN ASSET GROWTH


1 International 249.3 0.9 134.7 24.9 -38.0 -0.8 0.3 -3.6 367.62 United Kingdom 24.8 0.0 62.9 23.5 2.9 0.0 -0.6 0.6 114.23 Switzerland 9.6 2.8 19.4 1.1 -0.8 0.1 0.9 0.8 33.94 France 11.7 -0.3 4.7 -0.4 16.5 2.6 0.0 -4.0 30.95 Germany 14.8 -0.7 9.0 8.9 -2.5 -1.3 -2.2 -2.7 23.26 Sweden 3.3 0.1 14.4 3.5 0.0 0.0 0.0 0.9 22.27 Italy 25.4 0.0 0.3 0.3 -11.6 0.8 0.0 0.2 15.58 Norway 6.7 0.0 5.4 0.2 -0.3 0.0 0.0 0.2 12.39 Denmark 3.3 0.0 4.8 0.3 -0.2 0.0 0.0 0.1 8.210 Finland 3.1 0.0 4.1 0.4 -0.8 0.3 0.0 -0.1 6.911 Poland 4.8 0.0 0.8 0.3 -0.2 0.0 0.0 -0.1 5.612 Austria 3.4 0.0 1.4 0.4 -0.4 0.0 0.3 -0.6 4.513 Netherlands 0.9 0.0 1.8 0.2 0.0 0.0 0.0 -1.3 1.614 Hungary 0.4 0.0 0.0 0.1 0.5 0.0 0.0 0.2 1.215 Portugal 0.2 0.0 -0.2 -0.3 1.7 0.0 -0.1 0.0 1.216 Luxembourg 0.0 0.0 0.4 0.6 -0.1 0.0 0.0 0.0 0.917 Greece 0.1 0.0 0.2 0.2 0.3 0.0 0.0 0.0 0.718 Romania 0.7 0.0 0.0 0.0 -0.3 0.0 0.0 0.0 0.519 Czech Republic 0.7 0.0 0.3 0.1 -0.3 0.0 0.0 -0.5 0.320 Croatia 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.121 Slovakia 0.1 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.122 Russia 0.3 0.0 -0.2 -0.1 0.0 0.0 0.0 0.0 0.123 Liechtenstein 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.024 Slovenia 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.025 Malta 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.026 Latvia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.027 Estonia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.028 Bulgaria 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.029 Lithuania 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.030 Ukraine 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.031 Turkey 0.7 -0.2 0.0 0.4 -0.3 0.0 0.0 -1.1 -0.432 Belgium 4.1 0.0 2.9 3.8 -6.9 -0.1 0.0 -5.4 -1.633 Spain -3.5 0.0 0.5 -0.8 0.3 0.0 -0.3 -1.8 -5.5

TOTAL EUROPE 365.0 2.6 267.6 67.4 -40.5 1.7 -1.5 -18.3 0.6


11

FIGURE 5 EUROPEAN MARKET RANKING BY ESTIMATED NET SALES IN 2012 (€M)

EUROPEAN SALES


1 International 182,123.6 1,618.1 23,256.8 17,437.0 -38,458.2 -1,114.6 296.9 -2,936.2 182,223.42 Switzerland 5,142.9 1,891.4 6,078.2 -677.1 -788.8 102.9 538.7 474.2 12,762.63 Norway 5,434.0 40.2 729.4 118.3 -1,074.1 0.0 0.0 158.4 5,406.14 Sweden 1,640.4 76.3 1,684.4 1,434.1 -763.6 0.0 0.0 405.5 4,477.25 France 6,050.1 -202.1 -12,914.7 -2,476.8 13,458.7 2,172.5 0.0 -2,320.8 3,766.96 United Kingdom 2,189.0 -16.4 -14,520.8 12,505.6 2,121.8 -40.6 -494.2 253.5 1,997.87 Poland 3,664.1 0.6 -473.3 -829.6 -780.3 21.6 0.0 -20.9 1,582.28 Finland 1,089.2 -2.4 1,088.4 30.6 -1,066.8 295.3 12.8 -133.1 1,314.09 Denmark -92.5 0.0 1,378.9 43.3 -250.3 0.0 0.0 85.9 1,165.310 Portugal 130.9 0.0 -343.7 -420.8 1,597.8 0.0 -158.3 -28.8 777.211 Luxembourg -65.8 0.0 248.0 455.2 -118.7 0.0 0.0 0.0 518.612 Czech Republic 527.0 12.1 140.0 31.8 -336.6 -7.7 7.7 95.3 469.613 Romania 267.2 0.0 -9.9 0.8 89.2 0.1 0.0 -2.5 344.914 Austria 728.4 -5.8 8.6 -65.3 -429.1 -19.6 376.1 -368.7 224.515 Hungary 143.6 18.9 -63.5 13.3 9.5 4.8 -54.9 38.3 109.916 Croatia -39.9 0.0 -46.2 -40.6 224.3 0.0 0.0 0.0 97.617 Bulgaria 2.6 0.4 2.2 1.6 -4.0 0.0 0.0 0.1 2.818 Latvia 5.9 0.0 0.7 -0.3 -3.8 0.0 0.0 0.0 2.519 Lithuania 2.8 0.0 -3.1 -1.1 0.0 -3.0 0.0 0.0 -4.420 Ukraine 0.0 0.0 -0.2 -4.8 -0.4 0.0 0.0 0.0 -5.621 Slovakia 6.6 0.0 -13.5 -40.6 -67.8 -18.0 146.6 -19.7 -6.522 Malta 14.1 0.0 -0.5 -3.3 4.3 -14.2 0.0 -13.2 -12.923 Estonia 2.4 0.0 -34.3 0.1 0.0 0.0 0.0 0.0 -31.824 Liechtenstein 33.5 -3.0 -56.7 -3.9 0.0 -0.6 0.0 -2.8 -33.525 Slovenia 2.3 0.0 -32.4 -55.7 -3.1 -0.1 0.0 -0.2 -89.126 Russia 246.5 29.1 -287.7 -121.0 7.1 0.0 0.0 0.0 -126.127 Greece -210.8 -27.7 -67.4 -6.3 216.9 -3.7 0.0 -67.6 -166.728 Turkey 562.3 -197.8 -47.1 248.4 -1,320.2 0.0 0.0 -4.6 -758.929 Germany 8,937.2 -454.6 -7,510.5 4,232.7 -2,608.5 -1,293.7 -3,379.3 -1,035.3 -3,112.030 Netherlands -826.0 -1.9 -1,727.1 -575.5 -20.7 0.0 0.0 -1,386.1 -4,537.331 Italy 8,335.8 -11.9 -4,860.3 -3,374.7 -5,612.3 879.8 0.0 -641.7 -5,285.232 Belgium 2,105.3 -2.0 221.3 1,259.1 -6,775.7 -84.9 0.0 -3,614.6 -6,891.533 Spain -2,920.1 -8.6 -597.2 -1,271.4 -1,716.4 16.3 -41.6 -3,746.5 -10,285.5

TOTAL EUROPE 225,232.4 2,752.8 -8,773.1 27,843.3 -44,469.8 892.7 -2,749.5 -14,832.3 185,896.4


12

A version of this article originally appeared in The Financial Times (FTfm) on 14 January 2013.

When first executed on the world stage, the Cruyff Turn was surely one of the iconic moments in football, with an unexpected change of direction bamboozling opponents. Recently some fund companies in Europe have been contemplating whether they have the nerve and the skill to make a similarly dramatic change.

For the funds industry this is the shift from being perceived as short-term salesmen to longer-term stewards of their investors’ assets, which both the Kay Review of UK Equity Markets and the 300 Club’s recent report addressed. This article will question the notion that asset managers across the board can build businesses with a limited range of funds in a certain niche and for fund performance to attract ‘buy and hold’ investors steadily over time.

If possible, such a change could be good for both clients and asset managers alike. But I can’t help thinking that expectations of such a change are a bit like the newspaper headlines that proclaimed the death of catenaccio (Italian defensive-style football) after the stylish exponents of totaalvoetbal (total football), Ajax, beat Internazionale in the 1972 European Cup final.

Sadly history shows that, despite Dutch teams’ other considerable successes, the Netherlands lost the 1974 World Cup final to West Germany. And it is this result that a fund company must consider before overhauling its business strategy and product range. What looks good for one group doesn’t always work for another.

This is not to say that asset managers should not consider their clients’ interests – they are duty-bound to do so – and I have spent many years saying that more companies should spend greater efforts minimising fund costs that their retail investors bear. But too often observers assume that what is logical in the industry will naturally happen. This is rarely the case.

For example, criticisms of the number of funds in Europe (currently around 35,000) often focus on the vast arrays of funds that the largest groups manage. Yet hundreds of groups in Europe have mutual fund assets below €100 million.

Where is the business case – not least for those asset managers with shareholders – for the former to slash hundreds of funds (rather than just trimming a few, which we have seen of late)? The risk is clear of losing either current or future clients as investor preferences change.

So a big group with equivalent distribution ambitions, will almost inevitably expand its fund range as investor demands evolve but also withstand larger outflows when an asset class is out of favour (not necessarily because of under-performance).

A small manager with more limited distribution may be able to manage shorter-term changes in investor appetite. But this underlines that it would be a hard task to force many of the long list of small groups to shut up shop for an apparent ‘greater good’ of increasing the industry’s average fund size.

Besides, I am bound to wonder whether a larger average fund size really would translate generally into economies of scale being passed on to retail investors across Europe. If the industry was serious about this, then there are many large funds or fund companies that could have grasped this issue already.

There is a crucial accompanying issue that cannot be ignored: the frequency with which European fund selectors buy and sell active fund managers. Since 2005 the annual redemption rate for cross-border funds in Europe ranges between 48% and 97% (source: Lipper). But in the US the range was between 24% and 36% (source: ICI). Regardless of one’s views on such buying and selling activity, it is a reality to which pan-European asset managers cannot be blind.

In this environment it is little wonder that launching new funds is such a feature of the industry. A recent slowing of such activity has not changed the fundamental predisposition to develop new products. After all, if no new funds had been launched over the past decade then industry assets would have stayed at €3 trillion. Instead €2.8 trillion of the industry’s current €5.8 trillion sit in funds launched in the intervening years.

Very few football teams have the players to enable them to play stylish ‘total football’ and expect to win regularly, and perhaps even fewer fund managers would expect to find a particular strategy or security selections in favour with investors and fund selectors in all market conditions.

Or as Johan Cruyff himself put it, “Simple football is the best, but it is very difficult to play simple football.”

TIME FOR A CRUYFF TURN IN THE FUNDS INDUSTRY?By Ed Moisson | 5 January 2013


13

FIGURE 6 TOP 25 SECTORS IN EUROPE (€M)

FIGURE 7 TOP AND BOTTOM FIVE SECTORS BY SALES

ALL SECTOR RANKING

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

Bnd EmMkt

Bnd USDCorp HY

AssetAlloc

Bnd GlCorp

Bnd USD Bnd EurSh-T

Guarant'd FF Hdge Eq UK MM Euro

RANK RANK '11 FUND SECTOR ENS '12

1 40 Bonds Emerging Markets 27,610.0 2 20 Bonds USD Corp. High Yield 24,722.3 3 2 Asset Allocation 24,143.3 4 6 Bonds Global Corporates 20,942.3 5 33 Bonds USD 19,858.4 6 26 Equities Emerging Markets 17,956.4 7 37 Bonds Global High Yield 17,729.0 8 3 Bonds Global Currencies 17,042.8 9 9 Target Maturity Euroland 16,124.7 10 7 Equities Global 13,441.2 11 8 Bonds Emerging Markets - Local Currency 13,296.5 12 10 Bonds Flexible 12,902.2 13 213 Bonds EUR Corp. Inv. Grade 12,776.0 14 1 Money Market GBP 8,813.3 15 190 Fund of Funds Bonds 7,176.9 16 21 Bonds USD Short-Term 6,820.8 17 19 Bonds Speciality 6,012.3 18 126 Bonds EUR Corp. High Yield 4,636.7 19 18 Fund of Funds Asset Allocation 4,379.8 20 42 Bonds NOK 4,123.4 21 28 Bonds Asian Currencies 3,357.5 22 11 Bonds Inflation Linked 3,314.3 23 54 Bonds PLN 3,280.2 24 32 Bonds USD Corp. Inv. Grade 3,158.8 25 155 Bonds CHF 2,992.1

REST -110,176.5 TOTAL 186,434.8


14

FIGURE 8A

FIGURE 9A

EXTERNAL FUNDS OF FUNDS ASSETS (€BN)

EXTERNAL FUNDS OF FUNDS SALES (€M)

FIGURE 8B MARKET SHARE OF EXTERNAL FOF ASSETS

FUNDS OF FUNDS

France23%

United Kingdom20%

Germany14%

International12%

Rest21%

Italy10%

FUND MARKET DEC-12

1 France 69.8 2 United Kingdom 59.9 3 Germany 40.2 4 International 36.8 5 Italy 28.6 6 Spain 11.0 7 Sweden 10.9 8 Belgium 8.7 9 Switzerland 8.4 10 Austria 8.3

REST 13.4 TOTAL 296.1

FUND MARKET 2012

1 United Kingdom 4510.7 2 International 3309.6 3 Sweden 1836.9 4 Italy 944.8 5 France 651.9 6 Finland 509.4 7 Belgium 445.9 8 Switzerland 255.5 9 Norway 211.4 10 Slovenia 130.2

REST -4389.1 TOTAL 8417.2

FIGURE 9B MARKET SHARE OF EXTERNAL FOF SALES (€M)

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

UK International Sweden Italy France Rest


15

FIGURE 10 MOST POPULAR GROUPS FOR THIRD PARTY FUNDS OF FUNDS

RANK PROMOTER (ex-ETFs) NO. FOFS INVESTING ASSETS FROM FoFs (€M)

1 BlackRock 1,277 4,462.02 JPMorgan 1,104 3,046.83 Schroders 994 2,398.14 Fidelity 872 2,461.85 Franklin Templeton 809 2,189.86 DWS 785 3,713.47 Aberdeen 739 1,906.98 Invesco 729 3,379.49 BNP Paribas 699 1,700.510 M&G 691 4,799.6

FUNDS OF FUNDS’ HOLDINGS

FIGURE 11 MOST POPULAR INVESTMENTS FOR THIRD PARTY FUNDS OF FUNDS

RANK FUND (EX-ETFS) NO. FoFs INVESTING ASSETS FROM FoFs (€M)

1 M&G Optimal Income 171 831.82 Aberdeen Global - Emg Mkts Equity 171 510.93 Templeton Asian Growth 152 388.54 First State Asia Pacific Leaders 151 739.95 Alken Fund - European Opportunities 135 356.16 Templeton Global Bond 127 250.47 Morgan Stanley Global Brands 124 305.38 BlackRock GF World Gold 122 132.39 Fidelity FAST Europe 114 278.510 Allianz Europe Equity Growth 108 407.6

Note: Based on analysis of holdings of 2,000 European-domiciled third party funds of funds


16

By Ed Moisson | 5 October 2012 This article was originally published by Reuters – http://blogs.reuters.com/globalinvesting/

“Asset managers are emerging from their comfortable burrow to face a battery of lights.”

Sheila Nicoll, Director of Conduct Policy at Britain’s Financial Services Authority (FSA), had perhaps been reading Kenneth Grahame before her recent speech, and her words are likely to have sent a chilly wind through the willows of the UK funds industry.

The warning “poop poop” being sounded by the regulator has been getting louder and louder. Indeed the FSA may even be traveling faster than Labour Party leader Ed Miliband, who has recently suggested that he would impose a 1 percent cap on pension charges.

It was not so long ago that the FSA took a very different approach and removed its rules on excessive charges on the basis that “there may be no appropriate benchmarks” to determine this. They went so far as to say that “we do not act as a price regulator, and we do not consider it appropriate for us to take such a role.”

At the time, this move seemed all the more surprising as it was this very regulation that the FSA had referred to when trying to allay the Financial Services Consumer Panel’s fear that in allowing performance fees for open-ended funds, there was no requirement to cap such fees.

The more recent change in the FSA’s thinking was shown in its paper on product intervention, stating its intention to scrutinise both performance fees and the high charges for some index-tracking funds. The FSA did not shrink from suggesting that “it is possible to envisage the role of the regulator in imposing limits on price or excessive charges to remedy competition problems.”

FIDUCIARY DUTY The loudest voice in the woodland is surely that of Martin Wheatley, the future head of the FSA’s successor, the FCA, who has questioned how an investor can tell whether charges are fair. He has promoted the idea of fund managers “adopting a fiduciary duty to their investors, something that would offer an extra level of commitment beyond simply the letter of our rules.”

While the Investment Management Association (IMA) is looking again at this issue, the funds association initially responded to Wheatley’s speech by questioning the “legal underpinning” of the term fiduciary duty. Having said this, the IMA has not stuck its head in the sand, publicly recognising such obligations earlier this year.

It also detailed the governance arrangements of funds back in 2005 in a paper which gave a succinct definition of ‘fiduciary duty’: “Both the Manager and the Depositary have an obligation to act at all times in the best interests of Investors, disregarding their own interests where they conflict with those of the investor.”

But the IMA made it clear that this duty stopped short of the depositary taking a view on “commercial matters” such as the level of the manager’s fee.

The Wild Wood that is the US funds industry casts a shadow over the discussion. First, the US regulator models itself as “The Investor’s Advocate” – an approach more akin to the new FCA – and second, it holds that fiduciary duty does relate to the oversight of funds’ fees.

Here, section 15c of the 1940 Investment Company Act comes to light, whereby fund boards (a majority of which are independent) must monitor their funds’ fee and expense levels in relation to the rest of the industry. This need not create a decisive argument that fund boards are a panacea, but it does demonstrate a different and viable approach to overseeing fees.

FUNDS WILL FIND A CHILL WIND IN THE WILLOWS


17

One way this scrutiny manifests itself is in passing on economies of scale achieved to investors, as discussed in a previous column. If the UK and European industries are to demonstrate that they are giving investors as fair a deal as possible, then this nettle needs to be grasped. Simply capping fee levels at a fixed percentage will not suffice.

WEASELS OR BADGERS?If funds can justify the fees they charge by their performance – as many do – then some of the critical voices may be quieter, or find a less receptive audience. But demonstrating this over both the long term (as mutual funds are designed to do) and the shorter term (say up to 3 years, which has a more significant impact on fund sales) remains the challenge for asset managers.

Some consumers may well see fund managers as weasels, rather than an array of friendly moles, wise badgers or shrewd water rats. But such a perception crucially highlights the problem of exactly how consumers think of fund fees: some see them simply as the fuel for a lifestyle of fast cars and mansions out of step with the rest of society, while others will look at fees from an investor’s viewpoint, as a downward ‘drag’ on returns.

Despite this, retail investors have traditionally given more weight to funds’ past performance then their ability to keep costs low. This leads on to a question that the FSA’s Wheatley posed: “we might ask ourselves whether it is a problem that the industry appears to compete predominantly on the aspirational aspect of its service… when it is the one thing that cannot be compared and measured by potential investors.”

The counter-argument to this question must be that as long as investors, or their advisers, place a greater emphasis on a manager’s track record than on charges, then it remains a very tough proposition to grow a retail business based on what investor behaviour should be (depending on your perspective), rather than one based on what it is. Perhaps this is the equivalent of traveling quietly in a horse-drawn caravan while others race by in motor cars.

The impact of such attitudes is that the average annual charges at mutual funds in the UK have slowly been rising. Part of the reason for this may be laid at the feet of independent financial advisers (IFAs) and platforms, in the form of trail commission, and it is this that will be radically changed with the Retail Distribution Review (RDR) next year as customers will have to agree separately the fees they pay for advice.

So are managers really emerging from their burrows? Surely all fund companies have been buffeted by the financial crisis and witnessed the march towards greater regulation, not only the RDR in the UK, but also laws from across the Channel and the Atlantic.

As for investors, there is greater cost disclosure underway, although this need not mean they will pay less overall. Regulatory changes have already resulted in there being far more choice for cost-sensitive investors, who can certainly pay much lower fees unless they believe a manager is really worth it. Or as Kenneth Grahame put it, “good, bad, and indifferent – I name no names – it takes all sorts to make a world.”


18

Top 519%

Next 1019%

Next 1520%

Next 2014%

Rest20%

Next 258%

FIGURE 12

FIGURE 13

TOP 25 EUROPEAN MASTER GROUPS BY ASSETS IN 2012 (€M)

MARKET SHARE OF LEADING MASTER GROUPS

PAN-EUROPEAN MASTER GROUPS ASSETS

RANK RANK'11 MASTER GROUP NATIONALITY # FUNDS DEC-12

1 1 BlackRock US 440 329,928.62 3 Amundi FR 760 218,925.03 4 Deutsche/DWS DE 956 197,626.54 2 JP Morgan US 259 187,378.05 5 BNP Paribas FR 1,333 166,094.56 6 UBS CH 643 154,755.07 7 Fr Templeton US 108 118,666.48 15 AXA/AB FR 416 117,816.49 12 Lloyds/SWIP GB 230 115,692.610 26 PIMCO US 62 107,968.411 11 Fidelity US 210 106,736.212 10 BNY Mellon US 190 106,419.613 8 Cr Suisse CH 473 104,549.214 9 Intesa SP IT 473 103,550.315 13 Union DE 285 99,127.016 21 Prudential/M&G GB 121 89,504.717 17 HSBC GB 484 87,809.918 19 Schroders GB 176 87,366.919 18 Deka DE 372 86,234.120 16 Goldman Sachs US 115 83,795.321 22 Pictet CH 230 81,411.122 14 Natixis FR 315 80,134.323 20 Pioneer IT 439 80,024.324 23 Allianz GI DE 513 77,526.725 25 Invesco US 152 77,475.6

TOTAL TOP 25 9,755 3,066,516.6REST 2,864,107.3TOTAL 5,930,623.9


19

Top 555% 6-15

30%

16-2515%

FIGURE 14

FIGURE 15

TOP EUROPEAN MASTER GROUPS BY SALES IN 2012 ( €M)

MARKET SHARE OF LEADING MASTER GROUPS BY SALES

PAN-EUROPEAN MASTER GROUPS SALES

RANK RANK '11 MASTER GROUP NATIONALITY # FUNDS 2012

1 4 PIMCO US 62 34,827.82 1,768 AXA/AB FR 414 24,003.63 1,773 Amundi FR 758 22,592.74 1 BlackRock US 437 19,919.05 1,652 Nordea SE 278 9,932.66 14 Prudential/M&G GB 121 9,424.87 10 Morgan Stanley US 86 8,455.88 1,723 Aberdeen GB 143 7,677.89 6 Standard Life GB 73 6,645.210 1,762 Cr Mutuel FR 334 6,068.011 11 Pictet CH 229 4,953.412 1,749 RBC CA 45 4,555.513 1,765 Carmignac FR 15 4,488.114 12 Muzinich US 10 4,449.415 2 BNY Mellon US 189 3,214.616 1,710 GAM Holding CH 264 3,182.717 1,693 Vanguard US 41 3,171.818 26 MMC/Mercer US 38 3,161.319 92 Vontobel CH 71 3,149.920 75 MFS US 35 3,147.221 72 Lombard Odier CH 125 3,112.822 1,682 Baring US 52 2,990.723 17 Stone Harbor US 12 2,870.424 22 Sv Handelsbanken SE 95 2,837.225 32 Baillie Gifford GB 30 2,575.9

TOTAL TOP 25 3,957 201,408.1REST 28,538 -15,511.6TOTAL 32,495 185,896.4


20

Top 258%

Rest92%

FIGURE 16

FIGURE 17

TOP 25 FUNDS BY ASSETS (€M)

MARKET SHARE OF LARGEST 25 FUNDS

PAN-EUROPEAN FUND LEADERS ASSETS

Note: Excludes money market funds.

RANK RANK '11 MASTER GROUP NAT FUND NAME DOMICILE TYPE DEC-12

1 1 Fr Templeton US Templeton Global Bond Fund LU Bnd 34,251.62 2 Carmignac FR Carmignac Patrimoine FR Mix 28,013.93 4 PIMCO US PIMCO GIS Total Return Bond Fund IE Bnd 25,831.64 3 Fr Templeton US Templeton Global Total Return Fund LU Bnd 22,255.85 6 AXA/AB FR AllianceBernstein - Global High Yield Portfolio LU Bnd 18,757.36 9 Standard Life GB Standard Life Global Absolute Return Strategies UK Mix 18,282.67 14 PIMCO US PIMCO GIS Global Investment Grade Credit IE Bnd 17,492.18 5 Invesco US Invesco Perpetual High Income UK Eq 14,630.29 26 Prudential/M&G GB M&G Optimal Income Fund UK Bnd 13,768.410 10 BlackRock US iShares DAX® (DE) DE Eq 13,539.511 8 Fr Templeton US Templeton Asian Growth Fund LU Eq 13,318.112 66 AXA/AB FR AllianceBernstein - American Income Portfolio LU Bnd 13,099.313 7 Deka DE Deka-ImmobilienEuropa DE Prop 11,983.814 310 Lloyds/SWIP GB Scottish Widows UK All Share UK Eq 11,882.515 22 Aberdeen GB Aberdeen Global Emerging Markets Equity Fund LU Eq 11,780.516 11 Invesco US Invesco Perpetual Income UK Eq 11,171.717 43 AXA/AB FR AXA IM FIIS - US Short Duration High Yield LU Bnd 10,137.618 12 BlackRock US BlackRock Global Funds - Global Allocation Fund LU Mix 9,823.119 16 Swisscanto CH ZKB Gold ETF CH Cmdty 9,621.020 13 Commerzbank DE hausInvest DE Prop 9,235.221 17 Prudential/M&G GB M&G Recovery Fund UK Eq 9,096.322 134 PIMCO US PIMCO GIS Diversified Income Fund IE Bnd 8,968.723 34 Pictet CH Pictet - Emerging Local Currency Debt LU Bnd 8,964.024 15 BlackRock US BlackRock Global Funds - World Mining Fund LU Eq 8,886.325 20 RBC CA BlueBay - Investment Grade Bond Fund LU Bnd 8,817.5

TOTAL TOP 25 363,608.5REST 4,473,108.4TOTAL 4,836,716.9


21

Note: Excludes money market funds and funds of funds.

RANK RANK '11 MASTER GROUP NAT FUND NAME DOMICILE TYPE 2012

1 276 AXA/AB FR AllianceBernstein - American Income Portfolio LU Bnd 8,234.52 29,993 PIMCO US PIMCO GIS Total Return Bond Fund IE Bnd 8,061.63 9 PIMCO US PIMCO GIS Global Investment Grade Credit IE Bnd 5,865.04 32 PIMCO US PIMCO GIS Diversified Income Fund IE Bnd 5,582.55 6 Standard Life GB Standard Life Global Absolute Return Strategies UK Mix 5,489.76 5 Prudential/M&G GB M&G Optimal Income Fund UK Bnd 5,138.37 31,338 AXA/AB FR AXA IM FIIS - US Short Duration High Yield LU Bnd 4,550.18 25 AXA/AB FR AllianceBernstein - Global High Yield Portfolio LU Bnd 3,796.09 1,794 Allianz GI DE Allianz Global Investors Fund - Allianz US High Yield LU Bnd 3,716.310 11 PIMCO US PIMCO GIS Unconstrained Bond Fund IE Bnd 2,916.211 14 Muzinich US Muzinich Short Duration High Yield IE Bnd 2,779.512 29 Prudential/M&G GB M&G Global Dividend UK Eq 2,720.913 2 Fr Templeton US Templeton Global Total Return Fund LU Bnd 2,576.714 13 Morgan Stanley US Morgan Stanley-Global Brands LU Eq 2,437.815 22 BlackRock US BlackRock Index Selection - Emerging Markets Index Fund IE Eq 2,401.916 10 BNY Mellon US Newton Real Return UK Mix 2,390.017 15 Aberdeen GB Aberdeen Global Emerging Markets Equity Fund LU Eq 2,352.018 93 Baillie Gifford GB Baillie Gifford Diversified Growth UK Mix 2,255.219 34 Neuberger Berman US Neuberger Berman High Yield Bond Fund IE Bnd 2,138.920 687 AXA/AB FR AXA World Funds - US High Yield Bonds LU Bnd 2,027.921 131 Invesco US Invesco Balanced-Risk Allocation Fund LU Mix 1,996.822 23 Stone Harbor US Stone Harbor Emerging Market Local Currency Fund IE Bnd 1,976.823 19 Baring US Baring Dynamic Asset Allocation Fund IE Mix 1,976.724 932 Pictet CH Pictet - Global Emerging Debt LU Bnd 1,974.125 31,340 Carmignac FR Carmignac Patrimoine FR Mix 1,970.7

TOTAL TOP 25 87,326.1REST 143,040.2TOTAL 230,366.3

Top 2538%

Rest62%

FIGURE 18

FIGURE 19

TOP 25 FUNDS BY ESTIMATED NET SALES (€M)

MARKET SHARE OF BEST-SELLING 25 FUNDS

PAN-EUROPEAN FUND LEADERS SALES


22

By Ed Moisson | 24 September 2012

This article was originally published by Reuters – http://blogs.reuters.com/globalinvesting/

As Britain’s Deputy Prime Minister is finding, apologising when you have let people down is no simple matter. The worry for some absolute return funds must be that they are heading for a similar fate to Nick Clegg (even if they’re unlikely to suffer the same level of autotuned mockery).

One of the reasons for the rise of absolute return funds – those seeking to deliver positive returns in all market conditions – is that the industry has been trying to deal directly with client expectations left shattered by the financial crisis.

On top of their investment objectives, one way that absolute return funds say they have tried to better align investor and fund manager interests is by the use of performance-related fees, paid as a proportion of a fund’s returns, not a fixed percentage of assets (although pretty much all funds will charge the latter fee too). But do performance fees actually help to deliver more consistently positive returns, and do they do this for lower levels of risk? Or, much like making ill-advised promises about tuition fees, do performance fees actually make it more likely that a fund manager will have to say sorry down the line?

In the IMA’s Absolute Return sector (established in April 2008), 63.5 percent of funds have a performance fee structure in place. That contrasts with about 3 percent for all UK-domiciled funds.

Because funds in this sector are managed with the aim of delivering above zero returns on a rolling 12 month basis, it is this that has been used to compare their performance. Each fund’s performance was calculated at monthly intervals, looking at a 12-month period for each interval (up to the end of July 2012.

As a result, the data does not reflect a simple snapshot of how absolute return funds have performed over any one period, but instead gives a more detailed view of their ongoing performance since the inception of the sector (or since a fund’s launch, if later).

Using this measure, we can show that funds with performance fees delivered positive returns 62.1 percent of the time, while their peers with a more traditional fee structure managed it 63.5 percent of the time.

RETURNS AND RISKIn this analysis, funds are put into three groups: those achieving positive 12-month rolling returns less than 50 percent of the time, those achieving this between 50 percent and 74 percent of the time, and those funds achieving this goal at least 75 percent of the time. The funds are also split between those with and without performance fees.

This shows that funds with performance fees are relatively evenly split between the three performance ‘bands’, while there are more significant differences for those with a traditional fee structure. While the latter have fewer ‘poor’ funds (21 percent versus 31 percent among funds with performance fees) and more ‘average’ funds (46 percent versus 33 percent), the ‘good’ funds make up a fairly similar proportion of both totals (33 percent compared to 36 percent).

A different approach has to be taken when looking at risk. Here two universes of absolute return funds were assessed: funds with at least 3 years history (37 funds, of which 20 have a performance fee), as well as a larger universe of funds with just 1 year history (69 funds, of which 45 have a performance fee).

Both volatility of returns, expressed as standard deviation, and maximum drawdown were calculated. To gain a further level of granularity in this comparison, both the mean and the median was calculated to present average historical risk measures for these funds.

PERFORMANCE FEES AND APOLOGIES


23

The findings seem to be fairly clear: in seven of the eight comparisons made, funds with performance fees look to have been more ‘risky’, on average, than those funds without performance fees.

But further exploration of historical risk is warranted. Plotting standard deviation and maximum drawdown for each fund over 3 years, and distinguishing between funds with and without performance fees, reveals that 8 funds with performance fees are out of line from the other 29 funds (of which 12 have a performance fee) in their historical ‘riskiness’ (as measured by maximum drawdown and standard deviation).

Quite simply, those funds with historical characteristics that suggest greater risk all have performance fees. This also seems to support the point that a variety of strategies – with different risk profiles – are employed by funds seeking absolute returns.

Absolute return investors in the UK are not being forced to invest in funds with performance fees, both because a sizeable proportion (36.5 percent) of these funds maintain a more conventional fee structure, and because funds with performance fees have not demonstrated, on average, that they deliver better returns or lower risk.

Hugh Hendry, founding partner of Eclectica Asset Management, has gone so far as saying that “It is outrageous that managers with no long/short experience have the audacity to charge a performance fee.”

Clegg’s contrition was for making a pledge in the first place, not for breaking it. And with the sustained scepticism of financial advisers in mind, it’s no surprise that the number of UK fund launches with performance fees attached has declined.

It’s certainly difficult to make out a clear case for the better client/manager alignment that performance fees were designed to bring for absolute return funds. Some will plough on; some might make a good fist of it. But what odds on the poor performers plucking up the courage to apologise?


24

FIGURE 20

FIGURE 21

TOP 10 MASTER GROUPS BY ASSETS (€M)

TOP 10 MASTER GROUPS BY SALES (€M)

PRODUCT THEMESABSOLUTE/TOTAL RETURN

RANK MASTER GROUP NAT DEC-11 DEC-12

1 Standard Life GB 12,899.3 21,853.8 2 BNY Mellon US 9,599.6 13,680.1 3 GAM Holding CH 9,995.5 13,368.0 4 JP Morgan US 8,161.4 7,953.1 5 PIMCO US 4,514.1 7,670.3 6 Baring US 4,907.9 7,452.3 7 Amundi FR 7,260.9 7,106.3 8 Schroders GB 7,910.4 6,065.3 9 Intesa SP IT 3,899.2 5,816.1 10 Ruffer GB 4,990.4 5,558.9

TOTAL TOP 10 74,138.8 96,524.1 TOTAL 154,856.5 182,873.5

RANK MASTER GROUP NAT 2012

1 Standard Life GB 7,273.5 2 BNY Mellon US 3,318.3 3 PIMCO US 2,921.8 4 GAM Holding CH 2,717.0 5 Intesa SP IT 2,270.3 6 Baring US 2,114.1 7 Volksbanken Raiffeisenbanken DE 1,848.5 8 Wellington US 1,528.8 9 Bantleon CH 1,341.5 10 Assenagon LU 1,082.9

TOTAL TOP 10 26,416.6 TOTAL 21,789.4


25

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Asset Alloc Bnd Flex Bnd Speciality Mix Cons ST Dynam Bnd Em Mkt

PRODUCT THEMESABSOLUTE/TOTAL RETURN

FIGURE 22

FIGURE 23

TOP & BOTTOM THREE SECTORS BY SALES (€M)

TOP 10 FUNDS BY SALES (€M)

RANK MASTER GROUP FUND NAME 2012

1 Standard Life Standard Life Global Absolute Return Strategies 5,489.7 2 PIMCO PIMCO GIS Unconstrained Bond Fund 2,916.2 3 BNY Mellon Newton Real Return 2,390.0 4 Baring Baring Dynamic Asset Allocation Fund 1,976.7 5 Volksbanken Raiffeisenbanken Flossbach von Storch SICAV - Multiple Opportunities 1,812.4 6 Standard Life Standard Life Investments Global - Global Absolute Return Strategies Fund 1,725.9 7 GAM Holding Julius Baer Multibond - Absolute Return Bond Fund Plus 1,094.5 8 Wellington Wellington Management Portfolios II - Global Total Return Portfolio 1,047.3 9 Amundi Amundi Funds Absolute Volatility Euro Equities 946.9 10 GAM Holding Julius Baer Multibond - Absolute Return Bond Fund 882.8

TOTAL TOP 10 20,282.4 TOTAL 21,789.4


26

By Ed Moisson | 9 July 2012


“Wouldn’t you rather your donations achieve a lot rather than a little? Then you’ll need to get serious and proactive. If you do it wrong, you can easily waste your entire donation.”

Caroline Fiennes is not one to pull her punches when talking about charitable giving, but the more I talk to her, or read her new book – ‘It Ain’t What You Give It’s The Way That You Give It’ – the more it becomes apparent that her philosophy is not all that different from that of a professional fund manager.

No self-respecting fund manager would invest in a company just because they were asked to. A fund manager will choose to invest (or disinvest) because they believe it will help their fund perform well and that the investment fits within their investment objectives. Fiennes, who advises companies and individuals on their giving, advocates a similar approach for any donor: be clear about your objective and find organisations that have done a good job of achieving this, not just the ones that market themselves well.

This is just the start. As James Caan, entrepreneur and philanthropist, puts it, “Finding, investing and supporting good businesses is hard, but identifying, donating and supporting great charities poses the same challenges.” This is all the more apt as Caan has also been the chairman of a fund manager, Insynergy Investment Management.

This is not to say that giving and fund management are natural bedfellows. A collaborative exercise between several fund groups created the Invest & Give fund, but sadly it did not generate significant investment and was eventually closed. Lipper data reveals that socially responsible investment (SRI) equity mutual funds in Europe have healthy assets of just over 50 billion euros, but this still accounts for less than 3 percent of the equity fund universe (1.8 trillion euros).

Yet investing and giving can learn from each other, despite their differences. Those fund managers who avoid hugging an index are clearly pro-active in their selection of investments. By contrast, charitable donations are typically made reactively.

At a simple level, most people are more likely to give to those charities that shake a tin on the high street rather than tracking down a cause they really care about. While relevant for anyone, for those giving more sizeable sums it is all the more important to make a pro-active decision.

“Start with your heart and then engage your mind,” as Rebecca Eastmond, Head of Philanthropic Services at JPMorgan Private Bank puts it. This emotional dimension is crucial: which cause really matters to you and what sort of impact are you hoping to have?

DONKEY DONATIONSFiennes urges potential donors not to follow the herd – a classic dictum for many fund managers. For example, she cites data which show the Donkey Sanctuary spending over 2,000 pounds a year per donkey, while mental health charities in the UK only get 714 pounds for each of their beneficiaries. Is this really where our priorities lie?

Having decided where you want your money to go, you should then decide how you want to give, or in other words, the type of change you hope to make. Fiennes illustrates the dilemma by citing the work of New Philanthropy Capital, which attempts to give potential donors a better understanding of the difficult relationship between identifiable, and satisfying, outcomes for individuals (or donkeys) and the more nebulous pursuit of a wider, and potentially more useful, impact on society. The fact is, one tends to diminish the likelihood of the other.

GETTING SERIOUS ABOUT GIVING


27

Listening to this being explained, I could not help but hear echoes of different fund managers’ relative emphasis on ‘top down’ versus ‘bottom up’ investment (i.e. macro vs stock-picking) and the consequences of getting these calls right – or wrong. It is also apparent that ‘bad’ giving can be equally wasteful.

Such echoes could also be heard when discussing investment objectives. Fiennes’ advice is to give with no strings attached, echoing the unconstrained approach which has come increasingly to the fore in the investment industry, moving beyond hedge funds to the likes of PIMCO, for example.

She also warns against making too many demands of charities, with comments that will chime with fund companies sometimes weighed down by a constant cycle of completing requests for proposals (RFPs).

Having to complete a bespoke assessment of their activity for each major donor can be a massive burden for charities. As Fiennes says: “For sure, a charity should report on its overall effectiveness, but don’t make it write a long report just for you.”

COST COMPARISONParallels are not always appropriate. The relative importance of costs remains hotly debated in the funds industry, where they are inevitably a drag on returns to investors. But for charities the evidence seems to be pretty clear that administration costs are no indicator of whether a charity is any good. GiveWell, an independent charity evaluator, has gone so far as to describe costs (specifically the overhead ratio) as “the worst way to pick a charity”.

Picking a charity is no easy task. If you thought it was difficult to decide which mutual fund to invest in (there are about 2,500 domiciled in the UK and 35,000 across Europe), spare a thought for the charities vying for your attention – there are more than 160,000 of them, according to the Charity Commission.

Fiennes makes me squirm in my chair for suggesting that mydonations aren’t big enough to make much of a difference, pointing out that over half of personal giving in the UK is by people giving less than 100 pounds a month. She argues against diversification, suggesting that I give more to fewer charities (akin to those ‘high conviction’ portfolio managers that hold a concentrated portfolio of stocks), clubbing together with others (very apt for ‘mutual’ fund comparisons), or giving something other than hard cash.

On this last aspect, such views have recently been given shape with Miller Philanthropy’s launch of the Goodwill Exchange, a not-for-profit forum where professionals can register their area of expertise to provide small charities support on a project basis. Founder Gina Miller urges people to “give smarter, not just give more” with the specific aim of helping the smallest charities struggling to attract the money they need to undertake their work. In turn, spending more time on raising money can only undermine their efforts to concentrate on their charitable works.

Of course big donors can make a big difference – particularly if they give smarter. Fiennes cites the example of the Shell Foundation, which initially provided short-term, project-based support to many charities. Its grants failed 80 percent of the time. It then shifted its way of giving to finding a few charities, each of which was given a substantial investment (around 10 million pounds) over a longer period of time (normally five to seven years). The Foundation’s track record was transformed to succeeding 80 percent of the time.

Such an example shows that numbers can speak louder than words. Although what makes the numbers say what they do in this case was Shell’s change in approach, away from a quick tick in the charity box, to making their charitable giving a long-term investment. Or as Fiennes concludes, “to get your giving to achieve all it can, approach it as strategically and intelligently as you approach investing.”


28

PRODUCT THEMESRESPONSIBLE INVESTMENT

FIGURE 24

FIGURE 25




1 Nordea SE 58,393.5 75,124.8 2 Amundi FR 25,860.7 31,006.8 3 Storebrand NO 9,013.4 12,386.0 4 Natixis FR 7,178.4 4,618.6 5 BNP Paribas FR 3,536.3 4,132.2 6 KBC BE 3,559.0 3,530.6 7 Aviva GB 2,392.2 2,971.5 8 Allianz GI DE 3,416.2 2,952.3 9 MACIF FR 1,814.1 2,792.2 10 Pictet CH 2,685.8 2,673.4

TOTAL TOP 10 117,849.7 142,188.4 TOTAL 178,882.4 210,556.0


1 Nordea SE 9,551.5 2 Amundi FR 2,409.8 3 Storebrand NO 2,337.5 4 MACIF FR 940.2 5 LGT LI 414.8 6 Aviva GB 395.7 7 SEB SE 333.8 8 BNP Paribas FR 301.4 9 Mediolanum IT 295.2 10 State Street US 271.7

TOTAL TOP 10 17,251.6 TOTAL 12,592.2


29

-1,500

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-500

0

500

1,000

1,500

2,000

2,500

3,000

Eq Global Bnd NOK Bnd Gl HY Eq Env/Eco Eq Ren Engy/ClimChg

Bnd DKK

FIGURE 26 TOP & BOTTOM THREE SECTORS BY SALES (€M)

PRODUCT THEMESRESPONSIBLE INVESTMENT

FIGURE 27 TOP 10 FUNDS BY SALES (€M)

Note: Data includes both RI Screened and RI Extended funds.

RANK MASTER GROUP NAT FUND NAME 2012

1 Amundi FR Amundi Tréso Eonia ISR 2,006.8 2 Storebrand NO Storebrand Stat A 1,288.0 3 Nordea SE Nordea 1 - US Corporate bond Fund 1,003.3 4 Nordea SE Nordea Invest Engros Internationale aktier 963.2 5 Nordea SE Nordea Institutional Investment Fund, SICAV-FIS CLO Fund 698.6 6 Aviva GB Aviva Monétaire ISR 641.2 7 Amundi FR SG Monétaire Jour ISR 605.2 8 MACIF FR MACIF Court Terme ISR (C) 566.5 9 Nordea SE Nordea 1 - Norwegian Bond 515.3 10 Nordea SE Nordea Dedicated Investment Fund FIS - US High Yield Fd 482.9

TOTAL TOP 10 8,771.0 TOTAL 12,592.2


30

By Detlef Glow | 8 August 2012


The exchange-traded fund (ETF) market has shown strong growth since its inception in Europe. Many fund promoters have sought to capitalise on this, seeking to differentiate themselves from rivals and match client needs by injecting some innovation into their product offerings. This has led to a broad variety of ETFs competing for assets, both in terms of asset classes and replication techniques.

Looking at assets under management, however, the European ETF market is still highly concentrated. The five top promoters account for more than 75 percent of the entire industry. On a fund-by-fund basis the concentration is even greater.

The ten top funds by assets under management (AuM) account for 25.68 percent of the overall total, while the largest fund in the European ETF universe, iShares DAX, accounts for 11.624 billion euros or 4.75 percent of the overall market.

A closer examination of the AuM shows that only 47 of the 1,727 ETFs registered for sale in Europe hold assets above one billion euros. These funds account for 49.92 percent of the overall assets under management and are highly profitable “bread and butter” products for their fund promoters.

According to iShares, the world’s largest ETF provider, the largest funds in the markets also tend to have the highest turnover, making them attractive to institutional investors who can buy and sell large holdings without making a significant market impact. In addition, institutions such as funds of funds are, under the EU’s UCITS regime, not allowed to hold a major stake in any given fund in their portfolios, making a fund with higher AuM even more attractive.

It starts to look like a scale business, where size is its own reward.

MINNOWSWhat of the vast majority of ETFs which don’t boast the muscle of their 47 ‘billionaire’ peers? Actively-managed funds can be merged or liquidated if they don’t gather a certain amount of money over time. So are these lower-volume ETFS now more subject to possible consolidation?

The “poor funds” with lower AuM levels have to deal with a lot of pressure. All funds in a product range will incur legal, listing and marketing costs, among others, and since these exist regardless of a fund’s size, some ETFs are simply not profitable.

As long as the industry is enjoying healthy growth, where the overall AuM of a promoter are rising on a steady basis, a promoter can absorb this with the proceeds from more sought-after funds. But in an unstable environment, marked by falling revenues and an increasing regulatory burden, fund promoters are forced to review their product ranges, and may make the decision to liquidate funds that are not contributing to earnings.

Weighing the cost/benefit characteristics of an ETF is no easy matter and depends on how it is structured, listed and managed. But industry players tell me a good rule of thumb is that a fund can become profitable when AuM exceed 100 million euros. This gives the fund promoter has a solid stream of income from the management fee and they may be able to receive income from trading in the fund as well as from securities lending.

So maybe this is the level at which ETFs might suffer a similar fate to their underperforming peers in the actively-managed sector. Certainly from my point of view, an ETF that has not been able to gather at least one hundred million euros over a three-year period is in serious danger of closure.

ETF TIDDLERS FOR THE CHOP?


31

A detailed, and updated, view of the European ETF industry which Lipper produced recently showed that 294 of the 1,727 funds fall into this category. You can view graphics from the initial findings here. Note: the totals have changed since the update.

DANGER ZONEWith around one sixth of funds in the ‘danger zone’, this might sound pretty tough already for the industry, but it’s worth noting that the number of funds with subpar AuM dramatically increases if we do not apply the three year limit.

The complexity of cost-bases and income streams makes trial by AuM a bit of an unfair way of estimating the profitability of an ETF. But it can be taken for granted that larger funds are unlikely to be closed and smaller funds that fail to attract enough investors are on thin ice.

This was demonstrated by ETF Securities in June, when it liquidated nine of its funds because they didn’t meet targets for AuM or turnover volume.

Things may look grim for the minnows of the ETF market, but there are considerations aside from cold, hard cash. In a number of cases, the fund promoter will keep an unprofitable ETF purely to complete a product offering. Larger players especially like to present clients with a one-stop shop and a near-complete product offering.

And the flipside to possible consolidation in the ETF industry is a sustained pressure for innovation, notably in new initiatives toward more active indices, i.e., indices that optimize their risk-return profile, which is creating a new posse of niche products.

Despite the fund closures we are seeing over the short term, from my point of view the ETF industry will grow further in all areas, not just in terms of assets under management. We will see more ETFs that track an even broader range of indices coming to the market in the future. This behavior is rational, since product innovation and investor demand are the growth drivers of the industry. Nobody can know what will be the next strategy index to become a mega seller, so index providers and ETF promoters need to continue to be creative, even if they do choose to embark on the odd stint of housekeeping among the back markers.


32

PRODUCT THEMESEXCHANGE TRADED FUNDS

FIGURE 28

FIGURE 29




1 BlackRock US 81,509.3 105,711.5 2 Deutsche/DWS DE 32,207.7 36,529.0 3 Soc Gen/Lyxor FR 27,064.0 30,669.4 4 Cr Suisse CH 12,047.9 13,344.1 5 Swisscanto CH 11,292.1 12,293.9 6 UBS CH 8,100.2 9,071.5 7 Amundi FR 6,402.8 8,569.9 8 Source US 3,675.3 5,810.2 9 GAM Holding CH 4,603.3 5,178.9 10 Commerzbank DE 5,451.5 4,879.2

TOTAL TOP 10 192,354.2 232,057.6 TOTAL 208,078.1 252,274.7


1 BlackRock US 11,394.6 2 State Street US 1,878.4 3 Source US 1,685.1 4 Amundi FR 1,160.2 5 PIMCO US 861.4 6 HSBC GB 624.4 7 GAM Holding CH 441.6 8 Swisscanto CH 393.2 9 Deka DE 367.2 10 Deutsche/DWS DE 259.6

TOTAL TOP 10 19,065.8 TOTAL 17,062.0


33

-2,000

-1,000

0

1,000

2,000

3,000

4,000

Bnd Eur CIG Eq Europe Commod Bnd Eur Sh-T MM Euro Eq DE

PRODUCT THEMESEXCHANGE TRADED FUNDS

FIGURE 30

FIGURE 31

TOP & BOTTOM THREE SECTORS BY SALES (€M)


RANK MASTER GROUP FUND NAME 2012

1 BlackRock iShares MSCI Emerging Markets 1,056.6 2 BlackRock iShares BC Euro Corporate Bond ex-Financials 848.6 3 BlackRock iShares JPMorgan USD Emerging Markets Bond Fund 830.6 4 BlackRock iShares MSCI World 823.3 5 BlackRock iShares Markit iBoxx Euro High Yield Fund 698.7 6 BlackRock iShares BC Euro Corporate Bond 574.2 7 BlackRock iShares Markit iBoxx USD High Yield Capped Bond 566.9 8 BlackRock MSCI Europe 460.7 9 PIMCO PIMCO US Dollar Short Maturity Source ETF 454.0 10 BlackRock iShares FTSE Gilts UK 0-5 417.5

TOTAL TOP 10 6,731.0 TOTAL 17,062.0


34

PRODUCT THEMESBONDS HIGH YIELD

FIGURE 32

FIGURE 33




1 AXA/AB FR 21,425.8 35,390.6 2 Fidelity US 6,676.7 9,271.6 3 Nordea SE 5,801.5 9,434.9 4 Goldman Sachs US 4,781.3 6,315.2 5 Pioneer IT 3,887.0 5,505.6 6 Neuberger Berman US 3,646.4 6,676.1 7 Schroders GB 3,644.4 3,582.0 8 BlackRock US 3,614.7 7,296.6 9 PIMCO US 3,423.6 6,738.8 10 Fr Templeton US 3,231.5 4,520.4

TOTAL TOP 10 60,133.0 94,731.9 TOTAL 123,611.2 193,953.1


1 AXA/AB FR 11,194.5 2 Allianz GI DE 3,918.5 3 BlackRock US 2,759.1 4 PIMCO US 2,694.5 5 Nordea SE 2,504.0 6 Neuberger Berman US 2,377.3 7 JP Morgan US 1,732.9 8 Aviva GB 1,656.0 9 UBS CH 1,648.7 10 Amundi FR 1,606.1

TOTAL TOP 10 32,091.6 TOTAL 49,735.0


35

0

5,000

10,000

15,000

20,000

25,000

30,000

Bnd USD Corp HY Bnd Gl HY Bnd Eur Corp HY Bnd Europ Curr CorpHY

Bnd GBP HY

PRODUCT THEMESBONDS HIGH YIELD

FIGURE 34

FIGURE 35

TOP & BOTTOM SECTORS (€M)


RANK MASTER GROUPS FUND NAME 2012

1 AXA/AB AXA IM FIIS - US Short Duration High Yield 4,550.1 2 AXA/AB AllianceBernstein - Global High Yield Portfolio 3,796.0 3 Allianz GI Allianz Global Investors Fund - Allianz US High Yield 3,716.3 4 Neuberger Berman Neuberger Berman High Yield Bond Fund 2,138.9 5 AXA/AB AXA World Funds - US High Yield Bonds 2,027.9 6 PIMCO PIMCO GIS Global High Yield Bond Fund 1,906.5 7 JP Morgan JPMorgan Investment Funds - Global High Yield Bond 1,490.0 8 Fidelity Fidelity Funds - US High Yield Fund 1,288.4 9 Mediolanum Mediolanum Best Brands Global High Yield 1,272.8 10 BlackRock BlackRock Global Funds - US Dollar High Yield Bond Fund 1,231.9

TOTAL TOP 10 23,418.7 TOTAL 49,735.0


36

Top 5 sectors35%

Next 10 sectors26%

16-25 sectors14%

Rest25%

RANK FUND SECTOR # FUNDS ENS '12

1 Target Maturity Euroland 115 19,530.9 2 Asset Allocation 275 9,868.6 3 Guaranteed Fund 111 6,506.7 4 Bonds Global Currencies 69 6,189.7 5 Equities Global 116 4,603.6 6 Bonds EUR 55 4,260.4 7 Target Maturity Other 38 4,101.0 8 Protected Fund 115 4,022.7 9 Fund of Funds Guaranteed 40 3,945.8 10 Mixed Assets Balanced 45 3,556.7 11 Fund of Funds Asset Allocation 118 3,392.3 12 Money Market EUR 21 3,318.6 13 Bonds Emerging Markets 44 3,210.7 14 Bonds Global High Yield 25 2,618.0 15 Bonds EUR Corp. Inv. Grade 25 2,377.2 16 Bonds Global Corporates 28 2,347.4 17 Equities Emerging Markets 68 2,247.2 18 Bonds Flexible 24 2,086.6 19 Equities North America 47 2,057.3 20 Equities Speciality 66 1,859.4 21 Fund of Funds Bonds 18 1,732.2 22 Bonds USD 19 1,709.9 23 Bonds EUR Corp. High Yield 9 1,642.8 24 Bonds Emerging Markets - Local Currency 15 1,472.8 25 Commodities 45 1,437.0

TOP 25 SECTORS 1,436 100,096.0 TOTAL 2,513 136,036.0

PRODUCT DEVELOPMENTNEW FUNDS BY SECTOR

FIGURE 36

FIGURE 37

TOP 25 SECTORS OF NEW FUNDS (€M)

MARKET SHARE OF LEADING SECTORS OF NEW FUNDS


37

By Ed Moisson | 7 June 2012


Our team at Lipper spent much of the first quarter handing out awards to fund managers round the world who have delivered exceptional performance to their investors. Since then, I’ve had time to take a step back and assess just how good the wider European industry has been at outperforming over the longer term.

Active fund managers’ ability to out-perform their benchmarks sits near the heart of any discussion on the relative merits of active versus passive. In broad terms the argument against investing in an actively-managed fund is that one takes on the additional risk that the fund will significantly under-perform the index, a risk that is exacerbated over time by the additional costs associated with such a fund.

The argument against passive is that one not only misses out on the possibility of superior, but also that, in principle, one is guaranteed to under-perform the index.

Clearly the case for active fund management goes hand-in-hand with the case for prudent fund selection. Indeed an industry has grown up trying to deliver the latter for investors, with professional fund selectors choosing funds to invest in and packaging this up as a product of itself: funds of funds. Assets invested in funds of funds in Europe stand at around 360 billion euros – noticeably greater than the assets invested in passively managed funds.

The most straightforward means to assess actively managed funds’ success in beating their benchmarks is to look at their latest performance figures. To this end all actively managed equity funds’ performance relative to their benchmarks was assessed over 1, 3 and 10 years to the end of December 2011.

The proportion of funds that out-performed varied from 26.7 percent in 2011, 40.0 percent over 3 years and 34.9 percent over the past 10 years. Solely for managers of UK equity funds, the figures were 22.4 percent, 42.4 percent and 37.6 percent. But the issue of survivorship bias also needs be grasped. To do this, funds’ rolling returns were assessed every year from 1992 to the end of 2011. For 1-year periods, the proportion of equity funds that out-performed has varied between 59.1 percent and 26.7 percent, coincidentally the first and last years in this analysis.

TOUGH MARKETSThe annual average proportion of out-performing funds is 42.8 percent, at the higher end of the spectrum found in the initial analysis above. This suggests that the difficult recent market conditions have indeed had a negative impact on the proportion of active managers that have been able to beat their benchmarks.

The wide variation in out-performance depending on classification of funds is highlighted in 1-year rolling returns. For example, funds investing in Asia Pacific (ex-Japan) ranged from 8.3 percent (in 2004) to 83.8 percent (in 1999) of funds out-performing their benchmarks, while for UK equities the range has been much narrower, between 23.1 percent (2011) and 64.5 percent (2000).

For long-term investors the fact that an active manager does not out-perform in every calendar year is likely to be less significant than whether he/she can out-perform over a longer time period. To examine this, the data was expanded to look at rolling 3-year and 10-year periods.

For 3-year rolling periods the proportion outperforming is 41.4 percent and for 10-year rolling periods it is 39.7 percent. In other words, the proportion of funds out-performing over longer periods may have dropped very slightly, but it remains largely stable.

ACTIVE VS. PASSIVE, ROUND 3,462


38

Over 3-year periods, a greater proportion of UK equity managers generally outperform than for other classifications. While the average proportion of Asia Pacific funds out-performing is slightly higher than that for the UK (48.9 percent compared to 47.6 percent), this is clearly the result of results posted over the first 10 years, while the more recent period has seen a significant fall for Asian fund managers.

For 10-year rolling periods among the largest classifications, UK equity managers impressively maintain their average proportion of out-performers (47.4 percent), while North American equities – already relatively poor cousins – worsen dramatically over this longer period, with an average of just 20.8 percent of funds out-performing their benchmarks.

These findings will clearly not settle the active versus passive debate one way or the other, but they do provide robust statistical research into funds’ relative performance. Such insights can better inform this ongoing discussion.


39

CROSS-BORDER PROGRESSGROUP WINNERS

FIGURE 38 TOP 25 INTERNATIONAL GROUPS BY ESTIMATED NET SALES IN 2012 (€M)


RANK MASTER GROUP NAT # FUNDS ASSETS DEC '12 ENS '12

1 PIMCO US 59 107,603 35,128.22 AXA/AB FR 215 79,768 24,118.73 BlackRock US 369 213,089 12,717.14 Aberdeen GB 84 45,018 9,062.25 Prudential/M&G GB 66 49,764 8,997.16 JP Morgan US 189 61,507 6,464.27 Allianz GI DE 53 14,295 6,360.38 Nordea SE 94 27,983 5,866.89 Morgan Stanley US 68 24,321 5,396.810 Pictet CH 175 44,085 5,091.611 Amundi FR 213 30,884 4,988.212 Carmignac FR 14 50,218 4,862.713 HSBC GB 135 31,208 4,618.614 Muzinich US 9 10,128 4,448.215 Goldman Sachs US 107 27,612 4,026.916 RBC CA 39 23,608 3,730.317 State Street US 79 11,467 3,291.018 Invesco US 92 21,231 3,211.519 MMC/Mercer US 36 9,890 3,158.120 MFS US 35 13,952 3,147.221 Vontobel CH 44 9,244 2,940.622 Stone Harbor US 12 11,760 2,870.423 GAM Holding CH 134 28,819 2,698.024 Lombard Odier CH 97 14,324 2,485.525 Neuberger Berman US 13 7,497 2,475.0

TOP 25 2,431 969,277 172,155.2TOTAL 9,318 2,083,492 220,681.6

230,366.3


40

CROSS-BORDER PROGRESSGROUP WINNERS

FIGURE 39 GROUP POSITIONING BY SALES AND PERFORMANCE CONTRIBUTION TO ASSET GROWTH

BlackRock

Fr Templeton

Intesa SP

InvescoUBS

Deutsche/DWSPrudential/M&G

AXA/AB PIMCOAberdeen

NordeaJPMAllianzBNY

PictetStandard Life

GAMCarmignac

Morgan StanleyGoldman Sachs Muzinich

-2,000

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6,000

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-12,000 -6,000 0 6,000 12,000 18,000 24,000 30,000 36,000

Sales contribution (annually) (€m)

Perf

orm

ance

con

trib

utio

n (a

nnua

lly) (

€m

)



41

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IT CH FR DEU UK BE SP SWE AU NL

Domestic Cross-Border

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CH SWE BE AU SP NL IT DEU FR UK


-15,000 -10,000

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5,00010,00015,000

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CH IT FR UK SWE DEU AU SP NL BE


CROSS-BORDER PROGRESSFOREIGN SHARE OF SALES IN EUROPE

FIGURE 40 NET SALES OF CROSS-BORDER GROUPS BY MARKET IN 2012 - ALL FUNDS (€M)

FIGURE 41 NET SALES OF CROSS-BORDER GROUPS BY MARKET IN 2012 - EQUITY ONLY (€M)

FIGURE 42 NET SALES OF CROSS-BORDER GROUPS BY MARKET IN 2012 - BOND ONLY (€M)


42

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CROSS-BORDER PROGRESSFOREIGN SHARE OF SALES OUTSIDE EUROPE

FIGURE 43 NET SALES OF CROSS-BORDER GROUPS BY MARKET IN 2012 - ALL FUNDS (€M)

FIGURE 44 NET SALES OF CROSS-BORDER GROUPS BY MARKET IN 2012 - EQUITY ONLY (€M)

FIGURE 45 NET SALES OF CROSS-BORDER GROUPS BY MARKET IN 2012 - BOND ONLY (€M)

Europe75%

Rest2%

Offshore2%South America

6%Asia Pacific

15%


43

CROSS-BORDER PROGRESSFOREIGN SHARE OF ASSETS

FIGURE 46 CROSS-BORDER FUNDS’ SHARE OF ASSETS BY REGION FIGURE 47 TOP FIVE MARKETS FOR

CROSS-BORDER ASSETS

FIGURE 48 CROSS-BORDER FUNDS’ SHARE OF ASSETS (€M)

1. Assets of cross-border funds domiciled in Europe and sold worldwide.2. Actual asset data contributed by 45 group members of the Lipper AssetWatch service. 3. Data is third party retail only.

Europe75%

Rest2%

Offshore2%South America

6%Asia Pacific

15%

Rest43%

Switzerland16%

Italy16%

Germany12%

Taiwan7%

United Kingdom6%

COUNTRY DEC-11 DEC-12 GROWTH %

1 Switzerland 113,423.2 126,588.1 11.62 Italy 95,652.3 121,202.9 26.73 Germany 78,481.9 90,541.6 15.44 Taiwan 44,916.9 55,084.2 22.65 United Kingdom 32,454.9 49,069.8 51.26 Spain 23,578.8 33,198.1 40.87 France 21,002.5 31,560.0 50.38 Hong Kong 24,487.5 31,107.1 27.09 Netherlands 19,191.1 22,034.2 14.810 Singapore 12,247.7 16,963.6 38.5

TOP 10 465,436.8 577,349.5REST 251,833.8 326,958.3TOTAL 616,773.2 769,528.5


44

CROSS-BORDER PROGRESSDOMESTIC VS. FOREIGN SECTORS

FIGURE 49 TOP 5 DOMESTIC AND CROSS-BORDER SECTORS IN THE MAJOR MARKETS

Note: Excludes money market funds

FRANCE

DOMESTIC ENS '12 CROSS-BORDER REAL SALES '121 Bonds EUR Short-Term 3,222.1 Bonds USD Corp. High Yield Confidential2 Short Term Dynamic 2,221.1 Bonds Emerging Markets3 Target Maturity Euroland 1,616.2 Bonds Flexible4 Bonds EUR Corp. Inv. Grade 1,610.0 Bonds Global Corporates5 Fund of Funds Money Market 756.0 Bonds EUR Corp. Inv. Grade

GERMANY

DOMESTIC ENS '12 CROSS-BORDER REAL SALES '121 Asset Allocation 3,502.6 Mixed Assets Balanced Confidential2 Bonds EUR Corp. Inv. Grade 1,923.5 Bonds EUR3 Target Maturity Euroland 1,581.5 Bonds Emerging Markets - Local Currency4 Bonds Emerging Markets 1,338.0 Bonds Global Currencies5 Mixed Assets Conservative 1,334.1 Bonds Flexible

iTALY

DOMESTIC ENS '12 CROSS-BORDER REAL SALES '121 Target Maturity Euroland 10,825.8 Bonds Global Corporates Confidential2 Fund of Funds Bonds 3,134.8 Bonds Global Currencies3 Bonds Global Currencies 1,593.8 Bonds USD4 Bonds Global High Yield 1,358.0 Bonds Emerging Markets5 Currency Exchange Strategies 1,138.1 Bonds Flexible

SWITZERLAND

DOMESTIC ENS '12 CROSS-BORDER REAL SALES '121 Equities Emerging Markets 3,011.8 Bonds USD Corp. High Yield Confidential2 Bonds CHF 2,847.2 Bonds USD3 Equities North America 2,016.5 Bonds Global Corporates4 Bonds Global Currencies 1,242.6 Bonds Emerging Markets5 Equities Europe 859.1 Bonds Flexible

UK

DOMESTIC ENS '12 CROSS-BORDER REAL SALES '121 Asset Allocation 11,071.3 Asset Allocation Confidential2 Fund of Funds Balanced 1,835.4 Bonds Global Corporates3 Fund of Funds Conservative 1,711.5 Bonds USD Corp. High Yield4 Equities Emerging Markets 1,569.4 Bonds USD5 Equities North America 1,206.2 Bonds Global Currencies


45

It is not a surprise to discover that funds with first quartile performance attract the greatest inflows in the UK, but some new research from Lipper goes beyond the headline to investigate how the relationship between fund sales and performance has changed over the past ten years, with variations by sector, different rolling periods, and relative sales for lower quartile returns.

The research establishes the proportion of net sales attributable to funds with different returns. Net sales were calculated every three months for funds with 1-, 3-, 5- and 10-year rolling returns, not simply a snapshot of one period, and grouped by performance quartile.

Taking all funds together, for 1-, 3- and 5-year performance, first quartile funds in aggregate have attracted inflows in every quarter over the past ten years. For those funds with 10-year returns, the value of first quartile performance is less pronounced, but even here in 25 out of 33 quarters (i.e. more than 75% of the time), first quartile funds in aggregate enjoyed inflows.

For second quartile funds, on average positive sales activity is registered when looking at 1-year rolling returns across the ten years assessed. But second quartile funds typically suffered outflows for 3-, 5- and 10- year rolling returns.

This seems logical, for example with fund selectors giving managers the opportunity to improve returns when performance has dropped out of the highest quartile for one year. Even so, ultimately the dominance of first quartile performance in driving sales prevails, with some “tough love” shown to those that drop out of this top group for longer periods.

The findings can be broken down to see how sales activity has varied between IMA Sectors. Most striking is perhaps the success in generating inflows for poorer performing funds in the Mixed Investment 20-60% Shares sector (formerly Cautious Managed). This is most obviously the case when looking at 1-year returns, but even for 3-year and 10-year periods lower quartile funds fare relatively well in sales terms.

In particular one can see that between 2002 and the end of 2007 outflows from any quartile of funds were negligible in this sector, although the financial crisis has changed this somewhat for those with poorer 3-year or 5-year returns.

For equity funds it is worth noting that this asset class has been largely out of favour since 2008 and this is reflected in the findings for European, UK and UK Smaller Companies funds (although first quartile performance generally helps even here).

Having said this, Emerging Markets and Asia Pacific funds present different results, with inflows to first quartile funds generally outpacing all other funds (except for 10-year data). The former sector in particular has seen very limited outflows, even when looking at aggregate data for poorer performing funds.

Turning to Sterling Corporate Bond funds, it is interesting to find the degree to which aggregate sales for poorer performing funds – most notably those ranked in the second quartile – have regularly pushed into positive territory and look to be detracting from sales of those funds with first quartile performance.

This pattern is partly the result of the significant rise in sales of funds in this sector from the fourth quarter of 2008 to the third quarter of 2009, as the reverberations of the financial crisis were first being felt. It does look as though the managers that were most favoured in this period were those with at least 10 years experience, i.e. a proven track record (even if such a track record was not first quartile over shorter periods).

CONNECTION: RETURNS AND SALES IN THE UKBy Ed Moisson | 11 December 2012

This article was originally published on Lipper Insight - http://lipperinsight.thomsonreuters.com/


46

Among conclusions, it is worth saying that just because sales are greater for first quartile funds this does not mean that these funds do not also exhibit other characteristics that warrant investment. This is all the more the case when bearing in mind that there is likely to be wide variations in inflows for funds within the first performance quartile.

The difference in fund sales between those with good shorter performance periods (1- and 3-years) compared to longer periods (5- and 10-years) also suggests that some investors are taking advantage of a manager’s “winning streak” or, more precisely, the short-term persistence in fund performance.

Evidence for the phenomenon of short-term persistence has been found by various academics, including Bernhardt et al (2003), Bollen and Busse (2004), Carhart (1997), Hendricks et al (1993) and Zheng (1998). While definitions of “short-term” used in these papers vary, Wermers (2003) certainly goes further when he concludes that out-performers “continue to outperform other funds for at least two years following the ranking year.”

In such a situation it is certainly possible that investors, or their advisers, are effectively buying and selling perceived alpha generated by funds in an effort to stay ahead of benchmarks. Certainly there is much use of quant screens of different kinds by fund selectors – hardly surprising given the thousands of funds available.

This research does not mean that a fund manager has to be short-termist, but the sales patterns identified will inevitably put pressure on a manager’s recent track record if a fund wants to achieve significant inflows over time.


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FOOTNOTES1. All data as at 31 December 2012 unless otherwise stated.

2. ‘International’ fund market. Lipper defines an International fund as a fund that sources less than 80% of its assets from any single country. Some fund groups have domestic and international funds.

3. ‘Domestic’ fund market. If a fund sources more than 80% of its assets from a single country then the fund is allocated to that market regardless of its domicile.

4. Funds of funds have been excluded from all charts and tables (to avoid double-counting) unless otherwise stated. Therefore a market total is the sum of all the investment categories excluding the three funds of funds categories (in-house, ex-house and hedge).

5. The investment category ‘other’ includes a variety of different product categories. For most markets, especially Belgium, Spain and France, the figure comprises guaranteed funds, but there are also derivatives, commodities and other speciality funds in the ‘other’ category.

6. Property funds are open-ended property funds only.

7. Master group. Analysis that aggregates the European mutual fund assets under the umbrella of their parent company name.

8. ENS stands for estimated net sales.

9. ETFs are included in Lipper’s database on mutual funds, but this excludes exchange-traded commodity products that are not mutual funds.

10. References to foreign activity relate to actual sales as measured by Lipper’s SalesWatch confidential service. The 48 SalesWatch members are estimated to account for 75-80% of total cross-border sales activity.

11. Funds of funds holdings data based on analysis of 2,000 European-domiciled third party funds of funds.

CONTACT USPRODUCT MANAGER, LIPPER FUNDFILE:JÉRÔME COUTEUR [email protected]

SABINA GRABOWSKA [email protected]

PRODUCT MANAGER, LIPPER SALESWATCH:BARBARA FERRARESI [email protected]

ELISABETTA FORELLI [email protected]

CHERYL PATE [email protected]

DESIGNED BY:NAOMI HANDKE

LIPPER DATABASES FEATURED:FUNDFILE - http://bit.ly/LipperFundFile SALESWATCH - http://bit.ly/LipperSalesWatch

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