Things are bright in asset management, despite darkening times for investors
Now is the time of year when investors consider changes to their portfolios. This year, that task is more difficult than ever. The credit crunch did not magically end over the summer. If anything, the situation is worse, says Simon Nixon.
Fresh back from holiday, this is the time of year when investors contemplate major changes to their portfolios. This year, that task is more difficult than ever. The credit crunch did not magically end while half the City was sunning itself on a beach. If anything, the situation has deteriorated. The world has also changed in other important ways. The oil price continues to fall at speed and is now back close to $100 a barrel. Russia's invasion of Georgia has added a whole new layer of geopolitical uncertainty to an already volatile climate. Faced with a bewildering array of different funds competing for one's money, what is an investor to do?
One option is to buy the fund managers themselves. Asset management has always struck me as the nearest thing in the City to money for old rope. While the industry likes to claim that it is focused on performance, the key to this racket is fees bountiful and luxurious fees that ratchet up in all sorts of imaginative and unexpected ways. True, in this respect, fund management is no different from many other industries the law springs to mind. But what makes it truly special is that it is so scalable. There is very little extra fixed cost whether one is managing £100m or £10bn.
Of course, performance does matter, particularly to hedge funds, but not nearly as much as you might suppose. Few fund managers consistently outperform anything. Evidence suggests that choosing the right asset class (equities, bonds, emerging markets etc) is more important than choosing the right manager. Besides, a manager can easily hide one bad year's performance by focusing on some other yardstick that shows his results in a more flattering light. One London asset management boss says he would employ monkeys to run his funds if only his marketing people would let him.
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None of the inherent attractiveness of asset management as a get-rich-quick scheme has altered as a result of the credit crunch even though the European asset management sector is down 35% from its peak. That slump partly reflects the difficulty of hanging on to assets as investors become increasingly risk-averse. It also reflects weak fund performance during recent volatile markets. Finally, it reflects a substantial de-rating, with the sector now trading on an average of 11 times 2009 earnings, compared with a long-term average of 15 times.
But these figures don't tell the whole story. One effect of the credit crunch has been to intensify existing trends within the industry, which means that some parts of it particularly hedge funds and some private equity groups are potentially set to do very well over the next few years, while other parts typically old-fashioned institutional asset managers could struggle. Alternative asset managers are not immune to the market downturn and some have seen some real pressure on performance, but they are also exposed to some still-intact significant secular trends. They are benefiting from the ongoing switch by institutional investors away from traditional long-only fund managers towards a mixture of low-cost tracker-style funds and higher-risk hedge funds. They are also benefiting from greater demand for absolute return funds. Meanwhile, the biggest alternative managers are growing at the expense of the small thanks to growing economies of scale and better distribution. Finally, alternative asset managers are the investment route of choice for sovereign wealth funds, which have placed huge sums with high-profile managers. If you want to play the sovereign wealth fund phenomenon, this how to do it.
There are now quite a few alternative asset managers listed in London and New York and all look cheap on a historic basis. These include Man Group, which uses complex computer programs to bet on trends; Bluebay, which focuses on European bonds; Ashmore, which is the leading emerging market bond investor; GLG, now one of the world's largest hedge fund groups; 3i, the UK-based mid-cap private equity group; and Partners Group, a Geneva-based private equity investor. Whatever happens in the markets next, I expect these firms will emerge richer and stronger.
Russia: it's a buying opportunity
I have come across no less than three ashen-faced fund managers who admitted to having lost a fortune over past months in the Russian stockmarket. They piled into the country earlier this year because they thought that it looked ridiculously cheap. Now they are wondering whether to ride their losses or get out.
Regular readers will know that I have been deeply sceptical about Russia's gangster economy and the blind enthusiasm of many Western investors for some time. Russia has a rickety banking system and is too dependent on high oil and gas prices. That said, I don't think we're looking at 1998, let alone 1917. Russia is not about to implode or disappear from the world economy. So while the professionals nurse their losses and decide what to do next, I'd use this as a real buying opportunity.
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Simon is the chief leader writer and columnist at The Times and previous to that, he was at The Wall Street Journal for 9 years as the chief European commentator. Simon also wrote for Reuters Breakingviews as the Executive Editor earlier in his career. Simon covers personal finance topics such as property, the economy and other areas for example stockmarkets and funds.
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