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    Jake Moeller reviews highlights of a meeting with Haig Bathgate, joint CIO/ CEO of Tcam on June 2, 2016.

    In the “Brexit debate”-induced atrophy that is currently gripping the U.K. funds industry, sales of funds in the Investment Association (IA) Targeted Absolute Return (TAR) sector have remained comparatively buoyant. The sector contains around £59 billion of assets as of the end of April 2016, with estimated net inflows of some £2.4 billion year to date (May 31, 2016).

    VT TCam Absolute Return Portfolio, although not yet an elder statesman, has a reasonable pedigree in a sector that has seen nearly 20 new funds launched since 2014. Formally launched in UCITS form in December 2010, it was preceded by a segregated client mandate from April 2009. Tcam itself is the recently born entity of a management buyout of the investment arm of Edinburgh-based law firm Turcan Connell. This MBO was finalized in November 2015, with Mr. Bathgate taking on a dual CIO and co-CEO role.

    Haig Bathgate, CIO/ CEO - Tcam. With permission.

    Haig Bathgate, CIO/ CEO – Tcam. With permission.

    Philosophy

    The IA TAR sector is characterized by a peculiar lack of homogeneity. It contains corporate bond funds, equity long/short funds, and a number of multi-asset structures. The Tcam offering falls into the latter category and is designed to provide a positive capital return over 12 months in any market environment, with low realized volatility. “Our heritage comes from conservative legal clients,” states Mr. Bathgate. “We are strongly committed to beating a Libor +2% benchmark; however, we often take strong directional views. We don’t expect positive returns every day.”

    Construction

    This fund is remarkably straightforward in construction and has a refreshingly clear top-down/thematic construction process. There is no complex black box or optimizer driving asset allocation. Rather, Mr. Bathgate divides the fund into a number of strategy “buckets” that reflect the dominant macro themes he and his team see as the potential drivers of returns over a two- to three-year horizon.

    The core bucket consists of diversified low-correlation holdings. Currently, this is 35% of the portfolio (but could be as high as 50%) and is populated by a number of active mutual funds. There are four other themes in play in the portfolio: an inflation bucket populated by a U.S. Treasury linker, a European recovery bucket populated by high-tracking-error mutual funds, a LATAM debt bucket populated by a bespoke Brazilian bond instrument, and a U.K. property bucket populated by a REIT.

    The fund has no asset allocation or geographical constraints, and asset-class exposure is generally obtained via active mutual funds (although direct securities, passive instruments, and bespoke structures can also be used).

    Figure 1. Growth of VT Tcam Absolute Return Portfolio within IA TAR sector quartiles (to May 31, 2016)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    The underlying fund selection uses an initial quantitative screen, with tracking error being a particularly important metric. “We are seeking high-conviction and like-minded fund managers to implement our views,” states Mr. Bathgate. Intensive qualitative due-diligence meetings take place with the fund managers prior to a mandate being awarded, but Tcam actively seeks new and small funds. “The best time to invest with a fund is in its first three years,” states Mr. Bathgate. “Our experience shows we are usually rewarded for seeding a new fund and are prepared to do so, provided the underlying asset is sufficiently liquid.”

    Performance

    Thomson Reuters Lipper analysis reveals that 60% of funds in the TAR sector have returned a negative amount in the 12 months to May 31, 2016. TCam Absolute Return Portfolio is among those having had a difficult start to 2016. This has largely been driven by an underweighting to mining and resources–a position with which Mr. Bathgate remains comfortable. “An improvement in Chinese data has been instrumental in driving the recovery, but it looks unsustainable,” he explains.

    Figure 2. Performance Summary of VT Tcam Absolute Return Portfolio (to May 31, 2016)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Longer term, the fund has maintained steady risk-adjusted returns, and over three years it sits in the second quartile of the sector (see Figure 1. above). It also has a favorable Sharpe-ratio profile. The average of its monthly rolling one-year Sharpe ratio sits at 0.14 for the four years to May 31, 2016 (see Figure 3. below). This ranks the fund nineteenth in the sector on this basis. It has also delivered positive returns in 68% of the months since its inception and scores strongly in Lipper Leaders categories.

    Outlook

    Mr. Bathgate voices a number of concerns on markets, despite the stabilization following the turbulent first quarter 2016. In addition to his views on China he thinks the dynamics in many of the oil-rich nations give rise to concerns. “Depressed prices early in the year caused sovereign wealth funds in these countries to liquidate significant stock holdings,” he states. “It is not clear that the implications of this have yet been fully felt.”

    Figure 3. One year Sharpe ratios of VT Tcam Absolute Return Portfolio – rolling monthly (to May 31, 2016)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Similarly the uncertainty of the referendum EU Britain faces has created another layer of uncertainty is driving an increasing defensive bias to the portfolio. “With the outlook for the next few months so opaque, it’s imperative to exercise caution in the markets at present and to cut back on investments in riskier assets” states Mr Bathgate.

    Conclusion

    Investors who seek an absolute return solution should approach the IA TAR sector with a good degree of vigilance because of its highly heterogeneous composition. VT Tcam Absolute Return Portfolio offers a genuinely diversified exposure and has largely achieved its stated objectives, with a good risk-adjusted return profile.

    Mr. Bathgate is a passionate and driven investment manager, and after 18 years with Turcan Connell he holds a deep respect for risk management. This fund is built on basic and straightforward principles and is run by a small but well-qualified team. It would likely appeal to those investors for whom portfolio construction is as much art as science.


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    The British referendum on EU membership is fast looming on June 23, and there has been considerable debate on the impacts a potential “Brexit” might have on the U.K. funds industry.

    Recent news flow has highlighted the effect the uncertainty the referendum is having on investor sentiment generally. In May the FT reported data from the most recent Bank of America Merrill Lynch Fund Manager Survey showing not only a significant increase in cash holdings but a 16-percentage-point drop in allocation to U.K. equities—to the lowest point since 2008. In June Investment Week reported figures from the Bank of England showing £65 billion of U.K. assets being sold in March and April 2016.

    More specifically on mutual funds, examination of data on the U.K.’s Investment Association (IA) classifications (sourced via Thomson Reuters Lipper) reveals an overall drop of 18% in total assets of the funds in all IA classifications and estimated net outflows of £38 billion for the 12 months to May 31, 2016. January 2016 proved the worst month overall, with nearly £16 billion of net outflows that month alone.

    Figure 1  Ten top IA sectors ranked by estimated net outflows (12 months to May 31, 2016 [£m]) 

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    The largest IA sector (UK All Companies), with some 12% of all IA assets, has suffered a yearly net outflow of £9.2 billion. In the last 12 months it has experienced only a single positive month of flows (July 2015).

    The IA Sterling Strategic Bond sector has been worst hit as a proportion of its overall size in the U.K. market. With 4% of total assets overall, it has suffered nearly £12 billion of net outflows to the end of May 2016, without a single monthly net inflow for the year.

    Of the diversified categories the conservative IA Mixed-Asset 0%-35% has proven most resilient, with £410 million of net outflows for the year to the end of May 2016. By contrast, the IA Mixed-Asset 20%-60% sector has suffered nearly £5 billion of net outflows for the last 12 months.

    Figure 2  Ten top IA sectors ranked by estimated net inflows (12 months to May 31, 2016 [£m])

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Only four of the IA sectors have experienced more than £1 billion of net inflows in the 12 months to the end of May: Property, Global Equity Income, Global Bonds, and Targeted Absolute Return. The latter sector has been the standout success story for the U.K. market for the last 12 months. It has collected nearly £10 billion of net inflows. This is despite the corresponding average fund return of the sector being a negative 0.6% over the same period.

    It is difficult with market-linked investments to attribute any single determinant to their fortunes. Whatever the outcome of the British vote on June 23, 2016, examining the mutual fund flows in the U.K. market for the end of July will certainly prove a very interesting exercise.


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    Jake Moeller discusses the “Brexit” fallout with the CIO of Kames Capital–Stephen Jones, and its Director of Wholesale–Steve Kenny, on June 30, 2016.

    As a Scotland-based firm in the U.K. and owned by Aegon, a European-based multi-national insurance company, Kames Capital is an asset management business with multiple touch points on the rapidly developing Brexit saga. It currently has some £57.8 billion (€77.0 billion) of assets under management, with distribution across the U.K., Austria, Germany, France, Belgium, Italy, Luxembourg, Netherlands, Spain, Switzerland, Sweden, and the Channel Islands.

    Stephen Jones, CIO - Kames Capital. With permission.

    Stephen Jones, CIO – Kames Capital. With permission.

    Despite the myriad eventualities that could affect a business such as Kames, CIO Stephen Jones is, strikingly, very calm amid the nonstop news flow that has been generated since June 24.

    On Sterling

    “We have said all along that sterling would be the whipping boy in this outcome, and we maintain this to be the case going forward,” states Mr. Jones. He cites not only the new degree of disruption from the vote but emphasizes the U.K.’s existing deficit position. “It is clearly an environment for safe-haven currencies,” says Mr. Jones, “and we expect continued sterling weakness against the euro and dollar until the end of the year.” A low sterling also has obvious advantages for companies earning overseas revenue and exporters. “A weaker pound is a tool in managing the U.K. deficit and trying to stimulate activity in the economy,” states Mr. Jones.

    Figure 1. One year graph UK Pound Sterling/ US Dollar FX Spot rate (to July 4, 2016)

    On Interest Rates

    Kames Capital has maintained a “lower for longer” interest rate outlook for some time. In the wake of the vote Mr. Jones has modified this to “lower for yet longer.” He foresees interest rates in the U.K. will move to zero over the summer to pre-empt an abrupt slowdown in discretionary spending by consumers and businesses and to counter headwinds and delays in project activity. He dismisses any possibility of a Bank of England increase surprise to defend sterling because of the deflationary effects of the depreciation. “The BOE has been very consistent in ignoring U.K. inflation and setting monetary policy,” states Mr. Jones. He similarly thinks that negative rates are unlikely. “Government bond yields haven’t spiked, and the U.K. is not an emerging economy. Stimulus is key. There are monetary ways to undertake this, such as specific project funding, before the need for negative rates.”

    On the Equity Market

    Mr. Jones says there is “nothing particularly exciting” about the Kames view on equities now. “Large-capitalization foreign earners have done well and will continue to do so,” he states. Kames prefers large-caps over the smaller stocks of the FTSE 250 and is sticking to income-oriented names such as Imperial BrandsRoyal Dutch Shell and Shire.

    Regionally, he believes that despite its expense, the U.S. offers the best near-term opportunities. “Europe’s fragile recovery wasn’t prepared for Brexit,” states Mr. Jones. “In the U.S. you’ve got full employment, consistency of growth delivery for the last four years, and the Fed also remains on a ‘lower for yet longer’ footing.” He also advocates adding to emerging markets issues. “In a world where developed-market risk premia have gone up, with no great expectation of increased returns, EMs are certainly worth owning (in both equities and fixed income).”

    Figure 2. One year graph FTSE 100 Share Price Index (to July 4, 2016) 

    Rates and Strategy

    Given Kames’ “lower for even longer” mantra, duration continues to be a favored play. “We have added duration in the U.S. market and in long-dated government bonds,” states Mr. Jones. “With continued falls in Asian interest rates and the extension of QE in Europe, then Treasurys are a safe haven and with yield that is a beneficiary of a lot of the turmoil.”

    Even if the Federal Reserve increases rates toward the end of the year on the back of strong domestic activity, Mr. Jones isn’t overly concerned and doesn’t see it being more than 1%. “That will have vindicated Yellen (having made two rate increases) but will play to investors wanting to see some more heat in the economy. This will be attractive for credit and high yield as well as equities.”

    Mr. Jones is comfortable that the low interest rate has pushed out the default rate cycle and dismisses comparisons that the current market is in any way analogous to that of the global financial crisis. “There has been no distress in cash or securities markets whatsoever,” he states. “You’ve been able to trade any way you want.”

    Business Considerations

    Director of Wholesale, Steve Kenny, has recently returned from a European meeting of sales peers, where he conceded the mood was immediately “somewhat prejudicial” against U.K.-based companies after the referendum result, but he felt this had dissipated fairly quickly. “All fund groups are worried about what the next six months mean for flows and redemptions,” he states. “We are well placed, but you can’t control buyers’ behavior.”

    Mr. Jones sees balance sheet strength as key to dealing with the political uncertainties presented by this vote outcome. “Kames are an independently capitalized, independently governed and regulated entity with a strong and supportive ownership structure. Our capital is dynamically managed and stress tested way beyond any disruption by the removal of the U.K. from Europe or indeed the removal of Scotland from the U.K.,” he states.

    Mr. Kenny also points out that having offshore distribution platforms is now advantageous. “Our Dublin-based platform allows us to utilize currency preferences and provide comfort to European clients.” Mr. Jones, however, warns of bottlenecks in the new rush to establish offshore presence. “There is going to be a scramble for offshore centers, but they won’t have increased operational capacity yet, and performance track records will also need to be established.”

    Conclusions

    Kames Capital is a fund management house with considerable exposure across the whole range of potential Brexit consequences. Yet, it is difficult to perceive any pervading sense of impending doom. Mr. Jones is quick to remind his clients that Brexit is a national and regional concern and will pose many challenges, but that it is not a global crisis. He believes that businesses with broad geographical reach and a diversified product range should not only survive disruption but potentially discover new opportunities.

    Mr. Kenny is similarly able to conclude on a positive note: “The average U.K. discretionary fund manager is currently holding double-digit allocations to cash; Europeans even more. With rates so low, it will be a hard allocation to have justified by the end of 2016.”


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    The short-term volatility of U.K. domiciled mutual funds is beginning to normalize after peaking in the aftermath of the “Brexit” result of the U.K.’s European Union referendum on June 24, 2016.

    The featured graph (above) shows the daily rolling ten-day volatility of funds in the Thomson Reuters Lipper Global Fund Classifications, popular in the U.K., going back one year. The short-term volatility spike evident post “Brexit”- vote can be seen clearly across most sectors, but it has been most marked in the U.S. and U.K. equities classifications.

    A similar spike in short-term fund volatility was seen in the aftermath of the China “wobble” in summer 2015, but for U.K.-based funds, it was contained largely in those exposed to U.S. equities and high-yield credit markets.

    Another significant difference in these two major spikes was the dramatic increase in the volatility of U.K. government bond funds. These funds barely registered any increase in volatility over last summer but more than doubled in the week following the Brexit outcome, incorporating the huge effect of the sudden devaluation in Sterling and increased risk aversion.

    Risk aversion and fund flows

    Risk aversion has also been reflected in shorter term fund flows, with Thomson Reuters’ Eikon fund flow analysis revealing an estimated net outflow of US$ 4.2 billion from U.K. funds in the month of June. The flows heat map shows outflows have also affected Europe (with the exception of Germany) more generally and displays a large monthly rotation of some US$ 24 billion into money market funds by investors (see Figure 1. below).

    Fund outflows in the aftermath of the Brexit vote have not been a homogeneous experience for all U.K. fund groups. In a recent Lipper interview, Kames Capital’s Director of Wholesale, Steve Kenny stated that while “all fund groups are worried about what the next six months mean for flows and redemptions”, product offerings are now more significant (Kames has a strong Dublin-based branch to its business).

    Exhibit 1. Thomson Reuters Eikon Fund Flows Map (one month to June 2016)

    Source: Thomson Reuters Eikon

    This is a view reflected by Clive Selman, Head of U.K. Wholesale at Hermes Investment Management. “Fund flows have remained net positive for us prior to the referendum and post” states Mr Selman. “The nature of the downside-protection element of our fund range has been helpful, as well as having funds in sectors that look relatively attractive – GEMS, Asia, and U.S. SMID”.

    Buoyancy in the U.K. Stock Market

    This risk aversion and spike in fund volatility have come about despite what some analysts see as a surprisingly buoyant U.K. share market. Head of Equities at Hermes Investment Management, Andrew Parry, believes part of the reason for the relatively benign outcome post-Brexit is that most investors were positioned bearishly ahead of the vote. “High cash levels, reduced equities exposure, and large open put options provided strong technical support,” states Mr Parry. “Such pessimism was not based on politics alone – the consensus view was that the U.K. would vote to remain in the EU – but fears of slowing global growth.”

    Exhibit 2. FTSE All Share Performance Year to Date (July 14, 2016)

    Source: Thomson Reuters Eikon

    As U.K. fund volatility appears to normalize, Mr Parry is commensurately sanguine about support for the U.K. equity market in the medium-term. “The reaction of monetary authorities, who have learned from previous crises, provided liquidity to markets and promised more policy action to come,” he says. “The need for investors to earn a profit also contributed: with US$13 trillion of government bonds globally providing negative yields, the hunt for attractive returns will continue.”


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    The second annual Thomson Reuters Lipper Fund Selectors Forum was held at the Thomson Reuters Auditorium, Canary Wharf on July 13, 2016.

    Mutual funds are always a hot topic and no more so than after the unexpected result from the British European Union referendum, resulting in high levels of volatility across popular fund sectors.

    Following on from the highly successful inaugural event last year, Thomson Reuters Lipper again hosted a high-profile thought-leadership morning in collaboration with the Chartered Institute of Securities and Investment (CISI).The morning was dedicated exclusively to the discussion of key events that are important to fund gatekeepers and investors.

    An audience of around 120 drawn from private wealth, IFAs, mutual fund managers, fund gatekeepers, platform providers, investors and journalists participated in an informative and entertaining two-hour session of panels and presentations that brought together some of the industry’s most respected fund-selection practitioners in the U.K.

    The Art of Fund Selection 

    Head of U.K. and Ireland Research at Thomson Reuters Lipper, Jake Moeller presided over the first panel session, with panellists Victoria Hasler from Square Mile Research, Mona Shah from Rathbones, and Tony Yousefian from FundCalibre. The panellists agreed that the outlook for mutual funds in the post-referendum world is certainly more challenging but that a long-term focus for investors needs to be encouraged. None of the panellists would materially change the way they pick their funds as a result of the vote, with the criteria of “transparent and repeatable process” remaining a key metric.

    The panel also urged calm on the issue of U.K. property fund suspensions, with a consensus view that the environment isn’t analogous to the 2007/2008 property crisis and that investors should always understand that property isn’t a readily realizable asset class.

    IMG_0921

    (L-R) Jake Moeller, Victoria Hasler, Tony Yousefian & Mona Shah. Photo: Thomson Reuters

    The panellists iterated the considerable level of due-diligence that is undertaken before any fund is included on a panel, with all agreeing that meeting and interviewing the lead manager is the most material factor in assessing a mutual fund.

    Fund Manager Challenges in 2016

    Lipper’s Jake Moeller presented a session on some of the challenges facing U.K.-based fund managers. He highlighted how short-term volatility across a number of U.K.-domiciled fund sectors has receded since the “Brexit” vote. However, using the Eikon Flows module, he showed that risk aversion is evident still in current flows into money market vehicles. He also used Lipper performance data to show that the majority of active funds in the European and U.K. sectors sit above the first-ranked passive fund over three and five years over various rolling periods. There are “considerable potential opportunity costs” to investing in a low-cost passive option, according to Mr. Moeller.

    Lippers Jake Moeller highlights recent fund flow risk aversion in Eikon.

    Lipper’s Jake Moeller highlights recent fund flow risk aversion in Eikon. Photo: Thomson Reuters

    Mr. Moeller also showed, using the Thomson Reuters Regulation Tool, the considerable regulatory and compliance burden facing asset managers; there were 51,000 regulatory updates for compliance officers to contend with in 2015 alone. He also outlined the fund concentration in the U.K. market, revealing that the 60 top U.K. funds contain nearly a quarter of all U.K. fund assets.

    Mutual Funds and Portfolio Construction

    Richard Philbin, Chief Investment Officer–Wellian Investment Solutions; Haig Bathgate, Joint CIO/ CEO of Tcam; and Mark Harries, a multi-manager specialist participated in the portfolio construction session. The conclusions were broad-ranging, with a good deal of time also spent on discussing the U.K. commercial property sector. Mr. Harries raised concerns about the industry’s predilection to daily marking to market of illiquid asset classes.

    Mr. Philbin declared that the active-versus-passive debate needs to have less importance placed on it, with objective-based investing requiring all types of building blocks. Mr. Bathgate discussed the importance boutique fund managers play in his portfolio construction process, stating that many gatekeepers miss out on “formative alpha” as a result.

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    (L-R) Jake Moeller, Mark Harries, Haig Bathgate & Richard Philbin. Photo: Detlef Glow

    The panel raised the interesting point that fee compression isn’t necessarily a good thing for funds. It is important that quality be differentiated by price. There was also a view that performance based fees still had a place in the market.

    Finally, the panel discussed the implications for fixed income in a Brexit-induced “lower for longer” rate environment, concluding that the demand for yield will remain and that fixed income funds need to be considered with a great deal of investor diligence.

    An Engaged Audience

    Audience participation at the second annual Fund Selectors Forum was exceptionally high, with some particularly passionate points of view being raised throughout the event. At the start of the Forum audience members were encouraged to engage this event via social media, and #LipperFSF16 garnered considerable commentary.

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    The Twitter wall proved popular…Photo: Thomson Reuters

    The issues raised in this Fund Selectors Forum will no doubt continue to be discussed, and Thomson Reuters Lipper and the CISI have shown the importance of facilitating such crucial debates.

    Challenges as well as opportunities exist in the U.K. market, given the uncertain outlook Brexit provides. We look forward to seeing everyone again next year.


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    Ken Nicholson has recently returned to funds management after a year-long sabbatical. This followed the completion of a 14-year stint as one of Standard Life Investment’s (SLI) fund manager best kept secrets. It is a considerable boon to Mirabaud to have secured his services since late 2015. The Swiss banking group continues to quietly enhance its reputation in the U.K. and European funds market with an increasingly comprehensive suite of boutique active funds.

    A stockpicker philosophy

    This is a traditional stockpicking fund based on fundamental analysis and valuations. Mr. Nicholson stresses that Europe is economically developed, rich, and mature, meaning it is unlikely “to be seen as an exciting growth market.” For him the discovery of “hidden champions” underpins this high-conviction pan-European smaller-companies fund (there is also an ex-U.K. sister version of this fund).

    Ken Nicholson, Portfolio Manager - Mirabaud Asset Management. With permission

    Ken Nicholson, Portfolio Manager – Mirabaud Asset Management.

    Mr. Nicholson seeks companies that dominate their market with durable customer bases and a high share of recurring revenues. “Many European smaller firms have been around for a long-time,” states Mr. Nicholson, “often 100 years plus, with family control and generational ownership. Therefore, a company’s ability to innovate and constantly adapt is key for us.”

    Company visits are a key component of this fund, with Mr. Nicholson and his assistant–Portfolio Manager Trevor Fitzgerald–undertaking more than 300 meetings, calls and visits each year. The fund seeks to achieve higher risk-adjusted returns over its benchmark (the MSCI Europe Small Cap Index) over three years.

    Portfolio construction

    This fund usually contains around 40 stocks drawn predominately from the 800 or so companies in the MSCI European Smaller Companies Index; it has a tracking-error range between 4%-7%. Holdings typically are below €5 billion in market capitalization and are mostly characterized by poor analyst coverage–a factor key to Mr. Nicholson’s investment approach. “Nestlé has over 80 analysts covering it, but a stock such as Kardex has only two,” states Mr. Nicholson.

    Stocks are screened and valued using traditional metrics such as PE, PBV, PCF, dividend yield, and DCF analysis. Mr. Nicholson is also unapologetic for relatively high portfolio turnover around 100% per year. “If turnover drops below 100%,” he states, “we are not working hard enough to find new ideas.”

    Liquidity is an important consideration. The average holding capitalization of the fund is currently around €2 billion, but 90% of the portfolio is able to be liquidated within five trading days.

    There is certainly a niche feel to the portfolio, with the portfolio consisting of a highly diversified set of businesses. Koenig and Bauer exemplifies Mr. Nicholson’s approach. Formed in 1812 as a newspaper printer, it has been able to reinvent itself as a packaging printing specialist and is now well established to benefit from growth in consumer packaging.

    Exhibit 1. One-year share price history of K&B (to August 19, 2016 in Euro)

    Fund performance

    This fund was launched in November 2015 and of itself has only a short history. However, Mr. Nicholson had built up an impressive seven-year track record at SLI, managing a comparable fund with an identical process and philosophy.  This performance has also not come at the expense of risk, with Mr. Nicholson’s composite appearing in the lower end of the North-East risk/ return quadrant over five years (see Exhibit 3 below).

    Exhibit 2. Composite performance of Mr. Nicholson* (to August 13, 2016, in Euros)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management. Eric Ho.

    Considerations on “Brexit”

    “Brexit was only of passing interest to us,” states Mr. Nicholson. “Europe has already been in a low-growth environment for ten years, so this is just the ‘new normal’.” He believes that his diversified portfolio, with no dominating style bias, inoculates investors from macroeconomic risk. “We aim to achieve the highest degree of certainty before we invest and were happy with our portfolio prior to the Brexit outcome.”

    Following the vote, there have been only marginal changes in the portfolio, with no shift–as has been common with some other fund managers–into dollar earners, defensives, or staples. “We didn’t win or lose from the Brexit vote, and we didn’t intend to either,” Mr. Nicholson states.

    Exhibit 3. Five-year risk/return chart of Mr. Nicholson’s composite* performance (to July 31, 2016 in Euro)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper, Lipper for Investment Management. Eric Ho.

    Macro outlook

    Mr. Nicholson’s outlook for Europe is not one that is particularly buoyant from a macroeconomic perspective, and he also acknowledges that valuations are not overwhelmingly compelling. “Don’t buy the fund because you think European smaller companies are cheap–they’re not,” Mr. Nicholson warns. However, he encourages investors to reconsider valuations in light of the ongoing low-interest-rate environment.

    He believes that a low-growth trajectory for Europe should be expected in an “unpromising backdrop.” However, macro factors are at best only incidental to his stock selection process. “We don’t know what Dhragi is going to do next,” he states, but he points to his historical track record of outperforming in a range of differing market conditions.

    Conclusion

    While strictly speaking this fund isn’t style agnostic, its objective to deliver performance using multiple sources of alpha without reliance on any single bet, tilt, or beta play might make it a difficult proposition for a fund selector purist who is seeking a style box into which to place it. However, it ought to still appeal to the essence of active fund management.

    Mr. Nicholson seems genuinely relaxed after his break and clearly appears very comfortable with his new colleagues and the environment at Mirabaud. He has a remarkable risk-adjusted performance history and strong pedigree with smaller-company stocks. As this is a young fund of only €100 million, with an estimated capacity for €1 billion, it allows potential investors a short period of time to undertake their own due-diligence.

    Jake Moeller met with Ken Nicholson, Portfolio Manager, and James Southern, Sales Director- Mirabaud Asset Management, on August 12, 2016.

    * The composite performance has been calculated by combining SLI Glo Sicav European Smaller Companies Fund from 26 September 2007 to  August 2014. Then the MSCI Europe Smaller Smaller Companies Index to November 2015 (as a proxy while Mr Nicholson was on sabbatical). After which his Mirabaud fund performance from November 2015 to present.

     

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.

     


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    TCW may not be a fund group overly familiar to European investors, despite forming in 1971. It does, however, enjoy considerable goodwill in the U.S. and the Middle East, especially following its acquisition of Metropolitan West Asset Management (MetWest) in 2010.

    Today, TCW is looking to broaden its franchise into Europe, having launched a number of Luxembourg-based feeders into some of its successful U.S. fund range. “We own the second largest bond fund in the U.S., have a 20-year track record, and manage nearly $200 billion of assets,” states Laird Landmann. “We strongly believe our product suite is attractive to European-based investors.”

    Laird Landmann - TCW

    Laird Landmann – Group Managing Director – TCW. With permission.

    Fund Philosophy and Process

    TCW has a long-established fundamental value-driven approach. This is underpinned by the belief of mean-reversion of securities following technical deviations and the identification of “persistent” structural inefficiencies of the bond market. These include rating anomalies, market segmentation, and policy-maker intervention.

    TCW MetWest Total Return Bond Fund follows the same securities selection processes as all other TCW funds. It is a broad-based bond fund that contains nearly 500 holdings and is benchmarked to the Barclays U.S. Aggregate Bond Index, investing almost exclusively in U.S.-based issuance. It forms part of TCW’s “core” fund offering investing predominantly in A-rated securities or higher and restricting high-yield content to a 20% maximum. It doesn’t seek to take huge positions on duration, having only a one-year band either side of the benchmark.

    Macro-economic analysis forms an integral part of the TCW process, and the group has four generalist portfolio managers who examine long-term economic outlook and interest rate positioning. However, this is undertaken to the extent of contextualizing the fair value of the securities formed from the fundamental analysis. “Humankind has a predilection to make sense out of chaos, but predicting macro events is unproductive,” states Mr. Landmann. “It’s an interesting narrative but doesn’t return a lot of alpha.”

    Current Positioning

    The fund is currently defensively positioned, with the highest holdings (29%) in U.S. Treasuries and U.S. agencies (26%). This is on the basis that TCW believes the U.S. credit market to be late-cycle. “Companies have used debt to buy back stock or undertake M&A, not invest in capex,” states Mr. Landmann. “This is not a healthy sign for the credit cycle. Leverage is rising, incomes are dropping, and risk is increasing in spread assets.”

    Exhibit 1. Three year performance of TCW MetWest Total Return Bond Fund v benchmark & peer group (to July 31, 2016 in USD)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    The agencies position is currently providing the yield-kicker to the fund and is an area where TCW sees some relative value. “Ratings agencies are giving some of these lines a bit of flack,” says Mr. Landmann. “But you’re getting government-backed assets at Libor plus 200.” Mr. Landmann also likes non-agency mortgages. “These are deleveraging as homeowners pay down their mortgages. Even if house prices don’t rise any further, you are sitting on high-quality mortgage pools.”

    Mr. Landmann also like U.S. banks, with his favored issuers currently being Bank of America, Citibank, and Wells Fargo.

    On duration Mr. Landmann is also cautious: “The Fed is leading to a rate hike this year. We don’t think the level of real rates merits a substantial risk position to duration, so we are slightly short there.”

    Keeping Some Powder Dry

    Mr. Landmann is looking to increase exposure to investment-grade credit, but he is not prepared to do so until valuations lower. “We are on a risk budget diet,” Mr. Landmann explains. “Investors have to diet now if they want to feast later.” TCW picked up a small amount of credit during the market revaluations in February and March of this year, but Mr. Landmann considers a more material rotation toward risk to be most likely in the next 12-18 months.

    Exhibit 2. Ten year risk/ return of Metropolitan West Total Return Fund (to July 31,2016 in USD)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Outlook

    Despite overall caution with respect to valuations, TCW believes the U.S. bond market is in good health. Corporate issuance has been buoyant, with some $88 billion of issuance in the first week of August 2016 globally, and substantial demand from non-U.S. institutions and clients turning to the U.S. for yield are providing support.

    With respect to the upcoming U.S. presidential election, Mr. Landmann sees both candidates likely to want to undertake fiscal stimulus, which would put a lower bound on U.S. interest rates. However, he believes a “wild card” for Donald Trump might be the desire to change the leadership of the Federal Reserve or issue “helicopter money,” which may unsettle the market.

    Performance

    The performance of the U.S. master version of this fund has a very strong risk-adjusted track record, scoring highly  across all Lipper Leader categories (see Exhibit 3. below); it collected a U.S. Lipper Fund Award in 2016. Over ten years MetWest Total Return Bond Fund sits in the favored “northwest” quadrant in its classification’s risk/return profile (see Exhibit 2. above).

    Exhibit 3. Lipper Leaders Profile of Metropolitan West Total Return Fund (to July 2016 for U.S.)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    The European version of this fund, identically managed but with its shorter performance history, has tracked its benchmark over the last three years in what Mr. Landmann describes as “one of the more challenging periods our style typically faces.” However, it has still done well in its peer Lipper Global-Bond USD category over three years, clearing by over 5 percentage points in U.S.-dollar terms (see Exhibit 1. above).

    Conclusion

    TCW is a well-resourced and highly credible bond house and in the U.S. could be referred to as a “big hitter.” Although its reputation in Europe might not be well known, its pedigree will likely impress.

    This is a fund for the more risk-averse and larger retail or institutional investor and certainly one disposed to U.S. securities. Mr. Landmann makes it clear that a move into the European market does not represent a move away from TCW’s core value proposition of expertise in U.S. debt.

     Jake Moeller met with Laird Landmann, Group Managing Director & Co-Director of Fixed Income–MetWest, on May 24, 2016, and August 17, 2016.

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    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.


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    As we trundle on in the aftermath of the “Brexit” result of the recent British EU membership referendum, the surprise, and perhaps shock for many analysts and investors has begun to be digested – the Earth remains constant on its axis and the sun still rises. This event however, undoubtedly presents challenges to the European and U.K. funds industry. However, despite the wringing of hands and the barrage of related press coverage, these challenges may not be as material as investors might expect.

    Risk off in June & July no surprise

    The initial reaction of investors has been, unsurprisingly, a knee-jerk of considerable risk aversion. According to Thomson Reuters Lipper data, the pan-European mutual fund market suffered net outflows of over €20 billion for June 2016. It saw massive net inflows into Dublin-based money market funds, with some €14 billion going into U.S. dollar-denominated funds and €6 billion into Sterling denominated funds. This came at the expense of European and global equities funds.

    July reclaimed €22.0 billion of net inflows but risk aversion was still clearly evident with €13.3 billion flowing into Euro denominated money market funds (see Exhibit 1, below) and €5.3 billion flowing out of European equity funds (See Exhibit 2, below).

    Exhibit 1. Top Ten Fund Sectors by net Inflows, July 2016 (Euro Billions)

    European fund flows, July 2016

    Source: Thomson Reuters Lipper

    Considering the rough market conditions during first half 2016, it was not surprising that the assets under management in the pan-European mutual fund industry decreased from the record level of €8.88 trillion (as at December 31, 2015) to €8.76 trillion at the end of June 2016. However, this decrease of €126.7 billion has been mainly driven by the performance of the underlying markets (-€156.2 billion), while net sales contributed net inflows of €29.5 billion to the overall change in assets under management in the European fund industry. A smaller net inflow compared to previous years, but still positive.

    Exhibit 2. Top Ten Fund Sectors by net Outflows, July 2016 (Euro Billions)

    European fund flows, July 2016

    Source: Thomson Reuters Lipper

    Despite these flows figures, equity markets have been surprisingly buoyant. The MSCI AC World Index in Sterling has reached a five-year high (see Exhibit 4, below). Short-term fund volatility for U.K.-domiciled funds has returned to pre-vote levels after almost doubling immediately after the vote outcome (see Exhibit 5, below).

    Flow disruption is par for the course

    Of all the industries that have touch points to the ramifications of the Brexit outcome, the mutual funds industry is best placed to deal with such challenges. For U.K.-domiciled funds net outflows for June 2016 were nearly £3 billion, which might sound considerable. By contrast, in the China-induced summer wobble of last year the U.K. fund market suffered net outflows of £11 billion.

    In the oil price shock of January and February 2016 net outflows were nearly £16 billion. Similarly, the recent short-term fund volatility spiked considerably last summer, only to return to a normalized level. The main difference with the Brexit induced volatility has been the marked increase in gilt volatility which is more unusual but this too has reduced.

    Exhibit 3.European Fund Flows by Product Category (in €bn) 

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Source: Thomson Reuters Lipper

    Fund houses constantly deal with such contrasting market dynamics–outflows in a rising market, inflows in a falling market, and all combinations in between. For 2008 the European fund market experienced nearly €600 billion of net outflows, but it collected some €200 billion net for 2009. The Greek crisis of 2011 resulted in €100 billion of net outflows, but over €200 billion net flowed in for 2012 (see Exhibit 3, above).

    In any period of risk aversion, there are still asset allocation models which need to be populated. Discretionary fund managers in the UK are currently sitting on double-digit levels of cash. Their European counterparts are holding even higher levels. This cannot be justified for fee paying clients. This money will need to flow somewhere and it will require investors to carefully consider their next steps, but consider it they will. Whether it goes into equities, bonds or property, what has gone out, will have to come back in.

    Fund houses are already inoculated

    Certainly Brexit has caused consternation and reveals a considerable set of unknowns. However the global financial crisis of 2008 was considerably more material. It forged much of the change which means groups having survived that particular maelstrom, are now much better equipped to deal with a comparatively local event such as Brexit.

    Exhibit 4. MSCI AC World Index over 5 Years (to Sep 13, 2016 in Sterling)

    Source: Thomson Reuters Eikon

    Source: Thomson Reuters Eikon

    Consider what fund houses have had to endure in terms of the myriad legislative reforms since 2009. Direct acronym-heavy touch points include: MiFID II, AML, KYC, EMIR Shareholdings. Indirectly, add BASEL III, Solvency II, CRD, Dodd Frank, and AIFMD. According to Thomson Reuters Risk & Regulatory Data Solutions, there were some 51,000 global regulatory updates in 2015 for groups to contend with. Then you can throw in RDR reforms, the list goes on. Whatever comes of Brexit in the years ahead will be small fry in relation to provisions with which the fund groups will have already had to contend post the global financial crisis.

    Many U.K.-based fund groups will also have been inoculated by the Scottish referendum of 2014. This forced them to examine potential multi-region domiciles and operational bases. Many fund groups may not have changed anything as a result of the Scottish vote, but they will have the existing compliance blueprints in place which are perfectly adaptable in the current environment.

    Finally, fund houses across all domiciles have been getting fitter through the competition of a truly global and multifaceted industry. Fee compression has forced innovation, the passive industry has forced innovation and increasing levels of investor consumer sovereignty has forced innovation. Fund groups today are lean having already been forced to trim non-performing aspects of their businesses.

    Ramifications for product development

    The Brexit result will potentially see a short slowdown of new launch development. Fund groups might take stock of product development and re-consider their strategic options. Examining the 350 or so U.K.-domiciled fund launches year-to-date 2016, a significant proportion have been absolute return offerings. This reflects one particular success story of recent times. In the 12 months to May 2016, these products collected over £7 billion in net inflows.

    Exhibit 5. Daily Rolling 10 Day Volatility of UK fund Sectors

    Source: Thomson Reuters Lipper. Lipper for Investment Management

    Source: Thomson Reuters Lipper. Lipper for Investment Management

    Ironically the recent performance of this aggregate product group has been less than stellar and this may now be a saturated market. In a “lower for longer” rates environment fund groups need to ensure they can meet demand for income. The funds flocking to Dublin-based money market funds in June and July won’t want to stay there for long.  Analysis of fund flows data for July suggests that bond funds appear to be benefiting already from some of the cash swilling about. The thirst for yield remains unquenched.

    Opportunities always knock

    As we sit here in the U.K. it is easy to overstate the effects of what is undoubtedly a major democratic consequence. But in context, Brexit is a local, rather than a global event. Even as fund volatility spiked in the days after 23 June, you could buy or sell whatever securities you wanted in whatever quantities you wanted. Even commercial property funds (not all of which suspended trading) have begun to re-open with many now seeing the potential opportunities a devalued Sterling reveals.

    The managed funds industry is dynamic, innovative, and far more resilient than a local geopolitical event. June and July European fund flows don’t paint a particularly pretty picture and there might be more to come. But the financial services industry has experienced much, much worse before.

     

     

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    There is something strangely reassuring about seeing festive decorations being displayed in a large London department store only a few days after the U.K.’s hottest September day in 60 years. With one final flourish, summer is gone. Light trading volumes and asset allocation indecision should now be replaced with conviction and some assertion on the part of funds investors, heading into the final quarter of the year.

    June and July European fund-flow data revealed considerable “Brexit”-induced risk aversion, with investors taking flight from broad-based pan-European and U.K. equities funds and flocking into Dublin-based money market vehicles. August European data from Thomson Reuters Lipper revealed that, although many investors are continuing to keep their powder dry (USD-, GBP-, and EUR-denominated money market funds collected over €14 billion for August), others appeared to have decided where they want to be by year’s end.

    Other than money market fund movements, the best selling sector for Europe for August was Global Emerging Market Equity funds, which collected some €4.6 billion of net sales for the month. It was followed by Bond Global (+€3.5 billion), Bond Emerging Markets in Hard Currencies (+€2.9 billion), and Bond Emerging Markets in Local Currencies (+€2.2 billion).

    Exhibit 1. Estimated Net Sales by Asset Type, August 2016 (Euro Billions)

    Source: Thomson Reuters

    Source: Thomson Reuters Lipper: European Fund Flow Trends August 2016

    It appears, then, that after five years in the wilderness, emerging markets (EM) might finally be showing a return to favour. In Europe Brexit has confirmed a “lower for longer” interest rate environment, providing a natural feeder into riskier yield- bearing assets. The U.S. too seems to be unable to provide a guaranteed upward trajectory in rates, despite expectations.

    There is also now a confluence of strong performance to encourage investors. Last summer’s memory of the China “wobble” and its accompanying volatility feels distant; for 2016 year to date the average return of funds in the IA Global Emerging Markets equity sector is 29.0% (to August 31, 2016, in GBP), with the IA Global Emerging Markets bond sector average returning 26.0% and China/Greater China 18.7% over the same period. That makes the return of the IA Sterling High Yield sector of 9.3% on average look somewhat Spartan by comparison.

    Chasing returns is an investment strategy likely to disappoint, and chasing the hot money into EM may be similarly inadvisable. However, it is likely that—as we head toward the end of the year—there will be further offloading of cash. Discretionary fund managers in the U.K. and Europe who are still cash heavy will not be able to justify significant holdings to their clients come Christmas. And where do you allocate when yield and dividends in developed markets are at a considerable premium?

    Exhibit 2. Ten Top Sectors, August 2016 (Euro Billions)

    Source: Thomson Reuters

    Source: Thomson Reuters Lipper: European Fund-Flow Trends August 2016

    In a recent podcast with Thomson Reuters, Martin Gilbert—the CEO of Aberdeen Asset Management — noted “sentiment (on EM) has improved considerably.” This coincided with a sixth monthly increase in Aberdeen’s share price of 15% (to September 19, 2016) and, as Gilbert noted, a material reduction in short positions on Aberdeen’s stock.

    I’m not one for reading runes, but I will certainly be keeping an eye on EM fund flows in the final quarter. As the summer revealed, developed markets carry political risk, rates are staying low, and recent risk aversion has seen large and perhaps unsustainable inflows into cash.

    Summer is over, and now decisions have to be made in time for Christmas.

    A version of this article first appeared in FT Adviser Blog.

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    “Lower for longer” is the new mantra. Certainly in the U.K. and Europe and perhaps a little less so in the U.S., the anchoring of low end rates continues to drive yield-thirsty investors to distraction.

    Whispers about a bond bubble have been around for several years now, but with asset buying by central banks becoming an established policy measure, utterances are becoming louder and are coming not just from investors. There has been several high-profile investment executives warning of bond overheating.

    Large inflows have forced the hands of many bond fund managers to seek ways to fully invest them. The average bond size in the IA Strategic Bond sector sector for example, has increased from £410 million in September 2011 to £610 million in September 2016. Increasingly, bigger funds contain more securities or larger positions in individual lines, with managers sometimes being forced to move up the credit spectrum to maintain a decent yield in a world of tight compression.

    Have these inflows caused a material increase in credit risk for bond funds? It is worth examining two popular bond sectors to see in which credit buckets U.K. bond fund managers are concentrated.

    Sterling High-Yield

    Looking at the Investment Association (IA) Sterling High-Yield Bond sector: As of September 30, 2016, the highest average allocation was in BB-rated credit (39.0%) followed by B-rated (33.9%). Twelve months ago, these allocations were 38.8% and 37.4%, respectively. Five years ago (as of September 30, 2011) the average sector exposure to BB-rated securities was 34.4%, with 36.0% to B-rated securities. For 2016 average exposure to A- or better-rated securities was 10.9%, but for 2015 this figure was 8.8% and for 2011, 14.8%.

    Exhibit 1. IA Sterling High Yield Bond Sector – Debtor Profiles

    The balance between investment- and non investment-grade securities overall moved up for 2016: there was a total of 18.6% in investment-grade, up from 13.6% for 2015 and down from 21.7% for 2011. The most significant change over the last 12 months was the drop in aggregate exposure to riskier unrated securities: 4.8% for 2016, down from 10.3% for 2015, appearing to have funded the commensurate increase into investment-grade securities.

    Sterling Strategic Bond

    In the “go anywhere” IA Sterling Strategic Bond sector the highest aggregate concentration as of September 30, 2016, was in BBB-rated securities (25.7%), followed by BB-rated (15.2%). For 2015 this pattern was similar, with 23.7% and 14.6%, respectively. For 2011 portfolios in this sector contained an average of 20.8% in BBB-rated securities, with the highest allocation being to AAA-ratings (23.4%).

    Exhibit 2. IA Sterling Strategic Bond Sector – Debtor Profiles

    The overall aggregate exposure to investment-grade credit for 2016 was 58.9%. For 2015 this figure was 57.5% and for 2011, 66.7%. Aggregate exposure to unrated securities in this sector was 9.2% for 2016, down from 10.4% for 2015 and up from 8.2% for 2011.

    Conclusion

    In aggregate, over the last 12 months and compared to five years ago, it appears credit bond fund managers have not materially decreased the quality of their portfolio holdings. Fund managers appear to be backing their ability to “cherry pick” in safer credits and are not chasing riskier credit for the sake of it–even though the credit cycle has been extended. This should provide investors some comfort in the case of a rapid rotation out of corporate bonds.

    In a recent interview with Thomson Reuters Lipper, Stephen Snowden, Head of Credit at Kames Capital, dismissed concerns about a potential credit bond bubble. His belief is that liquidity risk in corporate credits is “not currently a systemic one” but rather is about individual managers managing their liquidity at a portfolio level.

    Perhaps then, investors should be keeping an eye on the size of their bond funds and considering capacity constraints rather than being overly concerned about credit composition.


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    The Thomson Reuters Lipper Alpha Expert Forum in London has earned a reputation as one of the European mutual fund industry’s premier thought-leadership events.

    Our eleventh annual event–held in London on November 16, 2016–was no exception, and we were proud to welcome some of the preeminent industry executives in Europe to share their views on key developments affecting the European mutual fund industry.

    Once again we partnered with the Chartered Institute of Securities and Investment–the leading professional investment body in the U.K.–as our co-hosts, and a full house in the Thomson Reuters Auditorium ensured a lively debate.

    The evolution of ethical investing to ESG and beyond

    The morning’s first panel session was moderated by Lipper’s Head of EMEA Research, Detlef Glow, who welcomed Ryan Smith – Head of Corporate Governance; Kames Asset Management, Andrew Parry – Head of Equities; Hermes Investment Management; and Wolfgang Pinner – CIO, Responsible & Sustainable Investing, Raiffeisen Capital Management.

    The panel was extremely optimistic about the continuing growth in popularity of environmental, social, and governance (ESG) investing–especially with “Millennial” investors, but it cautiously warned that fund groups need to “deliver ESG, rather than merely marketing it.”

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    (L-R) Detlef Glow interviews  Wolfgang Pinner, Andrew Parry & Ryan Smith 

    The panel argued that performance for funds with an ethical or ESG screen need not be compromised by portfolio restrictions, with a consensus that such criteria are actually very good for generating strong performance outcomes.

    The conclusions were that the industry has developed substantially from the days of simple ethical screening, with engagement being much more thoroughly incorporated across fund groups’ investment processes.

    Concepts such as “impact investing”–although often hard to define–are no longer nebulous concepts, and investors themselves are demanding ESG criteria-led investments.

    The European flows environment

    Detlef Glow outlined key patterns of flows into mutual funds in 2016. He noted that European fund net flows to the end of third quarter 2016 had seen bond funds, with over €60 billion, dominate. As confirmation of a “risk off” environment the second most popular category–with over €30 billion net–was money market funds. European equities, with over €10 billion of net outflows, suffered the most.

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    Jake Moeller highlights UK fund concentration.

    Jake Moeller, Head of Lipper U.K. & Ireland Research, examined some specific trends in the U.K., pointing out the ongoing popularity of absolute return-type products, which collected over £4 billion net year to date, despite having an average performance of only 1% over the same period.

    He also highlighted the concentrated nature of the U.K. funds market, outlining that–of the £990 billion sitting in the 6,000 mutual funds domiciled in the U.K.–the 50 top funds contain nearly a quarter of these assets.

    The passive ascendency

    Detlef Glow moderated a panel session with Mark Fitzgerald – European Product Manager, Vanguard; Thomas Merz – Managing Director & Head of ETFs Europe, UBS; Michael Gruener – co-head of EMEA sales, iShares; and Eric Wiegand – ETP Strategist, db X-trackers.

    The panel confirmed that ETF growth will continue and that both price compression and further innovation will characterize the next few years. Picking up on points raised in the ESG panel, there was discussion around the potential for ESG criteria to be incorporated into passive or rules-based structures. This would likely be a forthcoming innovation.

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    (L-R) Detlef Glow interviews Mark Fitzgerald, Eric Weigand, Thomas Merz & Michael Gruener.

    The active and passive debate was covered, with the panel arguing that if beta and then factors generate the bulk of returns, active managers may struggle to justify their costs in seeking alpha.

    Some of the panellists were dismissive of the argument that some sectors (e.g., emerging markets) are more fruitful than exchange-traded funds (ETFs) for active managers.

    Detlef highlighted data showing 2015 saw the highest net inflows into passive vehicles in Europe (about 30% of total net flows) in recent years. The panel agreed that this trend likely will persist.

    2016 macro review and outlook for 2017

    The final session saw Jake Moeller moderate the popular macroeconomic outlook session with Keith Wade – Chief Economist, Schroders; Simon Derrick, Chief Strategist at BNY Mellon; and Richard Dunbar – Investment Director – Aberdeen Asset Management.

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    (L-R) Jake Moeller interviews Simon Derrick, Keith Wade & Richard Dunbar.

    The “Brexit” vote and the U.S. presidential election outcome dominated the conversation, with the panel agreeing that since the China “wobble” of summer 2015, the market has been dominated by a number of unusually material macro events. The panel believed it is likely political risk will be more tightly priced in 2017 but that–against a backdrop of weak growth and real wages growth–political risks remain high.

    The effectiveness of central bank policy was discussed, with some credit being given to the Bank of England, the European Central Bank, the Bank of Japan, and the U.S. Federal Reserve, despite the distortion across yield curves.

    In conclusion, the panel slightly favored risk assets such as dividend-paying equities over bonds but believed the high-yield bond market will offer some opportunities in a “lower for longer” rate environment.

    Same time next year

    All the sessions experienced a high level of audience engagement, with lively questions and debate contributing to the success of the event. The three hours of Continuing Professional Development credit allocated to the event by CISI were well earned.

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    A packed house engages in the debate.

    A live “Twitter Wall” proved popular during the event, with considerable comment and photos being posted via #LAEF16. At one point, this hashtag was the third highest trending in the U.K.

    We think it is a tribute to the reputation of Thomson Reuters Lipper that we are able to gather such an acclaimed list of panellists to this annual event. Our considerable gratitude is extended to all the panellists who generously provided their time and thought leadership.

    It is vital to the industry that their experience and knowledge is shared.

    We look forward to welcoming you all next year!


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    Recently in London, Investment Week hosted its “Funds to Watch” conference showcasing mutual funds containing assets of less than £300 million.

    Whilst strictly speaking not all the fund groups represented were boutique houses (a number of large fund groups were promoting some of their smaller, less well-known funds), there were a considerable number of new and innovative mutual fund offerings on display.

    Tough to differentiate

    The mutual fund industry in the U.K. is largely characterised by its homogeneity. Fund analysts, selectors, gatekeepers, and multi-managers are skilled and adept at highlighting the not-inconsiderable differences in style and factor biases, size, and composition, which all contribute to the myriad performance outcomes we see in our performance tables. To the average “mum and dad” investor, however, one managed fund is pretty much the same as another.

    Brand matters

    Just as with any product, brand matters. In the absence of any other information, brand is a dominant factor in choosing a mutual fund. Investors might know of M&G or Invesco Perpetual because they see them advertised on the side of a taxi. That makes a conversation between an intermediary and a client on fund choice much easier than it might be if the product were Manderine Gestion or SVM, for example.

    The U.K. fund market is highly concentrated. According to Thomson Reuters Lipper data, there are some 6,000 funds domiciled here. That is a lot of funds. Consider that the U.S. mutual fund industry has only around 8,000 funds in an industry that is over three times larger than the entire European mutual fund industry.

    Exhibit 1. Concentration of UK Domiciled Mutual Funds (as at September 30, 2016)

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    The total assets under management (as at September 30, 2016) in U.K.-domiciled funds are around £990 billion. That too is a reasonable sum, but 25% of the total is contained in only 50 funds. That is quite an astonishing figure. “Blockbuster” funds such as Standard Life Investments GARs, M&G Optimal Income, or Invesco Perpetual High Income are household names to most of us, and there are another 200 U.K.-domiciled funds with assets in excess of £1 billion each.

    Adverse affects of concentration

    Concentration matters. Large funds take increasingly larger positions and hold more lines of stocks or bonds than smaller funds. That drives them closer to an index position, making sustainable alpha a more difficult proposition. Additionally, liquidity can also become an issue if, for example, a huge fund suddenly needs to liquidate an entire line of stock on the back of an adverse corporate event or in order to fund redemptions.

    Good things in small packages

    Small funds are attractive for many reasons. They are nimble, they can–especially in their formative years–outperform their benchmarks considerably, and they often seek investment opportunities that are ignored or overlooked by larger funds. They are a great tool for diversifying a portfolio that might contain an unintentional bias to, say, large-cap FTSE shares.

    The barriers to entry for a boutique are considerable, but they need to be given a chance to thrive. Gatekeepers need to freshen up their approved lists of the same well-known names. Large platforms and providers should consider fund additions that, although they may carry some reputational risk, ultimately invigorate and refresh the gene pool for all investors.


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    In a sepia-tinted past, product development for fund houses must have been a reasonably straightforward affair: offer a flagship “plain-vanilla” equity or bond product and build a cautious or balanced mixed-asset product around that mainstay.

    New Launches Down but Mixed Funds Up

    Despite investors, advisors, and asset allocators becoming increasingly sophisticated, new fund launches in the U.K. for 2016 were down 55% from the corresponding number for 2006. Comparably, the market for new launches was less segmented: In 2006 new fund launches occurred in more than 50 Lipper Global Classifications, with 22% of those launches consisting of mixed-asset or target return-type products. In 2016 new fund launches covered only 31 Lipper Global Classifications, but 33% of those launches consisted of mixed-asset or targeted return vehicles.

    Exhibit 1. Composition of New Fund Launches (Registered for Sale in UK) in 2016 – by Lipper Classification

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    Fund houses must put considerable time, effort, and resources into building new products. Lead time for a new launch can be considerable–up to a year from conception. Even then, there are no guarantees that in an increasingly saturated and competitive market a fund will sell–especially without the often-prerequisite three-year track record.

    Demographics driving design

    This issue for fund managers must be further complicated by the evolution of the marketplace, driven materially by demographics–particularly in the lucrative and growing mixed-asset space. Consider this evolution: The first readily accessible mixed-asset funds were available via with-profit products, with a shift at the turn of this century toward funds of funds. These in turn evolved into more complex multi-asset funds after the great financial crisis. Today we are seeing the rise of diversified growth funds, diversified absolute funds, targeted return funds, and increasingly, target date or targeted volatility funds.

    Crucially, it is demographics that have caused the over spill of institutional asset-liability type funds into the retail space. The provision of income, a key driver for institutional matching, is now considerably more important as “baby-boomers” retire en masse. Not only that, with the three different phases of retirement (high consumption, mid-phase, and high income demand), there are even more nuances for advisers to consider.

    “Solutions” and income are key

    It is not enough today that fund managers offer only a superior bond or equity product. Increasingly, they need to offer “solutions” for advisors rather than merely a vanilla product range. However, advisors who face ever-growing regulatory pressures still have to populate risk and asset-allocation profiles–often difficult with just a mixed-asset vehicle. The concept of outcomes based investment is the round hole with current product ranges a square peg into which it needs to fit.

    Undoubtedly, the future of fund product development is going to change further. Today there are more moving parts to fund distribution than ever, but it appears the most durable trend is income. Although absolute return funds were the fund-flows darling of 2016, collecting some £7 billion of estimated net inflows, some less-than-stellar returns have challenged that love affair.

    It is possible there will be a resurgence of multi-asset income-type funds, and there have been some strong recent additions to this stable that are designed to satisfy retiree demand.

    The reality is the retail fund world is no longer a sepia-tinted one. Product development experts have their work cut out for them.


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    Although the active versus passive debate has been around virtually as long as mutual funds have existed, active fund houses in Europe have been subject to considerably more scrutiny over the last 12 months.

    The recent interim FCA Asset Management Market Study in the U.K. highlighted some key points on the ability of the active fund industry to add value. Previously, a statement by the European Securities and Markets Authority highlighted the issue of “closet tracking,” which presented some active fund participants in an unflattering light.

    The ongoing debate on the merits of active investing versus passive investing will undoubtedly fill many more pages of academic- and industry-related literature. However, two things are certain: Active fund managers have to prove their worth with repeatable out-performance, and investors are sovereign – they invest where they see the best value and results.

    What do fund flows reveal?

    Since 2004, European fund assets historically have been dominated by active funds. According to Thomson Reuters Lipper data, the average annual percentage of active fund assets under management (AUM) has been 92% of overall AUM.

    Exhibit 1. Historical Assets Under Management of European Mutual Fund Market (€ billion)

    AUM

    Source: Thomson Reuters Lipper

    However, this average has decreased materially since 2011, with passive investments constituting a higher percentage of AUM. For 2004, passive investments constituted only 5% of total European mutual fund AUM. For 2011, this figure had increased to 8%, for 2014, 10%, for 2016 passive investments constituted 12% of AUM.

    The growth of passive investing can be seen clearly in the analysis of net flows, with 2016 proving to be the most fruitful year for passive product providers in Europe in 13 years, despite total net flows reducing from 2015.

    Exhibit 2. Estimated Net Flows into European Mutual Fund Market

    Source: Thomson Reuters Lipper

    Source: Thomson Reuters Lipper

    Are we at a turning point?

    It is difficult to assess all the drivers behind the growth in passive investing. Relative performance is key as is cost, with investors being much more savvy at seeking a good deal. There has also been a considerable increase in the amount of exchange-traded fund (ETF) products and providers now available in the market.

    The regulatory pronouncements mentioned above also provide a fertile backdrop for the passive fund industry in Europe but there are also a number of other factors (covered in some detail in Monday Morning Memo February 13, 2017), including asset allocation decisions, which may contribute to varying degrees.

    Irrespective of the rationale, the last three years have undoubtedly been good ones for the passive fund industry in Europe. Indeed, 2016 represents the best year yet. Whether this is a structural trend is difficult to say, but the onus is definitely on active fund managers to respond to this challenge if they are to maintain their primacy in the industry.


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    Recently, Investment Week hosted its Market Focus 2017: Fixed Income fund buyers’ conference in London, exclusively showcasing a selection of bond funds. I expected this event might be a hard sell, with the U.S. ten-year Treasury reaching its 1.37% nadir last July, a brave new inflationary world pervading our geopolitics, and a good deal of central bank distortion.

    Fund buyers appear calm

    Surprisingly, the event (which, reflecting interest in the asset class, was extremely well attended) was characterised by a sense of calm–both among the buyers and the sellers. There was no talk of bubbles or mass sell-offs, and every presentation submitted compelling arguments that supported the asset class.

    Exhibit 1. 20 Year History of 10 Year U.S. Treasuries (Yield Basis)

    Source: Thomson Reuters Eikon.

    Source: Thomson Reuters Eikon.

    Flows into fixed income still robust

    It’s fair enough to expect a certain amount of buoyancy for an asset class at a conference held in its honour, but it appears that European investors’ love affair with fixed income is far from over. Pan-European fund-flow data from Thomson Reuters Lipper reveal that global bond products were the most popular selling asset class for 2016, netting over €22 billion.

    Indeed, of the ten top-selling fund sectors for 2016 bonds were represented in five of them, including emerging markets, global high yield, and global corporate–to the tune of some €70 billion.

    Provisional data from the U.K. reveal that in the first two months of 2017 strategic bond funds and global bond funds are similarly proving popular, collecting nearly £1 billion net despite a small outflow for corporate bond funds.

    Exhibit 2. European Fund Flows 2016 (€bn) – Ranked by Sector 

    European Fund Industry Review 2016

    Source: Thomson Reuters Lipper

    Demand for yield can still be sated

    Investor demand for yield is still a highly durable theme, and although the U.S. is tightening, “lower for longer” in the U.K. and Europe is still providing broad support. The average yield on Sterling high-yield bond funds is around 4.3%, which is undoubtedly attractive to many investors.

    Furthermore, ratings migration within credit funds hasn’t materially increased in order to support yields. At the end of February 2017 the average exposure to BB-rated securities among Sterling high-yield funds was 39%, only a 5-percentage-point increase from 2012.

    No sense of panic, but no clear outlook either

    Unfortunately, there was no uniform outlook for bonds among the specialists at this fixed income conference, and I did not envy the asset allocators who had to go re-calibrate their bond and equity splits. Most of the fund managers agreed that the credit cycle was extended, but that it could be undone with geopolitical shocks.

    Many were short duration and others were writing put options on their portfolios. Some believed that too much was being priced into the reflation story, some talked of stagflation, and others were concerned about U.S. interest rates and the appreciating dollar.

    The beta play is over

    There was, however, one theme that stood out on the day: the easy bond beta play is well and truly over.

    For me at least, this was perhaps the most rewarding insight. For an asset class where many investors will have an itchy trigger finger, an active fund that is cherry picking in credit, avoiding huge duration calls and the crowded trades is probably a sensible place to sail if the weather becomes more inclement.


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    The 27th annual U.K. Thomson Reuters Lipper Fund Awards event was held at the elegant Chartered Accountant’s Hall on March 30, 2017. A full house of 200 participants from the U.K. and international fund management industries created an exciting buzz ahead of the industry’s premier night of recognizing excellence in fund management.

    The event was well followed on Twitter with many members of the audience sharing their views via the hashtag #LipperFundAwards.

    Chartered Accountant’s Hall in London proved a popular venue. Photo: Thomson Reuters.

    This year there was an emphasis on the history and importance of Lipper capabilities within the Thomson Reuters suite. A short video outlined the evolution of Lipper from its inception to the present day, enabling guests to better understand Lipper’s global reach within Thomson Reuters.

    ESG – a valuable tool for active fund groups

    Bob Jenkins discusses the importance of ESG investing. Photo: Thomson Reuters.

    Bob Jenkins – Lipper’s Global Head of Research, provided a keynote presentation discussing the importance of Environmental, Social and Governance (ESG) investing as a force for good in the world of funds management. He outlined how embedding ESG into their processes, active fund groups can further add value to investors in the face of increasing competition from passive funds.

    Great Ormond Street Hospital

    Great Ormond Street Hospital (GOSH) is at the forefront of medical care for ill children. Every day, 260 children arrive, doctors battle the most complex illnesses, and the brightest minds come together to achieve pioneering medical breakthroughs.

    Thomson Reuters is proud to support Great Ormond Street Hospital. Photo: Thomson Reuters.

    Thomson Reuters is a proud supporter of GOSH and this extraordinary hospital has always depended on charitable support to give seriously ill children.

    Audience members at this year’s U.K. Lipper Fund Awards provided generous support for GOSH throughout the evening which will be well utilised by this worthy cause.

    The “opportunity cost” of passive

    Jake Moeller, Head of Lipper U.K. and Ireland Research, and emcee for the evening, provided insight into the active funds industry; he put forward passionate advocacy for the active fund industry citing the opportunity cost investors can potentially suffer by eschewing an active strategy using performance data from Lipper for Investment Management.

    Lipper’s Jake Moeller discusses the potential costs of ignoring active funds. Photo: Giles Kidd-May, Crux AM.

    He also examined some of the popular misconceptions in the industry such as “closet tracking” which he revealed may not be as common as is often referred to in the market.

    The Lipper Fund Awards methodology

    Lipper Fund Awards are based on the Lipper Leader ratings for Consistent Return. The awards are calculated using a utility function based on the effective return over multiple non-overlapping periods: three-, five-, and ten-year horizons. The calculations over multiple periods ensure that all periods in which a fund underperforms the average of its peer group are identified.

    In addition, Lipper uses a utility function based on behavioural finance theory to penalize periods of underperformance, with more significant weightings given to excess negative returns. This methodology ensures that the winners of the Lipper Fund Awards are funds that have provided superior consistency and relative risk-adjusted returns compared to a group of similar funds.

    The winning mutual funds in the U.K.

    Twenty single funds from the largest peer groups by assets under management in the U.K. fund universe were honoured for the three-year category during the ceremony.

    UBS shone with two separate awards: UBS Global Emerging Markets Equity A Acc in the Equity Global Emerging Markets category and UBS (Lux) Eq S – Global High Dividend (USD) P-Acc in the Equity Global Income category.

    A full house enjoys the 2017 UK Lipper Fund Awards. Photo: Thomson Reuters.

    Marlborough was also well represented with MFM Techinvest Special Situations Fund winning the Equity UK SMIDs category and Marlborough European Multi-Cap winning in the Equity Europe ex UK category.

    It was great to welcome regular visitor Prusik who once again collected the award in the Equity Asia Pacific Ex Japan category with Prusik Asian Equity Income 1 B USD. Courtiers made their second consecutive appearance at a Lipper Awards winning with Courtiers Total Return Growth Fund in the Mixed Asset GBP Flexible category.

    A full list of winners can be found here.

    The group awards

    For the group awards a large group must have at least five equity, five bond, and three mixed-asset portfolios, and a small group must have at least three equity, three bond, and three mixed-asset portfolios.

    Exhibit 1. Group award winners and commendations

    Source: Thomson Reuters Lipper

    It is great to see a number of names who are making a habit of regular visits to the the Lipper podium: T. Rowe Price, Courtiers, Nordea, Jyske Invest and Fidelity have all been winners in recent years and are continuing to set a high standard for others in the industry.

    Thomson Reuters Lipper takes this opportunity to congratulate all the individual sector and group award winners. A full photo gallery of the event is available here and we look forward to seeing you all again for another huge night in 2018.


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    The S&P Dow Jones SPIVA Scorecards are out again. Bunker down the active fund groups, and brace yourselves for the rush of opprobrium you will undoubtedly endure. Be ready for the impending broadside fired by the anti-active brigade targeting your failed objectives and unjustified fee structures.

    Active groups turn the other cheek

    Indeed, the narrative in financial and social media since the scorecard came out has been unsurprisingly negative. Yet what will we hear from those who are most heinously indicted in this report? Not much, I suspect. There appears to be little appetite for active fund groups to advocate any collective discourse about the potential benefits they offer end investors.

    I’ve never really understood this reticence to roll up their sleeves. Perhaps it is diplomacy, perception of collusion, fear of a bout of unfavourable markets, etc. The result, however, is that active fund proponents are increasingly portrayed as mere creatures of faith who in the face of “compelling” evidence waste their hard-earned fee budget on a discredited belief system.

    Passive fund flows a larger slice of pie

    When you consider European fund flows for 2016, it is clear investors are voting with their feet. According to Thomson Reuters Lipper data, 45% of net flows into mutual funds were into passive vehicles. For 2015 this was 19% and for 2014 only 8%. Thus when Franklin Templeton or Fidelity announce—as they have—a move into the exchange-traded fund market, it is potentially misconstrued as an ignominious retreat for active rather than the prudent business diversifier it simply is.

    Exhibit 1. Estimated net flows into European mutual fund market (€ billion)

    Source: Thomson Reuters Lipper.

    Passive funds can mean lost opportunities 

    The “opportunity cost” of passive investing should be a material consideration for all investors. For example, the best performing active fund over five years to the end of 2016 in the Lipper UK Equity classification outperformed the highest ranked broad-based tracker over the same period by over 110%. That’s considerable outperformance sacrificed to save 50 basis points in costs.

    Exhibit 2. The best performing UK equity fund v the best performing broad based tracker in same sector (in GBP) over various time periods

    Source: Thomson Reuters Lipper, Lipper for Investment Management.

    Persistent outperformance is there to be found 

    Choosing that winning active fund was clearly a good move in retrospect, but how do you identify a winner in advance? Rudimentary evidence of persistency can be readily found. Nearly 70% of UK Lipper Fund Award winners over three years for 2014 remained in the first or second quartile of their categories at the end of 2016 for the same period. In the UK Equity classification 62% of funds that had first- or second-quartile one-year performance at the end of 2011 were still there five years later.

    Passive industry not to blame for anti-active sentiment

    Today, I am considerably more circumspect about the active/passive debate. I’ve seen this late-cycle rush into market-capitalised indices before and know that the tide will turn. Commensurately, I’ve learnt more about the benefits the passive industry provides all investors and commend its innovation. The passive industry itself is not responsible for the pejorative tone that often pervades the debate.

    The musings of the proselytising “true believer” are worth little. Active fund groups need to be more willing to provide substantive counterpoints to studies such as the SPIVA scorecards. Then we’d have a much more constructive, balanced, and—for all investors—considerably more valuable narrative to relay.


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    Usually designed to a high specification, fund group foyers often have on tasteful display the crystal fund awards the fund managers have collected over their years of operation. In addition to their sparkling aesthetic, these quiet sentinels stand as evidence of a fund group’s ability to add value to investors.

    Fund awards recognise consistent outperformance

    A considerable number of media organisations and data providers (including Thomson Reuters Lipper) host an annual fund awards event, and there are plenty of opportunities for a fund house to pick up these sought-after gongs. Categories and methodology behind the various awards differ, but past performance is usually a major consideration; a fund with a period of relative outperformance of its peers will often find itself as a contender.

    What do awards mean to end investors?

    It’s worth considering how important these awards are to the investors of winning funds and what they tell us, if anything, about the potential fortunes of the fund in the future. Certainly, fund awards are meaningful to fund groups themselves. Many individual fund managers proudly collect their trophy on the night, and groups subsequently promote their victory in marketing materials. Whether fund awards generically are of any use in assessing the enduring quality of an investment is more open to speculation.

    Award winners and pedigree

    In addition to other layers of due diligence, fund awards certainly offer an insight into the ability of a fund manager to add value to an investor. In the U.K., there are a number of generators of excellence over the years who are regularly picking up awards; Prusik Asian Equity Income, Henderson Preference & Bond, Russell Investments UK Long Dated Gilt, and Techinvest Special Situations are funds that spring readily to mind.

    A considerable number of fund groups such as Fidelity, Kames, Columbia Threadneedle, and Schroders have consistently had the same fund appear as a candidate or winner over multiple discrete years.

    Is there evidence of persistency?

    It is evidence of this persistency of performance that is the value of a fund award. Nearly 70% of U.K. Lipper Fund Awards winners over three years for 2014 remained in the first or second quartile of their categories for the same period at the end of 2016.

    Similarly, of the 2013 winners of the popular Investment Week Fund Manager of the Year Awards, which has a qualitative overlay (the Lipper Awards are based solely on a quantitative process), 71% of them were in the first or second quartile of their categories for three-year performance at the end of 2016.

    Fund awards advantageous in a competitive market

    It is unlikely any serious fund gatekeeper would confess to using a fund award as a metric for selection processes, but I maintain there are worse ways of assessing a potential investment in isolation. Past performance is an important component of fund assessment and is effectively encapsulated in a fund award. To otherwise uninformed investors, a fund award can be a proxy for at least some rudimentary performance analysis.

    The worth of fund awards for active funds is further being inflated by the growth and sustained popularity of Exchange Traded Funds and other passive investments. For 2016, 24% of estimated net flows into pan-European-based mutual funds were into passive vehicles. For 2015, this was 32%. Compare this for example to 2004 when passive investments only constituted 7% of total net flows.

    In a highly competitive fund market experiencing unprecedented consolidation, those glittering, silent sentinels standing proudly on display in fund group foyers may become increasingly valuable indeed.


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    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    The first quarter of 2017 was a very good one overall for the pan-European funds market. Thomson Reuters Lipper data reveals nearly €170 billion of estimated net sales for the period for active, tracker and exchange traded funds (ETFs) combined.

    This is 70% of total net sales for the whole of 2016 and suggests that in the absence of any market catastrophe, the industry could be on target for a record year of sales.

    Exhibit 1. Pan European Mutual Fund Estimated Net Flows

    Source: Thomson Reuters Lipper

    Source: Thomson Reuters Lipper

    The first quarter of 2017 also revealed that investors’ affection for passive investments remains strong with total estimated net sales for passive vehicles constituting 20% of all sales. Indeed, more recently in April 2017, six of the top ten best-selling funds were passive funds.

    Passive funds and share registries

    The popularity of passive investments can also be seen in the share registries of large cap companies around the globe.  Looking at the most recent fund shareholders report for the FTSE 100’s largest constituent – HSBC Plc, only four of the top 20 fund holders of the stock are traditional active fund managers with the other fund holders consisting of trackers/ ETFs (13 holders) or large pension funds ( 3 holders).

    A similar picture is revealed for the U.S. market. For the S&P 500’s largest stock – Apple, tracker funds/ ETFs constitute 13 out of the top 20 fund holdings with 5 individual Vanguard trackers amongst those.

    Exhibit 2. Fund Ownership Summary of HSBC

    Source: Thomson Reuters Lipper

    Source: Thomson Reuters Eikon

    In Europe, the FTSE Europe ex UK’s largest stock Nestlé, also has concentrated fund holdings in passive vehicles but less so than the markets above. 12 of the top 20 largest holdings are either passive/ ETF or large pension funds.

    It takes a professional stock analyst to say whether or not Apple at a PE of 18, Nestlé at 30 or HSBC at 320 represent good value for money or not but even for these highly liquid stocks, given the ongoing growth in passive investing, at some point, there is going to be a surfeit of investors buying large cap stocks at any price. These may not possibly be the most prudent purchases as we enter the later stages of the economic cycle.

    How to avoid the passive herd?

    Active funds are a solution for those who are in anyway concerned about market herding and certainly one that I would strongly advocate. However, even for the most diehard passive investors there are an increasing range of solutions. The rise of “smart beta”, factor and multi-factor investing has really taken hold in Europe. At the end of 2011, there were 27 factor-based ETFs with a comparatively paltry €248 million of assets under management. At the end of April 2017, there are over 260 smart beta products containing some €1.7 billion of assets.

    The concept of “diversifying” beta exposure has been a staple of institutional investors for many years. Given the rising tide of asset flows and the increasing share of this into passive products, this should be something that retail passive investors become familiar with lest like lemmings they run over the market cap weighted cliff.


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    The “wisdom of the crowd” might for some be a reassuring phenomenon that can be readily applied to mutual fund investing. There is some sense to this; most investors are not fund experts, so a large and popular fund (in the absence of any other information about it) has probably had its tyres kicked enough times to act as some type of warranty.

    Why do investors flock to the same funds?

    There are many reasons for a fund or a fund house to be popular. Brand recognition, the effectiveness of its sales team, and its fund range are key as is availability on platforms and, unsurprisingly, historical performance. However, it is also true that many approved lists and guided architecture platforms have a very similar feel about them. Clearly, there are a number of the same funds that are appealing for a large number of gatekeepers—so those “tyres” have probably been diligently researched.

    Exhibit 1. The Concentration of the U.K. Mutual Funds Market

    Source: Thomson Reuters Lipper. Lipper for Investment Management.

    Source: Thomson Reuters Lipper. Lipper for Investment Management.

    For better or worse and likely for some of the reasons above, there is a high degree of investor concentration across funds in the U.K. Because of the vagaries of fund passports and domiciles, it is difficult to summarise regional fund markets precisely, but Thomson Reuters Lipper data suggest the U.K. fund “market” consists of some 3,800 funds (if you include closed funds with remaining assets), containing around £1.2 trillion of assets (as of April 30, 2017).

    Considering these aggregated totals, concentration is clearly revealed. The largest 30 funds contain a fifth of the U.K.’s assets under management. Ranking all of these funds by April 2017 assets under management, 50% of the total U.K. asset base comprises only around 170 funds.

    How have popular mutual funds performed?

    The debate on the merits or otherwise of “blockbuster” funds is fodder for another article, but it is undeniable that the likes of SLI Gars, M&G Optimal Income, Invesco Perpetual High Income, Newton Real Return, and Woodford Equity Income have become names familiar to anybody in financial services.

    We can take a snapshot of how the more popular funds are performing by considering the monthly rolling one-year performance deciles over five years (to month-end May 2017) and take the average of these to “score” each fund (1 is an excellent first decile average , 10 is a poor tenth decile average).

    Of the 30 top funds by AUM in the U.K., 5 don’t have the requisite performance to score (although what data they do have scores them reasonably well), 7 are index funds (none of which scores above 5), and only 3 of those funds remaining score 4 or higher. This suggests that the recent performance of the most popular funds in the U.K. currently may not justify their investor commitment.

    Safety in numbers? Not always

    Such analysis has considerable limitations (individual investor experience differs according to entry point), but it certainly supports the more rigorous studies of fund size, which suggests that—for mutual funds at least—the gems may not always lie where the crowds are headed.


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    The third annual Thomson Reuters Lipper – European Fund Selectors Forum was held at the Thomson Reuters Auditorium, Canary Wharf on July 11, 2017.

    Mutual fund research and selection is a crucial component of the investment and financial planning value chain. It is also a field increasingly under scrutiny by regulators, the press, and investors themselves.

    George Littlejohn. Director at CISI welcomes members.

    George Littlejohn – Director at CISI, welcomes members. Photo: Thomson Reuters.

    In this environment, Lipper was again pleased to host a highly relevant forum that considered the challenges faced by the fund selection industry in 2017 and beyond. We were again proud to collaborate with the Chartered Institute of Securities and Investment (CISI).

    An audience of around 140-drawn from private wealth, IFAs, mutual fund managers, fund gatekeepers, platform providers, investors and journalists participated in an informative and entertaining three-hour session of panels and presentations bringing together some of the industry’s most respected fund-selection practitioners in the U.K.

    Presentation 1: fund flow-patterns in Europe

    Lipper’s Head of EMEA Research, Detlef Glow, outlined current investor appetite by examining trends in pan-European fund flows. He revealed that the mutual fund market in general is in, good health with a milestone of over €10 trillion of total assets under management in Europe being reached in Q1 2017. He also noted that 2017 is on track to be a bumper year for European net sales, with the figure to the end of May 2017 of some €300 billion already surpassing the entire amount for 2016.

    Head of Lipper EMEA Research, Detlef Glow outlines European Fund AUM

    Head of Lipper EMEA Research, Detlef Glow outlines European Fund AUM. Photo: Thomson Reuters.

    General trend towards risk aversion

    Mr. Glow revealed an ongoing trend of risk aversion among European investors, with the most popular asset classes in 2017 being bond and money market funds, which have had nearly €200 billion of net inflows for the year to date. U.S.equities funds, with net outflows of over €5 billion, has fared most poorly to the end of May 2017.

    Passive investments remain popular in Europe

    ETFs and tracker funds which now constitute a total of 12% of the entire pan-European funds asset base, have continued to see strong net inflows of nearly 20% of the total fund flows year to date.  That is double the ten-year average of annual total passive flows.

    Fund concentration in U.K. is marked

    Jake Moeller, Head of Lipper U.K. and Ireland Research, also highlighted the fund concentration in the U.K.; the £1.2 trillion fund market, despite consisting of some 3,800 mutual funds, holds nearly 50% of its assets in only around 170 funds.

    Panel 1: The “Art and Science” of fund selection

    Jake Moeller presided over the first panel session, with panellists Victoria Hasler from Square Mile ResearchMona Shah from Rathbones, and Dr Nisha Long from Citywire.

    Consistency a major criterion for fund selectors

    Dr. Long emphasised the importance of consistent medium-term risk-adjusted performance, but she emphasised that it is important to monitor this on a rolling monthly basis to seek aberrations. Ms. Hasler referred to “confidence of outcome,” where Square Mile seeks to select fund managers who consistently stick to their defined style. Ms.Shah similarly showed a preference for consistent style bias, pointing out that “underperformance doesn’t always reflect lack of skill”, and referring also to strength in governance and resourcing.

    <em>The Art &amp; Science of Fund Selection (L-R) Jake Moeller, Dr Nisha Long, Mona Shah and Victoria Hasler</em>

    The Art & Science of Fund Selection (L-R) Jake Moeller, Dr Nisha Long, Mona Shah and Victoria Hasler. Photo: Thomson Reuters.

    Fund concentration mitigated by boutiques

    On fund concentration in the U.K., the panel recognised that it is not unusual for approved or buy lists to have commonality. Dr. Long believes that large funds must be judged on their ability to add alpha rather than on popularity alone.

    Ms Hasler emphasised the opportunities that exist in the boutique fund space to differentiate, while Ms. Shah also pointed out that many good fund managers may be off radar in standard screening processes.

    Closet trackers may not be a major concern

    Closet trackers and ETFs were discussed in some detail. All panellists recognised that growth in passive investing will keep active fund managers “on their toes.”  Ms. Shah believes that the popularity of passive investing will weed out “closet trackers” who will not be able to hide as fee transparency increases. She also reminded investors of the importance of understanding complex ETF activities such as securities lending. Ms. Hasler pointed out the importance of large scale for ETFs in contrast to active funds.

    Panel 2: portfolio construction and the macro environment

    Founding editor of Investment Week, Lawrence Gosling moderated Peter Elston, Chief Investment Officer of Seneca Investment Management; James Klempster, Investment Director of Momentum; and David Coombs , Investment Manager at Rathbones.

    Avoiding the herd is a popular strategy

    On portfolio construction, Mr. Coombs observed that key to risk control is to constantly trying to anticipate “what can go wrong” and to avoid herd consensus by not absorbing too many “expert” opinions. Mr. Klempster highlighted the importance of outcome-based investing but similarly stressed avoiding “a weighted average of consensus.” Mr. Elston highlighted Seneca’s preference to seek fund opportunities in global equities while avoiding exposure to emerging markets.

    Portfolio Construction (L-R): Lawrence Gosling, David Coombs, James Klempster, Peter Eslton

    Portfolio Construction (L-R): Lawrence Gosling, David Coombs, James Klempster, Peter Eslton. Photo: Thomson Reuters.

    Risk and liquidity need to be carefully considered

    Some areas of contention arose for this interesting panel around the examination of income, liquidity, and the price of risk, with all three panellists referring to lessons learned from the global financial crisis. Mr Coombs stated that income-generating assets not correctly priced off gilts could lead to false conclusions about liquidity.

    Insurance may be prudent

    Mr. Klempster also referred to a potentially complacent market (measured by a low VIX), the need for puts, and concerns of “lobster pot” investments.

    Mr. Elston, citing current bond yields, pointed out that assets with low volatility still carry a risk of loss and that he prefers seeking yield from REITs and alternative sectors such as infrastructure.

    Panel 3: future trends in fund selection

    Mr. Gosling also moderated the final panel, which examin future trends in fund selection, with Albert Reiter- founder and CEO of e-fundresearch.com Data GmbH and investRFP.com; Rob Sanders, co-founder, DOOR Ventures; and Andrew MacFarlane, Investment Director, FUNDHOUSE.

    Technology is a facilitator rather than pure disrupter

    The view of this panel was that—far from being made redundant—the future of the fund selection industry is assured but with changes as to how it is conducted. Mr. Reiter argued that standardisation of the inputs into decision making processes is key. Efficiency and time savings made by standard approaches to fund research methodology will allow fund selectors more time to make improved qualitative decisions.

    Future Trends in Fund Selection: (L-R) Albert Reiter, Andrew MacFarlane, Lawrence Gosling, Rob Sanders. Photo: Thomson Reuters.

    Fund ratings can have a different model

    Andrew MacFarlane outlined how FUNDHOUSE is disrupting the traditional fund-rating model with a unique approach to fees and how moving away from a “pay to play” model increases the perceived objectivity of fund ratings generally.

    Fund managers also benefit from new systems

    Mr. Sanders confirmed that DOOR is not seeking to be disruptive to the fund selection industry, rather to create a more efficient market for time-consuming due-diligence and research documentation. He outlined that fund groups as well as fund selectors were being swamped with time-consuming and non-standard requests for information and that groups such as DOOR will be key to providing better quality and more consistent information to the markets.

    An audience engaged

    Audience participation at the third annual Fund Selectors Forum was exceptionally high, with some particularly passionate points of view being raised throughout the event. At the start of the Forum audience members were encouraged to engage this event via social media, and #LipperFSF17 garnered considerable commentary.

    Audience participation was live and via a Twitter Feed.

    The Forum was also attended by a number of trade journalists and some of the output can be found here.

    The issues raised in this year’s Fund Selectors Forum will no doubt continue to be discussed. Since 2017 looks to be a material year for fund selectors from both a regulatory and market perspective, Thomson Reuters Lipper and the CISI have demonstrated the importance of facilitating such crucial debates.

    We look forward to welcoming you again next year.

     


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    Is the fund research and selection industry–as many of the commentariat would have you believe–in a state of existential crisis? The beam of light that initially illuminated the U.K. financial services value-chain under RDR reforms has focused more intensely, with recent high-profile regulatory initiatives, on the role of fund selectors.

    I contend that the future of fund selection is assured and as important as ever. Far from being threatened by robo-advice, passive funds, or regulatory scrutiny, fund selectors today are well placed to secure themselves as valued “cleaners” of the increasingly dynamic Augean fund stable.

    A buoyant funds industry is supportive

    We should consider the funds industry more widely. Far from being in a state of atrophy, the pan-European funds market is in robust health. Thomson Reuters Lipper Q2 data reveal that assets under management in Europe stood at €10 trillion at the end of June 2017.

    Exhibit 1. AUM growth of Pan-European Funds Market by Product Type (€ Million)

    Source: Thomson Reuters Lipper

    Source: Thomson Reuters Lipper

    The U.K. alone had over a tenth of those assets. Pan-European fund inflows over the year-to-date period totalled €363 billion. There were some 12,000 cross-border funds a U.K. investor could potentially access. Who wouldn’t need help sorting out the wheat from all that chaff?

    Who will police “closet trackers” and other scandals?

    I do not share the somewhat sceptical views of many active fund critics. Despite what many see as a relapse to old ways in the form of “closet tracking,” I believe most fund manager groups genuinely hold their clients’ best interests at heart. Furthermore, which fund managers really believe they can pull the wool over the eyes of any halfway decent fund selector on active share and tracking error?

    The rise of passives equals opportunity, not threat.

    The rise of passive funds and ETFs is also seen by most fund researchers as an opportunity rather than a threat. Assets held by the European ETF industry stood at €578 billion at the end of June 2017, up 12% from the end of 2016.

    Exhibit 2. Pan-European Estimated Net Flows by Product Category (€ Million)

    Selection

    Source: Thomson Reuters Lipper

    Far from being a set-and-forget investment, there is much to consider in regard to ETFs. Scalability, securities lending policies, tracking error, cost and in an increasingly saturated market, corporate takeovers, are all complex moving parts of an investment many mistakenly see as simple and transparent.

    The response of fund selectors is proactive

    At the recent annual Lipper European Fund Selectors’ Forum in London, I was pleased to witness the response of some of the industry’s most high-profile fund selectors to current challenges: Technology is not disruptive; it allows more time for deeper qualitative research. Regulation is welcome and, to the extent that fund selection isn’t a homogeneous industry, poses more difficulty for regulators themselves. An increasing passive market requires the attention of fund selectors to reveal its particular vagaries. Fund selectors are now prepared to provide evidence of the value they add to their unique client bases.

    For end investors, the critical layer of additional due-diligence fund selectors provide should be apparent. However, just as a repentant gambler who never quite shakes off the ignominy of past misdeeds, the mutual funds industry too is a major beneficiary of their ongoing vigilance.


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    The ten-year anniversary of the start of the Global Financial Crisis (GFC) has passed with less fanfare than one might expect. That is understandable; to this very day we are feeling the repercussions of that tumultuous event. For those of us caught up in that storm the anniversary evokes mainly unpleasant memories.

    Bond funds were hit hard in 2008…

    As we deal with ongoing central bank distortion and “lower for longer” interest rates, direct results of the GFC, it’s worth reflecting on the impact it had—and continues to have—on bond funds in the U.K. and Europe.

    To contextualise this, we can examine historical fund flows. According to Thomson Reuters Lipper data, pan-European bond funds had haemorrhaged €500 billion by the end of 2008. It wasn’t until the end of 2013 that those outflows were recouped.

    But have rebounded strongly

    Talk of a “bond bubble” has been floating around for the last few years as the credit cycle has been fuelled by low debt-funding rates and insatiable investor appetite for income. Indeed, bond funds have been pan-Europe’s top-selling asset class for three of the last five years. Year-to-date as of June 30, 2017, net inflows of €161 billion suggest that in the absence of any major market shock, we could see the best year for the asset class in the ten years since the GFC.

    Exhibit 1. Pan-European Mutual Fund Flows by Asset Class 2004-1H 2017 (in Euro)

    Thomson Reuters Lipper

    Source: Thomson Reuters Lipper.

    Should investors be concerned? The Lipper Global Bond GBP Corporate sector has returned a healthy 65% for the period from the start of 2007 to the end of 1H2017 (U.K. equities were up 83% and cash was up 25% by comparison). Recent returns are still buoyant (+2.6% for 1H2017), and there is little sense of impending doom by bond fund managers–although most recognise the easy-beta play has long sailed.

    Bond managers have learnt crucial lessons from the GFC

    Before the GFC the rules of risk premia for assets above cash were inviolate. That confidence ended after 2008 when even many investment-grade bonds couldn’t be marked to market. Since then, the industry has paid a lot more attention to the vagaries of the bond market and how they affect bond funds.

    Bond fund managers have learnt a lot of lessons; a better understanding of credit ratings and the importance of covenants in high-yield and loans are examples. Similarly, managers have not succumbed to the siren call of increasing credit risk to boost yield– in the flexible IA UK Strategic Bond sector the average BBB-rated exposure in 2007 was only 13.2%; today it is 26.6%. Fund gatekeepers and selectors too are much more diligent about fixed income fund composition, and there is considerably more forensic analysis of bond funds than there was in 2006.

    Due-diligence on bond funds improved but beware passive money

    Such improved analysis and learnt lessons augur well. Bond funds may remain in calm waters for a while longer, but there is certainly a sea change coming for rates and central bank activity. Another cloud is passive money. Flows into pan-European bond ETFs are growing considerably; for 1H2017 they constituted 10% of all bond fund flows.

    10 years on from the GFC, it is arguably a happy anniversary for a recovered and robust bond-fund market. However, in current conditions, I for one would prefer an active fund captain in charge of the bond ship.


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    Our financial services industry is to be commended for its ability to evolve and adapt. It is dynamic, innovative, and even exciting. Ongoing regulatory initiatives after the Global Financial Crisis have greatly improved the investment product-delivery chain, the quality of investor advice and product understanding has risen considerably and with an increasingly complex dynamic, fund managers are rising to the demands of transparency.

    Do retail clients need institutional-type products?

    I often wonder, though, if we are beginning to over-egg the pudding. Recently, I attended a fund-buyer conference where a fund on display was so complex that I was relieved to discover its structure and process had confounded not only me but a considerable number of the delegates.

    Complexity in mutual funds isn’t new, but with the commensurate rise in intermediary understanding the seepage of funds primarily designed for the institutional domain into the retail space is common. Investors are seemingly becoming an army of asset-liability matchers and “life-stylers.” As a result product objectives are often deliberately vague, and industry and data classification schemes are battling to maintain meaningful like-for-like peer comparisons.

    Products in “plain-vanilla” classifications are decreasing

    Thomson Reuters Lipper data reveal that of the non-institutional funds launched in the U.K. so far in 2017, 8% are in Lipper’s Alternatives classifications. This figure was only 3% for 2012. Similarly, fund launches into the Mixed-Asset GBP Balanced classification have fallen from 10% to 5% over the same period. There have also been other patterns developing, such as the rise of funds within flexible, specialist, and unclassified sectors at the expense of funds classified in traditional “plain-vanilla” peer groups.

    It is perhaps in the recent popularity of absolute-return vehicles that we see the largest array of complexity and diversity. Within the Investment Association’s broad TAR classification for example there are products from 19 different Lipper classifications drawn from currency funds, alternative equity market-neutral funds, and global macro-type funds, to name a few.

    There are certain influences that demand more complex solutions, and the imminent retirement boom may be one of those. However, investors have always been retiring at some point. It’s not as if the retirement “glide path” is a new concept that cannot be accommodated with relatively simply designed products.

    Does additional fund complexity bring better performance outcomes?

    There is no guarantee that additional complexity brings favourable outperformance and volatility outcomes. For 2016 the average return on IA TAR funds was 1.9%, with a standard deviation of 0.5. Lipper’s Mixed-Asset Conservative GBP funds, by comparison, returned 8.6% with a standard deviation of 1.2. You try working out what is the optimal risk/ return trade off for that example. One thing is certain, additional complexity can potentially lead to an investor’s misunderstanding of what a product is trying to achieve.

    Where additional flexibility gives a fund manager a better set of tools to generate returns, we have beneficial evolution. Where additional complexity for its own sake becomes a marketing gimmick or an attempt to dazzle fund selectors or investors, it’s probably over-egging the pudding.


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    The twelfth annual Thomson Reuters Lipper Alpha Expert Forum was held in London on November 7, 2017 and maintained its reputation as one of the European mutual fund industry’s premier thought-leadership events.

    We welcomed some of the preeminent fund industry executives in Europe to share their views on key developments and challenges facing the industry today.

    Once again we partnered with the Chartered Institute of Securities and Investment–the leading professional investment body in the U.K.–as our co-hosts, and a full house in the Thomson Reuters Auditorium ensured a lively debate.

    The evolution of ethical investing to ESG and beyond

    The morning’s first panel session was moderated by Investment Week’s founding editor, Lawrence Gosling, who welcomed Andrew Parry–Head of Sustainable Investing, Hermes Investment Management; Chris Welsford–IFA and Managing Director of Ayres Punchard Investment Management Limited; and Trevor Allen–Product Manager, Risk and Performance Division, BNP Paribas.

    [L-R] Lawrence Gosling, Trevor Allen, Chris Welsford, Andrew Parry

    [L-R] Lawrence Gosling, Trevor Allen, Chris Welsford, Andrew Parry. Photo Thomson Reuters.

    The panel discussed the increasing influence of environmental, social and governance (ESG) criteria into mainstream investing, with Mr. Parry noting that poor governance is not only an investor threat, but could “come back to bite companies.”

    Mr Allen noted that shareholder rights are an increasingly key component for ESG outcomes while Mr. Welsford warned that shareholder engagement may not always be based on ESG criteria and maintained the importance of considering ethics independently of broader ESG inputs. Litigation, too, was mentioned as a potential means of engagement.

    The panel noted that ESG can no longer simply be used as a marketing tool. Investors and fund selectors are increasingly prepared to hold fund managers to account on actionable ESG outcomes recognising that ESG screens consistently improve performance outcomes.

    The European flows environment

    Detlef Glow, Head of Lipper EMEA Research, outlined key patterns of flows into mutual funds in 2017. He noted that European fund net flows of over €600 billion to the end of Q3 2017 were on track to set a new annual record, with total assets under management in Europe passing the €10-trillion mark for the first time.

    Detlef Glow outlines European Fund Flows

    Detlef Glow outlines European Fund Flows. Photo Jake Moeller.

    Mr Glow noted the popularity of global equity funds which have collected over €60 billion of net inflows, reflecting investor appetite for regional diversification. He also noted that flows and AUM are both dominated by active funds, despite the perception the market is more disposed to cheaper passive products. Approximately 14% of total net flows for Q3 were into passive vehicles.

    It was also noted that the UK remained the major individual fund market in the Europe with 20% of total assets. This was despite potential Brexit headwinds and the popularity of other fund domiciles.

    The passive ascendancy; the rise of rules

    Detlef Glow also moderated a panel session with Gregg Guerin–Senior Product Specialist, First Trust Global Portfolios; Hector McNeil–co-CEO and founder, HANetf; and Jason Xavier–Head of EMEA capital markets, Franklin Templeton ETFs.

    The panel examined how rules-based and smart beta products are augmenting traditional passive offerings and allowing investors to move away from market-capitalised indices. It was agreed that this is particularly valuable in a late-cycle environment.

    [L-R] Jake Moeller, Detlef Glow, Gregg Guerin, Hector McNeil, Jason Xavier. Photo Thomson Reuters.

    Mr. McNeil encouraged the audience to reevaluate their perceptions of ETFs, arguing they should be considered a piece of technology rather than an asset class. Mr. Guerin highlighted how rules-based investments provided excellent diversification for investors, potentially providing them access to undervalued assets. Mr. Xavier pointed out how the European regulatory environment is influencing the market for ETFs, noting its potential to increase retail demand.

    Some of the panellists were dismissive of the argument that some sectors (e.g., emerging markets) are more fruitful than ETFs for active managers. It was recognised that, increasingly, themes such as technology and ESG are the next innovations for the ETF market.

    2017 macro review and outlook for 2018

    The final session saw Jake Moeller, Head of Lipper U.K. and Ireland Research, moderate the popular macroeconomic outlook session with Keith Wade–Chief Economist, Schroders; Jason Day–Senior Investment Manager, Standard Life Wealth; and Patrick Armstrong–CIO, Plurimi Investment Management.

    [L-R] Jake Moeller, Keith Wade, Patrick Armstrong, Jason Day. Photo Thomson Reuters.

    [L-R] Jake Moeller, Keith Wade, Patrick Armstrong, Jason Day. Photo Thomson Reuters.

    Discussions of the increasing interest rate environment, central bank activity, and liquidity dominated the panel. Mr. Wade noted that, despite the global shift from quantitative easing (QE) to tightening (QT), there will still be sufficient liquidity to maintain bond yields at around 3%.

    Mr. Armstrong warned that investors should reduce return expectations in respect to higher equities valuations. On the assumption of nominal growth and earnings growth of 4.5% over the next seven and an average multiple of 16.5x in 2025, the S&P500 would produce a return of only 1.3% per annum, he stated.

    Mr. Day noted that returns on a balanced portfolio will be more difficult to maintain, and he observed the large dispersion between value and growth assets.

    The panel concluded that valuations across many asset classes are on the high side, but the members favoured risk assets over bonds. Both emerging-market debt and equities were popular. European and Japan equities were preferred over U.S. equities. Inflation, too, could now begin to stir as labour markets become tighter.

    Expert opinions matter

    All the sessions experienced a high level of audience engagement, with lively questions and debate contributing to the success of the event. The three hours of Continuing Professional Development credit allocated to the event by CISI were well earned.

    A live “Twitter Wall” proved popular during the event, with considerable activity posted via #LAEF17.

    Thomson Reuters Lipper is very proud to have assembled such accomplished panellists to this forum. Our considerable gratitude is extended for their generosity and thought leadership. It is vital to the industry that their experience and knowledge be shared.

    We look forward to welcoming you all back in 2018!


    Sign up for weekly updates on fund markets and investment opportunities here.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    How does one ascertain the health of the pan-European mutual fund industry? While I’m able to control lifestyle factors—such as levels of exercise and diet—that may affect my health, the mutual fund market is an amorphous body of assets and liabilities reflecting an incalculable collection of differing objectives. The lifestyle factors this industry faces include not only prevailing market conditions but the aggregated expectations of all its participants.

    Lifestyle factors have been a challenge

    Recently, there has been plenty of challenging lifestyle factors for our industry. One can go back to “Black Monday” in the summer of 2015 and the subsequent commodity price collapse. We have had the Brexit referendum and the Donald Trump presidential election, both providing further uncertainty. Underlying regulatory initiatives also have directly affected the European mutual fund industry. Consider fund managers’ touch points to MIFIDII, EMIR, Basel III, Solvency II, Shareholdings Disclosure, AIFMD, and Dodd Frank as well as ongoing ESMA and FCA pronouncements.

    Fund flows are a barometer of health

    Flows are for me a critical measure of the fund industry’s health. It is difficult to conclude that on this metric alone, the industry is not in anything but robust health. According to the most recent quarterly Thomson Reuters Lipper data, the first nine months of 2017 have set the stage for a new record year in the pan-European fund industry.

    Exhibit 1. Historical Assets Under Management of European Mutual Fund Market (to September 30, 2017 in € trillion)

    Review of the European Fund Industry, September 2017

    Source: Thomson Reuters Lipper.

    Assets under management in Europe stood at €10.2 trillion at the end of September, with the U.K. encompassing nearly 20% of that total. We have been making good progress against the U.S. market, which stands at some U$20 trillion. Additionally, the European fund industry has enjoyed record net inflows of €614.2 billion (with the U.K. representing around 9% of that) for 2017 so far, far above the previous watermark recorded (€386 billion for all of 2015). The number for the first nine months of 2017 is well above the long-term 12-month average of €166 billion.

    A good blend of asset growth is a healthy sign

    Investors too are showing a healthy regard for differing asset classes. Perhaps not as risk-averse as you may expect in light of the challenging lifestyle factors mentioned above, equities are still buoyant. This is reflected in the flows into Lipper fund classifications: Equity Global (+€51.3 billion) is the best selling sector for the year 2017 so far, followed by Bond Global (+€38.0 billion), Bond Global USD Hedged (+€33.9 billion), and Bond EUR Short Term (+€31.2 billion) as well as Bond Emerging Markets Global in Hard Currencies (+€27.5 billion).

    There has also been considerable product consolidation in Europe with respect to new fund launches. Some 1,400 funds have been launched in Europe and the U.K. for the year to date, a figure nearly 50 percentage points down from the launches for 2012. This undoubtedly reflects somewhat healthy competitive elements in the industry.

    In light of the very challenging lifestyle events Europe’s fund market is facing in 2017 and beyond, it strikes me that it in pretty good shape with a healthy outlook for the future.


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    The Gregorian calendar has one considerable fault: Each year December comes around much more quickly than expected! The upside, however, is that it provides financial market participants the opportunity to reflect, evaluate, and consider how they will respond to the challenges for the upcoming year.

    Compliance touch points are increasing

    According to Thomson Reuters Regulatory Data solutions, there were some 51,000 regulatory updates in 2015 globally. For U.K. and European fund managers there has been much to ponder in 2017, and 2018 will undoubtedly provide the same. Brexit looms large. MIFIDII, EMIR, Basel III, Solvency II, AIFMD, and Dodd Frank as well as ongoing ESMA and FCA pronouncements are forcing fund managers to look closely at their business models.

    Yet, as we move into 2018 the pan-European fund market is without doubt very buoyant. According to Thomson Reuters Lipper data, the industry passed €10 trillion of total AUM in 2017. Net flows of some €600 billion as of the end of Q3 represented the highest net flows total since 2004. Barring any unforeseen crises before Christmas, 2017 will be a bumper year indeed.

    Exhibit 1. European Mutual Fund Market – Net Fund Flows by Product Type to Q3 2017 (€bn) 

    Source: Thomson Reuters Lipper.

    Despite the rising tide, product dynamics have changed. From 2004 to 2014 passive funds and ETFs contributed on average 7% of the total annual sales of all funds in Europe. For 2015 this average jumped to 32%. For 2016 it was 24% and for 2017 (through Q3) it was around 14%. With its holistic offering BlackRock has, with AUM over €700 billion, twice the European asset base of its nearest rival (Amundi). Is it any surprise then that we have seen active fund groups such as Franklin Templeton and Fidelity launch ETFs in 2017?

    Fund consolidation will have to continue

    It is impossible to accurately predict how the markets will fare in 2018, but even with these healthy fund flows there must certainly be an impact on the number of funds available for sale to European and U.K. investors. According to Accelerando Associates, the US$16-trillion mutual funds market has some 9,500 mutual funds, with an average fund size of US$1.7 billion. Compare this with Europe where there are some 11,000 cross-border funds with an average fund size of only €260 million.

    This cannot be sustainable. Indeed, Lipper data show new fund launches in Europe (including the U.K.) for 2017 (through Q3) are down 49% from 2012. Unsurprisingly, fund concentration in Europe is considerable. The U.K. fund market, for example, contains nearly 40% of its total assets in only 100 funds. This pattern is similar throughout Europe and ostensibly doesn’t auger well for boutique funds unless they are able to garner the attention of increasingly influential fund buyers.

    Sales teams may restructure

    Fund houses too will face pressure to reduce their sales teams. Accelerando suggests that 80%-90% of fund house revenues are generated from 10%-20% of sales staff; there is the potential to see current sales teams decreased an average of 35% over the next three to five years.

    Even with a rising tide 2018 will undoubtedly be a year of consolidating fund ranges, more compact sales teams, and–I suspect–more rules-based product launches.

    A late-cycle rotation out of passives could be the joker in the pack–and perhaps a topic for December 2018.

     


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    Occasionally, the global mutual fund industry produces a fund manager whose name becomes familiar even to those outside its usual orbit. One of these doyens, Franklin Templeton’s emerging markets (EM) pioneer, Dr. Mark Mobius, is set to retire after an esteemed 30 year career.

    EM fund launches have been considerable

    To put the durability of Dr. Mobius into perspective – when we go back to the late 1980s, there were only ten funds in what is now the broad-based Thomson Reuters Lipper Global Emerging Market Equity Funds classification. Today, there are some 1,200 funds in this classification, and in 2017 alone, we saw over 70 new fund launches.

    The extent to which the broad EM church in equities has widened is reflected also by the growth in country and regional classifications: Asia, Europe, and Latin America all have their own separate EM classifications. Furthermore, there are 26 separate country fund classifications for countries from Morocco to Thailand, containing funds that could potentially contain a high proportion of EM shares.

    Exhibit 1. AUM of Lipper Global Emerging Market Equity Classification (in U$ bn)

    Source: Thomson Reuters Lipper.

    Lipper assets under management data go back to 2003. For  that year global EM equities funds contained around U$115 billion AUM. Today, that total is just over U$1 trillion, which represents an average annual AUM growth rate of some 25% a year.

    However, this has been anything but a neat compounding. In 2008 EM equity AUM contracted by 60%, and more recently, with the tapering of quantitative easing in 2015, some 20%.

    Exhibit 2. Comparative 30-year performance of Lipper Global Equity Classifications (in U$ to December 31, 2017)

    Source: Thomson Reuters Lipper

    Source: Thomson Reuters Lipper, Lipper for Investment Management.

    Performance and EM re-structuring

    For the 30 years ended December 31, 2017, EM equity compounded at 8.8% pa (in U.S. dollars) in contrast to global equity ex-U.S. (6.5% pa), but it still falls short of global equity U.S. (9.1% pa). This was largely due to the magnitude of the global financial crisis drawdown, which affected EM equities over U.S. equities by a magnitude of 2x.

    The evolution in EM equities isn’t just reflected in regional development and its infiltration into investor consciousness. As Dr. Mobius himself points out, the composition of EM markets has shifted dramatically over the last ten years. The proportion of “traditional” EM sectors such as energy and materials stocks have decreased materially with a commensurate increase in technology and consumer exposure.

    Liquidity risks & passive flows

    However, liquidity and volatility are key risks that, despite structural changes, remain. Gary Greenberg, manager of the U$3.4 billion Hermes Emerging Market Equities Fund, points out that of the 30,000 EM stocks he considers his investible universe, there are fewer than 3,000 of sufficient liquidity to include in a modest-sized EM equities portfolio.

    Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

    Compounding this issue further is the effect of passive vehicle concentration.  Approximately 33% of fund assets (at the end of 2017) in the Lipper Global EM Equities classification are held in passive vehicles. By comparison, the equivalent figure for all funds registered for sale in Europe is 18%. Any late-cycle rotation out of passive vehicles into active funds could certainly affect EM markets disproportionately.

    By way of example, the most recent Eikon Fund Share Holders Report for Tencent (the largest holding in the iShares MSCI Emerging Market ETF) reveals that of the ten largest fund share holders for this stock, eight are passive or low tracking-error vehicles.

    Exhibit 3. 5-Year Volatility of Lipper Global Equity Classifications (rolling quarterly in USD from 1991 to 2017)Source: Thomson Reuters Lipper

    Source: Thomson Reuters Lipper, Lipper for Investment Management.

    Volatility remains above other equities

    Despite the possible headwinds of increasing interest rates and an appreciation of the U.S. dollar, the EM story remains compelling for many investors. The contribution of EM countries to global GDP growth is material, and market valuations are relatively attractive.

    However, despite the myriad changes seen in EM during the time of Dr Mobius’s career, there hasn’t been a commensurate decrease in volatility of EM equities over that of other regions. The average of the five-year volatility in EM equities since 1987 (rolling quarterly in USD) is 46% higher than that of U.S. equities and 32% higher than that of global equities (ex-U.S.).

    It remain to be seen what progress is made on this front over the next 30 years.


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    The 28th annual U.K. Thomson Reuters Lipper Fund Awards event was held at the elegant Banking Hall on March 14, 2018. A full house of 200 participants from the U.K. and international fund management industries created an exciting buzz ahead of the industry’s premier night of recognizing excellence in fund management.

    The event was followed on Twitter with many members of the audience sharing their views via the hashtag #LipperFundAwards.

    A full house at the Banking Hall ensured a great atmosphere. Photo, Thomson Reuters.

    Setting the scene: 2017 – a good year for fund flows

    Jake Moeller, Head of Lipper UK & Ireland Research at Thomson Reuters was the emcee for the evening. He set the scene with a keynote presentation revealing that even in the light of considerable regulatory initiatives, the Pan-European mutual funds industry was in robust health.

    In 2017 the industry had passed the €1 trillion of assets under management with record net inflows of nearly €800 billion.

    Jake Moeller highlights a Pan-European fund flow record and regulatory challenges. Photo, Thomson Reuters.

    Jake also noted that only 12% of total Pan-European AUM was in passive vehicles and that the long-term average of net flows into passive vehicles since 2004 was around 10%. Despite a high of nearly 30% of flows in 2015 being in passive vehicles, this figure in 2017 had fallen back toward the long-term average.

    He also examined the concentration of funds in the UK market noting that the top 100 funds contained 40% of assets in this market. He highlighted that none of the evening’s single-asset class winners were in these top 100 funds by AUM. He also highlighted the potential opportunity for active fund managers in a late cycle environment. Using the Eikon Fund Share Holdings report, he showed that for the largest 20 fund shareholders of HSBC, 15 were passive vehicles.

    Guest Speaker – Matt Dawson

    In an entertaining speech, former England rugby captain, scrum-half and key member of the winning 2003 World Cup team, Matt Dawson spoke on leadership, teamwork and how he has adapted the lessons of his sporting career into other fields.

    Former England Rugby captain, Matt Dawson. Photo, Thomson Reuters.

    Matt also outlined the important work of Great Ormond Street Hospital – the represented charity for the evening.

    What does it takes to win?

    In an onstage chat with Jake Moeller, Doug Sieg, the imminent CEO of Lord, Abbett & Co (the winner of the Bond Small Group Award), outlined some of the key factors contributing to its Award success.

    Lord, Abbett & Co’s Doug Sieg, on stage. Photo, Thomson Reuters.

    Doug discussed the attraction of the Pan-European fund market to U.S.-based firms and recognised that attracting and retaining talented staff was a key component for competing against more established European names. He also emphasised the importance of long-term thinking in order to be successful in this competitive market.

    Lipper Fund Awards methodology

    Lipper Fund Awards are based on the Lipper Leader ratings for Consistent Return. The awards are calculated using a utility function based on the effective return over multiple non-overlapping periods: three-, five-, and ten-year horizons. The calculations over multiple periods ensure that all periods in which a fund underperforms the average of its peer group are identified.

    In addition, Lipper uses a utility function based on behavioural finance theory to penalize periods of underperformance, with more significant weightings given to excess negative returns. This methodology ensures that the winners of the Lipper Fund Awards are funds that have provided superior consistency and relative risk-adjusted returns compared to a group of similar funds.

    The winning mutual funds in the U.K.

    Twenty single funds from the largest peer groups by assets under management in the U.K. fund universe were honoured for the three-year category during the ceremony.

    Marlborough Fund Managers was well represented this year collecting the Equity Europe ex UK category winner with Marlborough European Multi-Cap A Inc. It also collected the gong for the Equity UK category with its third party MFM Bowland fund.

    The team from Yuki Funds flew in from Japan to collect its first UK Lipper Fund Award.

    First time winners in the UK this year included Yuki Funds which collected the Japan category for Yuki Japan Rebounding Growth and EFG which collected the Bond Global category with New Capital Wealthy Nations Bd USD Ord Acc.

    The popular Equity UK Income category was collected by TB Evenlode Income B and Sielern made another appearance this year winning the Equity US category with Stryx America USD.

    A full list of winners can be found here.

    The group awards

    For the prestigious group awards a large group must have at least five equity, five bond, and three mixed-asset portfolios, and a small group must have at least three equity, three bond, and three mixed-asset portfolios.

    Exhibit 1. Group award winners and commendations

    A new face this year was Danish fund manager Sparinvest who won the Equity Small Group category. Ballie Gifford who also picked up a single fund award picked up the Equity Large Group Award and Marlborough Funds Management which having already collected two single fund awards won the Overall Small Group award.

    RLAM had a very successful evening. Phil Reid (c) collected the Large Group Overall Award.

    The big winners of the evening were Royal London Asset Management who not only collected a single fund award but won two group awards for Mixed Assets Large Group and the coveted Overall Large Group.

    Thomson Reuters Lipper takes this opportunity to congratulate all the individual sector and group award winners. A full photo gallery of the event is available here and we look forward to seeing you all again for another successful evening night in 2019.

    Bankers Hall in the City of London, proved a popular venue. Photo, Thomson Reuters.


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    Having recently enjoyed a feast of inspiring Commonwealth Games performances, I was prompted to check out how well active funds have come out of the blocks in 2018.

    I’m on the record as saying 2018 could be a good year for active funds. Typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks they invest in, providing fertile ground for active stock pickers.

    No signs of passive vehicle flow slow down in 2018

    There is no doubt that flows into passive funds in Europe and the U.K. have been buoyant over the last few years, with some evidence of reaching “peak passive” at the end of 2017. Thomson Reuters Lipper data reveal that the average annual percentage of passive pan-European fund (ETFs and tracker funds) flows of total fund flows was 5% from 2004-2014.

    Exhibit 1. Historical European Estimated Net Fund Flows by Product Type (€bn)

    Source: Thomson Reuters Lipper

    Source: Thomson Reuters Lipper

    For 2015 passive vehicles had a huge year, constituting 32% of total fund inflows. For 2016 this figure fell to 24%, and for 2017 the figure was 11%. However, for Q1 2018 the provisional figure rose to over 30%, suggesting the love affair with passive funds is far from over in Europe.

    Majority of active funds are performing below passives

    Performance-wise, Q1 saw passive vehicles take an early and commanding lead. Only about 7% of active funds in the Lipper UK Equity classification beat the highest ranked broad-based tracker over the period. In the Lipper Europe ex UK classification the figure was higher, with 47% of active funds beating the highest ranked broad-based tracker fund. For the Lipper US Equity classification the figure was 34%.

    Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

    The “opportunity cost” of passive investing can still be considerable

    When it comes to performance comparisons, it is important to consider the “opportunity cost” of not investing in an active fund (i.e., the potential outperformance of an index). Often this can be considerable. For example, for the five years to the end of 2017 the best performing active fund in the IA UK All Companies classification outperformed the highest ranking broad-based tracker by around 85 points—not inconsiderable. For Q1 2018 the comparable spread over the period was around 4 points. Again, for the period that was not insubstantial.

    Fund investing is a marathon, not a sprint…

    Of course, one needs to have correctly identified these winning funds in advance of the performance outcomes. Whilst I still believe that over the longer term, persistency of alpha generation can be found (consider, nearly 75% of the Lipper Fund Award trophy winners of 2014 were in the first or second quartile of their sectors for three-year performance at the end of 2017), over Q1 2018 random selection would have certainly favoured a passive option.

    On the face of it Q1 was fairly nondescript for active funds. Fund flows and performance were firmly in favour of passive. However, fund investing is a marathon—not a sprint, and my faith in active funds to climb back up the gold medal tally by year-end remains.

     


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    The summer of 2015 was a balmy one until “Black Monday.” Only two weeks before, I had been invited to the launch of a China A-shares ETF product. It was indeed unfortunate timing–that product has since closed.

    After Black Monday, fund flows into China-themed funds and ETFs in Europe atrophied. Thomson Reuters Lipper data reveal around €5 billion of net outflows from UCITs China-themed funds since that correction. However, Q1 2018 was a very good quarter and showed a considerable reversal of trend, with nearly €1 billion of inflows over the period. That was despite lacklustre performance over the same period.

    Suddenly, there is a bit of a buzz about China. Is the trade war on or off?  What are the implications of its US$30 trillion of debt, and how will the inclusion of A-shares in MSCI indices impact the market?

    Fund flows and fund launches

    Currently, there are some 120 UCITs China-themed funds available for sale in Europe with around €27 billion of assets under management. That is approximately the same level of assets in these funds as around the time of the Black Monday correction. Despite poor recent data, this figure represents an increase of around 50% in total assets since 2010.

    These flows are relatively small, however. To illustrate perspective, the total pan-European fund market AUM is around €10 trillion, and net inflows for 2017 were nearly €800 billion.

    Despite the persistent outflows of UCITs China-themed funds, fund launches have been surprisingly resilient, with around 30 new funds and a handful of ETFs coming to market since August 2015. Although they have not collected many assets, they may well be poised to do so.

    Exhibit 1. Performance of Lipper China Fund Categories From Black Monday Until May 24, 2018 (% in Local Currency)

    Source: Thomson Reuters Lipper

    Much ado about A-shares

    The imminent inclusion of A-shares into the MSCI indices in June 2018 is gathering much interest. Exposure to the Chinese domestic economy, the shares’ low correlation to the U.S. dollar, and a broader investor base are viewed positively, but many fund managers urge a balanced view.

    Gary Greenburg, head of emerging markets at Hermes Investment Management, believes selectivity is key: “The China A-share market contains thousands of companies, of which a number are interesting, a number are undervalued, and a small number are both interesting and undervalued.”

    China: Passive or active exposure?

    China faces the considerable macro headwinds mentioned above. However, Q1 2018 revealed strong performance at the stocks level. Research from Prusik Investment Management shows 45% of the China-domiciled stocks on average reported revenue and profit increases of 17% and 25%, respectively, for the period.

    Many fund managers and analysts see the Chinese market as ripe for active stock pickers and warn against the indiscriminate exposure to already expensive companies that ETF purchases potentially lead to.

    Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

    Monitoring stock ownership reveals clues as to the role passive ownership may have in affecting stock prices. From the most recent Thomson Reuters Eikon fund shareholders report for Alibaba, of the 20 top fund holdings, 4 are passive funds, whereas for HSBC, of its 20 top fund holdings, 14 are passive funds. This dynamic will become increasingly marked as more China stocks make their way into popular indices.

    The largest current holding in the iShares MSCI China A ETF, is Kweichow Moutai Co Ltd. This is currently trading on a PE multiple of 30.5x (against a peer group average of 21.5x). A good equity analyst will be able to tell you if this stock is well priced however, its current fund shareholders report reveals of the 20 top fund holdings, 7 are passive vehicles. Post June, this number will undoubtedly increase.

    What does 2018 hold for China stocks?

    If the Lipper Q1 fund-flows data for China set the pattern for the rest of the year, then summer 2018 could potentially be good for the region. Macro noise will create uncertainty, but it seems many Chinese companies are getting themselves into good shape. Controls on leverage should prevent the amplified volatility we saw around Black Monday.

    There is a large disparity between Mainland China-listed shares, which constitute around 23% of global traded value but which will weigh in with the MSCI in June at under 2%. This is certainly a supportive long-term dynamic. However, it appears this is a region where blindly buying shares through a passive strategy is potentially riskier than using other strategies.

    For many investors ESG and governance are key factors that would preclude many China shares. As active foreign investors and institutions gradually become more influential, this could improve governance, but only if China itself is prepared to share the love with minority investors.

     


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    We have just passed the two-year anniversary of the “Brexit” vote, and we are now heading into another crucial week. British Prime Minister Theresa May meets with her cabinet on Friday to finesse further details of the U.K.’s imminent departure from the European Union.

    From a mutual-funds perspective there certainly are potential material impacts on how the U.K.’s current fund passporting arrangements will be accommodated (or otherwise) in the new relationship with the EU. Fund houses are undoubtedly hoping for some clarity on this soon.

    Performance

    Despite the uncertainty around Brexit for U.K. firms, the two-year period since the initial vote has coincided with strong performance of funds in Thomson Reuters Lipper classifications popular with U.K. investors,  particularly equities:

    Lipper Global Classification % Growth 24/06/2016 to 19/06/2018 (in GBP)
    Lipper Global Bond GBP Corporates 7.5
    Lipper Global Bond GBP Government 3.0
    Lipper Global Bond GBP High Yield 8.1
    Lipper Global Equity Europe ex UK 34.8
    Lipper Global Equity UK 30.7
    Lipper Global Equity US 42.2

     

    Fund Volatility

    Fund volatility (as measured by the daily rolling ten-day standard deviation) of Lipper fund classifications popular with U.K. investors has declined markedly from the date of the Brexit vote, never returning to the original spike of late June 2016 (see chart below).

    Exhibit 1. Daily rolling 10-day volatility of Lipper Fund Classifications

    adsf

    Source: Thomson Reuters Lipper, Lipper for Investment Management

    The inflation-led correction in U.S. markets from February 2018 can be clearly seen, but by comparison has caused less disruption–especially in bond fund volatility–than has the Brexit vote. This may be a signal that Brexit has now fizzled from a global news item into a particularly local event.

    Lipper Global Classification % change in rolling 10-day volatility (1/7/2016 to 19/06/2018)
    Bond GBP Corporates -62%
    Bond GBP Government -69%
    Equity Europe ex UK -25%
    Equity UK -76%
    Equity US -76%

     

    Fund Flows

    It’s difficult to interpret fund flows in the context of a single geopolitical event such as Brexit because of the myriad factors that determine investor preferences. From the end of June 2016 to the end of May 2018 estimated net flows into U.K.-domiciled funds are £55.4 billion. This can be considered a reasonable figure and is proportionally commensurate with pan-European flows.

    Global equity funds have certainly been winners, likely supported by strong performance. Interestingly, however, there have been net outflows from U.K. equity funds and U.K. equity income funds, despite robust performance (some of which is undoubtedly attributable to the fall in Sterling since the vote). Global equity income funds too have suffered outflows perhaps as many popular “bond proxy” stocks become more expensive and investors buy into the global growth story.

    The ten top Lipper global classifications ranked by estimated net flows (£m) are:

    Equity Global £20,405
    Money Market GBP £10,066
    Bond Global £9,587
    Equity Global ex UK £6,448
    Mixed Asset GBP Aggressive £4,237
    Absolute Return GBP High £3,562
    Bond Global High Yield £3,083
    Bond GBP Government £2,653
    Mixed Asset GBP Balanced £2,551
    Mixed Asset GBP Conservative £2,288

     

    The ten bottom Lipper global classifications ranked by estimated net flows (£m) are:

    Equity UK Income -£11,793
    Equity Global Income -£5,443
    Equity UK -£3,939
    Absolute Return GBP Medium -£2,419
    Equity Sector Real Est Other -£1,460
    Equity UK Sm&Mid Cap -£1,404
    Bond EUR Corporates -£856
    Real Estate UK -£821
    Bond GBP High Yield -£634
    Alternative Equity Market Neutral -£472

    Fund Launches

    For many fund managers the aforementioned uncertainty surrounding passporting has caused them to consider solutions to ensure they will be able to sell their product suites throughout Europe.

    In the two years since the Brexit vote there have been 309 U.K.-domiciled funds launched and 307 Dublin-domiciled funds registered for sale (RFS) in the U.K. launched (primary funds only). Interestingly, the latter figure actually represents a 25% decrease from the number of Dublin-based RFS U.K. funds launched in the two years before the Brexit vote.

    Anecdotally, I would have expected the number of Dublin launches of funds registered for sale into the U.K. to be proportionally higher, but as with all things Brexit, interpreting numbers can be as difficult as reading tea leaves.

     


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    The fourth annual Thomson Reuters Lipper Fund Selectors Forum was held at the Thomson Reuters Auditorium, Canary Wharf, on July 4, 2018.

    Mutual fund research and selection, along with portfolio construction, are crucial components of the investment distribution value chain. Increased due-diligence and governance requirements imposed by regulators mean the fund selector and portfolio constructor have more influence on–and responsibilities to–investors than ever before.

    Lipper was pleased to host again this flagship industry event showcasing the challenges faced by the fund selection and portfolio construction industry in 2018 and the benefits it brings to the financial services industry.

    Once again, we were proud to partner with the Chartered Institute of Securities and Investment (CISI). We welcomed some 150 guests, consisting of private wealth advisors, financial planners, fund managers, gatekeepers, platform providers, investors, and journalists.

    Presentation 1: fund flow-patterns in Europe

    Lipper’s Detlef Glow

    Lipper’s Head of EMEA Research, Detlef Glow, outlined current investor appetite by examining trends in pan-European fund flows. He revealed that the mutual fund market in general is in robust health, with a milestone of over €10 trillion in assets under management reached, following a record year of sales in 2017.

    Key points included:

    • YTD May 31, 2018, the best selling sectors were Unclassified, Equity Global, and Equity Emerging Markets Global, with approximately €42 billion of combined estimated net inflows.
    • Over the same period net outflows from Money Market GBP, Bond Euro Corporates, and Bond USD High Yield totalled approximately €22 billion.
    • Aviva Investors, BlackRock, and UBS, with approximately €50 billion of net inflows, were the top fund houses for 2018 YTD.
    • ETFs and tracker funds totalled 12% of total AUM in the pan-European funds market, with the rest held by active funds.

    Panel 1: Fund selection and the due-diligence imperative

    (L-R) Jake Moeller, Victoria Hasler, Tony Yousefian, Lucy Walker

    Jake Moeller presided over the first panel session with panellists Victoria Hasler from Square Mile Research, Tony Yousefian from FundCalibre, and Lucy Walker from Sarasin, who discussed fund selection criteria, client alignment, sell-decision rules, the importance of environmental-social-governance (ESG) criteria, and the changing nature of the fund manager relationship.

    Key points:

    • Consistency of performance and style remains a major criterion for fund selectors.
    • Deviating from defined processes (even if it results in outperformance) is a red flag for a potential sale.
    • Underperformance doesn’t always reflect a lack of skill.
    • Fund capacity is a potential problem, but it needs to be considered on a fund-by-fund basis.
    • ESG considerations are no longer incidental to fund selectors and generally form a key part of the gate-keeping process.
    • Good fund selectors need to be aware of boutique offerings and be prepared to bring new ideas to market.

    Panel 2: portfolio construction and the macro environment

    (L-R) Jake Moeller, David Coombs, Peter Fitzgerald, Justin Onuekwusi

    Jake Moeller moderated the second panel with Peter Fizgerald, CIO, Macro and Multi-Asset at Aviva Investors; David Coombs, Investment Manager at Rathbones; and Justin Onuekwusi, Multi-Asset Fund Manager at LGIM.

    The panel discussed the evolution of portfolio construction from long-only funds of funds to today’s popular multi-asset and targeted-volatility funds. The panel also outlined portfolio positioning and discussed current headwinds and opportunities in the market.

    Key points included:

    • Cost pressures and low barriers to entry have made a traditional active fund-of funds structure a difficult proposition to market.
    • Some fund-of-funds structures still have a place, but structures need to be carefully considered.
    • Investors are now much more risk conscious, and absolute returns are preferred to relative returns.
    • Demand for income and higher preretirement management are creating a bigger gulf between retail and institutional investors.
    • Panellists were sanguine on selected equities’ holding cash to reduce volatility, but investors need to be creative by using tools such as derivatives to enhance flexibility.
    • Beware the use of “late cycle.” There is still potential for markets to run for several more years in a “lower for longer” interest-rate environment.

    Panel 3: Diversity in the funds industry

    (L-R) Jake Moeller, Bev Shah, Maike Currie, Natalie Kenway

    Jake Moeller moderated the final panel of the morning, which examined the issue of workplace diversity in the funds industry. He was joined by Bev Shah, founder and CEO of CityHive; Maike Currie, Investment Director at Fidelity; and Natalie Kenway, Deputy Editor at Investment Week. The panel outlined the importance and benefits of improving gender, sexuality, ethnicity, disability, and age diversity.

    Key points included:

    • “Group think” is a huge risk to companies; improved diversity reduces this.
    • Cognitive diversity should be a broad objective of all working environments.
    • Female role models in the financial industry are too few.
    • Quotas and legislation are not always ideal but are important early in the formation of the diversity narrative.
    • Diversity formulated as a box-ticking exercise can be counter-productive.
    • Fund groups are now much more aware of diversity issues, and the narrative is becoming more popular with the readers of mainstream and trade press.
    • Flexibility in the workplace is a strong foundation for improving broad diversity.
    • Managers should consider their workplaces as a “community” and encourage networking among its different constituents.
    • The fund selector has a key role to play in lobbying fund houses to improving diversity through the request-for-proposal (RFP) process.

    Audience engaged

    Audience participation at the third annual Fund Selectors Forum was exceptionally high, with excellent questions and some particularly passionate points of view being raised throughout the event. At the start of the Forum audience members were encouraged to engage this event via social media, and #LFSF18 garnered considerable commentary.

    The issues raised in this year’s Fund Selectors Forum are at the forefront of the industry and will continue to evolve in 2018. Thomson Reuters Lipper and the CISI have demonstrated the importance of facilitating such crucial debates.

    We look forward to welcoming you again in 2019.

     


    Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

     

     


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    I’m on the record as saying 2018 could be a good year for active funds. Typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks they invest in, providing fertile ground for active stock pickers.

    It is quite difficult to know where exactly we are in the cycle and just how late in fact we are in it, but there is no doubt that flows into passive funds in Europe and the U.K. have been buoyant over the last few years.

    Lipper data reveal that the average annual percentage of passive pan-European net fund flows (ETFs and tracker funds) of total net fund flows was a modest 5% from 2004-2014. However, in recent years there has been a structural shift in this average. For 2015 passive vehicles had a huge year, constituting 32% of total net fund inflows. For 2016 this figure fell to 24%, and for 2017 the figure was 18%—all well above that longer-term average of 5%.

    A receding tide floating only passive boats

    However, data to the end of Q3 2018 reveal a comparatively poor year for both active and passive vehicles. For this period there have been net inflows for all types of funds of only some €6 billion (compared to total net inflows for 2017 of nearly €800 billion). See Figure 1 below.

    Figure 1. Pan-European Estimated Net Flows, 2004 to Q3 2018 (in € billion)

    Source: Lipper by Refintiv

    Active funds have had net outflows of €44.0 billion, and passive vehicles (index funds and ETFs combined) have had net inflows of €56.4 billion. So, it appears that unless active funds have a record-breaking final quarter in 2018, they will be unable to keep their heads above water–as in 2008 and 2011.

    Performance matters

    Performance-wise for Q3 2018, passive vehicles are fairly well ahead of their active counterparts.

    Figure 2. U.K. Performance

    Source: Lipper for Investment Management.

    Source: Lipper for Investment Management.

    Only 34% of active funds in the Lipper UK Equity classification beat the highest ranked broad-based tracker over the period. In the Lipper Europe ex-UK classification the figure was lower, with 25% of active funds beating the highest ranked broad-based tracker fund.

    Figure 3. Europe ex-U.K. Performance

    Source: Lipper for Investment Management.

    For the Lipper US Equity classification the figure was 31%. The longer-term performance periods to the end of 2017 are not particularly stellar. But, perhaps surprisingly in the competitive U.S. market at least, active funds up to Q3 are doing better than in the longer-term data.

    Figure 4. U.S. Performance

    Source: Lipper for Investment Management.

    Opportunity cost is still material

    When it comes to performance comparisons, it is important to consider the “opportunity cost” of not investing in an active fund (i.e., the potential outperformance of a fund over an index). Often this can be considerable. The orange bars in each of the graphs show this. For example, in the five years to the end of 2017 the best performing active fund in the Lipper UK Equities classification outperformed the highest ranking broad-based tracker by around 105 percentage points—not inconsiderable.

    For Q3 2018 the comparable spread over the period is 11 percentage points. There are certainly some active funds doing well, just not that many of them.

    A tough market for all–especially active funds

    On the face of it the period to the end of Q3 2018 has been fairly nondescript for active funds in aggregate. However, compared to the record year of 2017, it is a tough market in Europe for all fund providers, both passive and active.

    I remain an advocate of active funds and believe we could still see an improvement of relative data by the end of the year. I don’t lose sleep over short-term data, but I will concede there is much room for improvement in the final quarter of 2018.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    I recently visited a fund buyer conference in London that exclusively showcased a selection of emerging-markets (EM) equities funds.

    In the current environment I had expected the conference to be potentially a febrile affair, but I was struck by the pervasive sense of calm–from the fund managers, fund buyers, and asset allocators alike.

    Outflows in EM equities Q3 2018 have been material

    It’s understandable to expect a certain amount of enthusiasm for an asset class at a conference held in its honor, but Lipper data reveals that investors overall have retreated from the asset class. For Q3 2018 pan-European-based funds in the Lipper Equity Emerging Markets Global classification had estimated net outflows of €5 billion. To the nine months ended September 30, 2018, the total overall net inflows for EM equity funds were only €0.3 billion. For the same period in 2017 the estimated net flows were a relatively robust €15 billion.

    EM equity performance has struggled to the end of Q3 2018, returning a negative 9.4% in U.S. dollars, compared to the Lipper Global Equity US classification, which returned a positive 8.7% (in USD). EM’s poor performance has resulted in some US$103 billion being wiped off the value of these funds worldwide over the nine months to the end of September 2018.

    Asset allocators remain largely unmoved

    It appears much of the outflows may have been “hot money.” Institutional investors have barely stirred. The Lipper Life Office Asset Allocation Survey for September 2018 reveals the average portfolio allocation to EM equities in the Flexible Investment Sector was 2.0%. For January this exposure was 2.2% and for September 2017 2.3%. That is coming down from a small base certainly, but it is hardly a damning indictment for the asset class.

    Figure 1. Performance Chart – EM Equities v Global and US Equities (in USD, 9 months to September 2018)

    Source: Lipper for Investment Management.

    The headwinds faced by EM equities are readily identifiable by many analysts: rising interest rates, potential USD strength, the fallout from escalating trade wars, and geopolitical issues, dominated recently by Turkey. These headline issues may have spooked many investors, but EM equities managers and asset allocators themselves seem to be keeping cool heads.

    Do we understand EM markets better today?

    Perhaps underlying fundamentals for EM remain reasonable enough to support strategic investors’ longer-term theses for the asset class. Year-to-date earnings in EM stocks have largely remained strong, and returns have been dominated by exchange rates.

    Hermes Investment Management’s Head of EM, Gary Greenburg, put it quite simply in his recent Lipper Alpha podcast: “What people believe to be the case can be more powerful than what is the case. People believe that EMs are cyclical plays, they believe that they are affected by the USD, they believe that they are capital importers and commodity exporters. In fact, this no longer characterises EM.”

    Perhaps this time, the significance of these structural changes is finally beginning to sink in and reduce panic levels.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    The thirteenth annual Lipper Alpha Expert Forum was held in London on November 8, 2018 and maintained its reputation as one of the European mutual fund industry’s premier thought-leadership events.

    We welcomed some of the preeminent fund industry executives in Europe to share their views on key developments and challenges facing the industry today.

    Once again we partnered with the Chartered Institute of Securities and Investment–the leading professional investment body in the U.K.–as our co-hosts, and a full house in the Thomson Reuters Auditorium ensured a lively debate.

    Future directions for fund groups

    Lipper’s Jake Moeller moderated the morning’s first panel session and welcomed Martin Davis, Head of Europe, Aegon Asset Management & CEO, Kames Capital; Eoin Murray, Head of Investment, Hermes Investment Management; and Keith Skeoch, Co-CEO of Standard Life Aberdeen Plc.

    (L-R): Jake Moeller, Eoin Murray, Martin Davis and Keith Skeoch

    2018 – a difficult year

    The panel noted that there had been a substantial change in the environment for fund groups in the last twelve months. Mr. Murray noted that “2018 had been a much more challenging year from an investment perspective after 2017 being characterised by strong returns and low volatility.” Mr. Davis reflected on global politics becoming more difficult to ignore, causing “direct changes to the expectations of investors’ appetite to risk and products.”

    Mr. Skeoch similarly noted that recently active fund managers had valued “highly concentrated” assets such as those in the U.S. and the growth style at the expense of “disciplined long-term processes.” A subsequent change to this could “impact product design into 2019/20″ he said.

    Increased regulation since Lehman’s only part of the job

    Ten years on from the Lehman’s crises, the panel noted that the governance and regulatory regime was much stricter, it wasn’t according to Mr. Skeoch “a quick fix for the restoration of trust.” Mr. Davis called for a more holistic approach to regulation in an “environment of increasing vertical integration” of firms noting “that the end customer may not understand the purpose of differing (inter-departmental) regulation.”

    Active funds and passive funds

    As three predominantly active houses, all the panellists spoke in favour of active funds management but noted the disruption the increasing trend in passive investing has caused. Mr. Murray noted that the “passive trend was here to stay” and added that there was a potential “peak passive number but we’re not there yet.”

    Mr. Davis agreed that the trend for passive funds had left active fund groups competing for a “smaller slice of the pie” stating that there were “too many active fund managers, with little product differentiation.”

    Mr. Skeoch was circumspect on the framing of the current debate. He noted the potential for a changing tail-wind to support active funds over the longer term. He stated that active firms need to examine their propositions more broadly: He said: “What’s the role we play? Which part of the risk/ return spectrum do we want to operate in?” and warned that firms would be doing their clients a disservice if they “simply focused on price.”

    ESG & Diversity

    The panellist all agreed on the merits of ESG and the cultural shift in investment processes and firm thinking. All three firms have a strong pedigree on ESG investing.  Mr. Murray noted that these issues were “critical to our core beliefs at Hermes.” He also recognised that improving issues such as workplace diversity were a work in progress but limited by low turnover at the top of the firm.

    Mr. Davis warned that there were many firms “jumping on the bandwagon” for whom ESG criteria were more of a marketing consideration. Mr. Skeoch noted that on the gender pay gap, his firm “needed to get better” and that “it wasn’t just about gender.”  He highlighted that his company was a “recent signatory to the Government initiative on race” and was becoming increasingly “proactive and disciplined on the way we look at hiring, promotion and succession planning.”

    The European fund flows environment

    Detlef Glow, Head of Lipper EMEA Research, outlined key patterns of flows into mutual funds in 2018. He noted that after a record year of flows in 2017 and the industry surpassing the €10 trillion assets under management milestone, the environment in 2018 had been substantially more difficult for fund groups with net flows of only €50 billion to the end of Q3 2018.

    Detlef Glow

    Mr. Glow noted the relative popularity of global equity funds which have collected over €20 billion of net inflows, reflecting investor appetite for regional diversification. He also noted that flows and AUM are both dominated by passive vehicles with active funds actually suffering net outflows for the year to Q3.

    Mr. Glow also noted that of the top ten firms in Europe for flows to Q3 2018, seven of them did not actually have ETFs in their product suite

    (R)evolution in the ETF Industry

    Detlef Glow moderated the panel session with MJ Lytle–CEO, Tabula Investment Management; Hector McNeil–co-CEO and founder, HANetf; and Andrew Walsh–Head of UKI Passive & ETF Specialist Sales, UBS Asset Management.

    (L-R) Detlef Glow, Hector McNeil, MJ Lytle and Andrew Walsh

    The panel examined whether ETFs had become the product of choice for European investors, how new ETF promoters might succeed in the crowded provider environment, the lack of innovation in smart-beta space and the potential growth of active ETFs

    Mr. McNeil encouraged the audience to re-evaluate their perceptions of ETFs, arguing they should be considered a wrapper rather than an asset class and compared them to a digital product where a mutual fund was analogue.

    Mr. Walsh recognised the benefit that the passive industry had brought to active investors arguing that from five years ago, the ETF industry “had shaken out index huggers and forced the prices of active funds down.”

    Mr. Lytle said it was harder to assess the trends that were driving the long-term growth of ETFs arguing that it was more about the value of the wrapper: “ You can launch an ETF and sell it on to a broker” he said, concluding this reduced the regulatory burdens of such things as AML and KYC requirements for a fund firm.

    Mr. Lytle also argued that there would be substantial growth in active ETFs in the near future, especially in bond products. Mr. McNeil concluded on a very buoyant point: “In ten years time, all product launches will be ETFs.”

    2018 macro review and outlook for 2019

    The final session saw Jake Moeller, Head of Lipper U.K. and Ireland Research, moderate the popular macroeconomic outlook session with Shamik Dhar–Chief Economist, BNY Mellon; Andrew Milligan–Global Head of Strategy, Standard Life Wealth; and Patrick Armstrong–CIO, Plurimi Investment Management.

    (L-R) Jake Moeller, Shamik Dhar, Andrew Milligan and Patrick Armstrong

    Discussions of the tightening interest rate environment, central bank activity, and liquidity dominated the panel with some discussion on where we are in the cycle. Mr. Dhar noted that “2017 was the story of global synchronised growth but that 2018 has been a much more idiosyncratic story.” He also painted a picture of slowing growth into 2019:  “The U.S. could drop to 2.5% growth range, China coming down from 6.5% to 6%, the Euro area 1.5% and overall global growth of 3% -3.5%.” he said.

    Geopolitics matter…

    Andrew Milligan stated that the markets had priced in a lot of bad news: “If we saw some decent profits growth into 2019, we could see financial markets rally quite nicely even against a slowing growth backdrop.” He noted a point of caution on geopolitical issues: “Markets can cope with tariffs and Brexit,” he stated “but there could be a complete recasting of the U.S./ China relationship.” He also mentioned Italy as another “potential geopolitical headwind.”

    Inflation could too…

    Mr. Armstrong had a divergent view on the potential risk of inflation which Mr. Dhar had described as the “dog that didn’t bark.” Armstrong viewed the potential for employment capacity in the U.S. to have a more significant effect than expected: “The biggest issue businesses in the U.S. face today is not being able to fill job openings – the Phillips curve has been incredibly flat but I believe is beginning to steepen now.”

    Asset Allocation outcomes

    In conclusion Mr. Armstrong stated that he was “short U.S. bonds and equities” and taking risk where “people were scared: We own Italian bonds and we’re short bunds.” Mr. Dhah believed there was still value in both selected bonds and equities. He added that investors could also consider “hedges such as buying volatility on dips.”

    Mr. Milligan suggested holding “higher levels of cash in 2019 but put it to work in buying a mix of global equities and as long as interest rates rise slowly buy into real yields in fixed income markets.”

    Expert opinions well received

    All the sessions experienced a high level of audience engagement, with lively questions and debate contributing to the success of the event. The three hours of Continuing Professional Development credit allocated to the event by CISI were well earned.

    A live “Twitter Wall” proved popular during the event, with considerable activity posted via #LAEF18.

    Lipper is very proud to have assembled such accomplished panellists to this forum. Our considerable gratitude is extended for their generosity and thought leadership. It is vital to the industry that their experience and knowledge be shared.

    We look forward to welcoming you all back in 2019!

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    Mutual fund selection is a combination of art and science. The art is qualitative assessment and evaluation. The science is the forensic breakdown and analysis of performance outcomes. We are constantly reminded by regulators of the frailty of relying on the past to predict the future–and rightly so. Investors must treat past performance with caution.

    Past performance—the only evidence we have

    The simple fact is that past performance is the only meaningful footprint any fund manager leaves behind. It is the only tangible evidence to verify–or indeed counter–the slick marketing collateral fund groups use to seduce us.

    How we analyse this past performance is crucial. It is too simple to allude, as many critics of past performance do, to the randomness of future outcomes. Certainly the future is random, but not the contribution of skill to future outcomes. Taking a fund manager’s percentile ranking at any point in time poses the same problems for a potential investor as does looking at the balance sheet of a company. It is just a snapshot.

    What is more important for us to do is to break down the performance over many periods and examine it forensically.

    Data mining the wheat from the chaff

    There are some 13,000 genuine cross-border funds from which European buyers can choose. There is no way any fund buyer can be intimate with the entire universe of available funds. A well-built quantitative screen is a sensible approach to identifying those funds which warrant further investigation.

    A high-quality database of funds is essential for a robust quantitative screen. Lipper for Investment Management is a very powerful tool for building screens. It allows users to incorporate, with ease, a plethora of relative and absolute return metrics over rolling periods and within multiple sector classifications. Lipper sectors are constantly monitored to ensure that like-for-like data can be readily extracted and compared.

    Is there evidence of consistent alpha?

    The starting point for any meaningful quantitative screen is to extract the fund manager’s performance and examine it within the context of how much active risk the fund manager has taken relative to a benchmark and, if necessary, a fixed-return outcome such as cash. At its simplest the quantitative screen must answer the question: “Has my fund manager consistently converted active positions into alpha?”

    In building a quantitative screen, fund selectors will have their own preference for different metrics and calibrations. My example below (Figure 1.) ranks U.S. funds by a combination of three one-year rolling periods of relative return (40% weighting to current year, 30% to t-1 year, 20% to  t-2 year) and 10% to the current three-year Sortino ratio.

    Figure 1. Output of a Lipper generated Quantitative Screen for U.S. Equities 

    Source: Lipper for Investment Management

    Source: Lipper for Investment Management, Jake Moeller.

    Science plus art equals better fund research outcomes

    The rudimentary quantitative screen above highlights funds that have produced strong risk-adjusted returns with consistency—a good starting point for further investigation.

    There are some obvious limitations to the type of returns-based analysis in a quantitative fund screen. They are limited to the track record of the fund and they do not provide much colour on elements such as style and factor biases. However, this is where the importance of the qualitative component (the “art”) of fund research comes in.

    The qualitative art of fund selection is for me, as important as the science, but I wouldn’t even commence my search without a decent quantitative screen to point me in the right direction.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    Since the days of the Delphic Oracle, it is in human nature to try to predict the future. I, for one, concede it is a difficult skill! At the end of 2017, I optimistically predicted that 2018 could be a good year for active funds. It has turned out to be a very testing one indeed—for mutual funds across the board and active funds in particular.

    The thesis is that, typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks in which they invest, providing fertile ground for active stock pickers.

    However, quantitative easing and tightening has been distorting the market cycle considerably. Judging where we are in a “normal” market cycle is more art than science, but the complexity today is incalculable. The sudden shift in volatility which started in February 2018 hasn’t precipitated, as yet, a sustained structural shift in momentum.

    2018 – A tough year all around

    Undoubtedly, 2018 was challenging. In local currencies, the Lipper Global Equity US classification returned -6.3%, Lipper Global Equity ex-US -14.1%, Lipper Global Equity Europe -13.0%, and Lipper Global Equity UK -11.0%.

    Whilst 2017 was a record-breaking year for pan-European fund flows, with Lipper data showing €760 billion of estimated net inflows, 2018 was dire. Outflows of €129.2 billion represent the first after six consecutive years of net inflows.

    Figure 1. Pan European Estimated Net Flows 2004 to 2018 (in € billion)

    European Fund Industry Review 2018

    Source: Lipper at Refinitiv.

    Performance matters

    In terms of relative performance for 2018, passive vehicles secured a comprehensive victory over their active counterparts as the graphs below reveal.

    Figure 2. UK Equity Funds Classification – Comparative Active & Passive Performance

    Source: Lipper at Refinitiv

    Only 8% of active funds in the Lipper UK Equity classification beat the highest ranked broad-based tracker fund in the same classification in 2018.

    Figure 3. Europe ex UK Equity Funds Classification – Comparative Active & Passive Performance

    Source: Lipper at Refinitiv

    In the Lipper Europe ex-UK classification the figure was slightly higher, with 14% of active funds beating the highest ranked broad-based tracker fund in the same classification.

    Figure 4. US Equity Funds Classification – Comparative Active & Passive Performance

    Source: Lipper at Refinitiv

    In perhaps the most difficult classification to outperform—the Lipper US Equity classification—the performance of active funds was higher, with 24% of active funds beating the highest ranked broad-based tracker fund in the same classification.

    Longer periods improve the numbers, but not by much

    It is dangerous to place too much importance on one-year data, but for each of the three- and five-year time periods, the data reveals that in aggregate for each of the three classifications above, investors would have been better off in a tracker fund.

    Opportunity cost remains material

    When it comes to performance comparisons, it is important to consider the “opportunity cost” of not investing in an active fund (i.e., the potential outperformance of a fund over an index). Often this can be considerable.

    The orange bars in each of the graphs show this. For example, in the five years to the end of 2018, the best-performing active fund in the Lipper UK Equities classification outperformed the highest ranking broad-based tracker by nearly 37 percentage points—a considerable outperformance for investors in that fund.

    A tough market for all – especially active

    2018 was undoubtedly difficult for fund managers and investors alike. Further volatility, geopolitical uncertainty, and central bank influence will likely throw more curveballs for the market, but I remain an advocate of active funds.

    We may soon enter a period which may be more conducive for active funds in aggregate but concede there is much room for improvement in 2019, and I will not be making any Oracle-like predictions this year.


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.


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    In 2019, Lipper is upgrading our fund classification schemes. This is a process fundamentally embedded within our business. It is a core part of our DNA. Simply put: categorizing funds is what we do.

    There are two main schemes that will benefit from the release: US and Global.

    The Lipper US Fund Classifications are designed exclusively for the world’s largest fund market. They are delineated into open-end, closed-end and variable annuity categories.

    The broader Lipper Global Classifications (LGCs) include all of the above US funds, but also provide our customers with a single definitions-based approach across all markets and funds. Our commitment to transparency and thoroughness is unique. We have more than 400 categories in our current LGCs and are adding more as the fund market evolves.

    Fund classification – a changing science

    Fund classification was once relatively straightforward. Collect the market benchmark, identify the funds with that benchmark and then create categories where you have a defined critical mass of funds. This plan still holds perfectly true for many of Lipper’s proprietary sectors and this will continue.

    After the global financial crisis, the assignment of funds into sectors has become increasingly complex. The last ten years have seen a sea change in the way that fund managers attempt to protect themselves from any future catastrophic market events. Our classifications continue to evolve as the industry releases new styles of funds to address these issues.

    Product evolution needs to be incorporated

    We continue to see the growth of “target” and outcome-based funds—funds with no benchmark that aim to provide a stated return within a certain timeframe. Other product types such as liquid alternatives, absolute return funds and multi-asset funds are also becoming increasingly popular.

    Being able to make relevant fund comparisons is always crucial, but a new system for classification is necessary. The “signposting” technique is often employed. What does that mean? We have to acknowledge and accept that not all target funds will behave in the same way. This is often true even when funds possess a similar “hedge-like” strategy. Lipper’s job is to identify similar “outcomes” which can lead to a clearer investor “signpost”. In other words: “Here are the funds you may choose that have the same ‘outcome’ in mind.”

    Classifications: art and science

    There is actually more subjectivity involved in fund classification design than one might immediately think. It is invariably a mixture of art and science. Educated investment specialists can still fail to agree on where or how a particular fund should be classified and which categories should be created.

    Conflicting opinions on the highest priority attributes (and subsequent classification triggers) can all be “technically correct”. Different approaches can validly exist. For instance: Should we prioritize geographic exposure over currency exposure? How many countries constitute sufficient diversification for a regional class? How much does hedging matter? What exactly do we mean by “funds with a predominant weighting to…”?

    What makes a robust fund classification system?

    It is paramount to have a consistent rules-based approach. Subjectivity can only be tolerated in the design of the classification system itself, but not the classification of individual funds. To this end, Lipper’s analysts receive constant training to ensure that objectivity and consistency reign supreme.

    The system needs to be fair, independent and free from any external influences and bias. Trust is still a major part of our philosophy. The classification systems drive the Lipper Fund Awards and the Lipper Ratings system. We take these responsibilities very seriously indeed.

    We look forward to delighting our customers with an improved fund classification suite. Watch this space for further specific details about the forthcoming release of Lipper Classifications 2019.

    Lipper and Refinitiv customers can find more information via this link.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

     


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    The 29th annual U.K. Lipper Fund Awards event (and the first under the Refinitiv banner) took place at London’s elegant Banking Hall on March 14, 2019. A full house of 150 participants from the U.K. and international fund management industries created an exciting buzz ahead of the premier night of recognizing excellence in fund management.

    London’s Banking Hall proved a popular venue. (Henrik Andersen/ Refinitiv)

    Lipper Awards now powered by Refinitiv

    Leon Saunders-Calvert, Head of Sustainable Investing & Fund Ratings at Refinitiv, introduced the company and affirmed its commitment to the prestigious Lipper Awards, stating: “We’re committed to delivering more content, more fund product offerings, more innovative delivery systems, and more comprehensive global funds coverage than ever before. As the global leader in fund performance data, tonight we celebrate true excellence in the industry.”

    Leon Sanders Calvert, Head of Sustainable Investing & Fund Ratings – Refinitiv. (Henrik Andersen/ Refinitiv)

    Setting the scene: 2018 – success despite sailing into a headwind

    Jake Moeller, Head of Lipper U.K. & Ireland Research at Refinitiv, was the emcee for the evening. He reflected that following record inflows in 2017 of nearly €800 billion, the Pan-European mutual fund industry suffered net outflows of €150 billion in 2018 under increasingly volatile market conditions.

    Lipper’s Jake Moeller highlights opportunities in the European funds market. (Henrik Andersen/ Refinitiv)

    Despite this, Mr. Moeller highlighted the opportunities existing for fund management firms. He noted while the largest 100 funds in the U.K. contain 39% of assets, only two of the evening’s award winners fell within this segment.

    Mr. Moeller also highlighted the potential opportunity for active fund managers in a late-cycle environment by revealing the concentration in ownership in large capitalisation stocks. Apple’s fund ownership summary in Eikon revealed nine of the ten-top fund owners as passive vehicles.

    Guest speaker: Dame Frances Cairncross

    In a thought-provoking presentation, economist and former journalist, Dame Francis Cairncross, outlined key macro and geopolitical issues which “keep me awake at night.” These included tension in Kashmir, the rise of populism, and the concentration of global debt.

    Dame Frances Cairncross addresses the audience. (Henrik Andersen/ Refinitiv)

    Dame Cairncross concluded optimistically, citing improvements in life expectancy of women, increasing creativity in markets, and the potential of artificial intelligence.

    What does it take to win?

    This year’s onstage “fireside chat” saw Mr. Moeller interview Paul Glover, Chief Investment Manager at NFU Mutual (the winner of the Equity Small Group Award), who outlined some of the secrets of his firm’s success.

    NFU Mutual’s Chief Investment Manager, Paul Glover chats with Jake Moeller. (Henrik Andersen/ Refinitiv)

    Mr. Glover revealed that committed focus on its customer base and a collegiate working environment were instrumental in creating the conditions for NFU Mutual to win its inaugural Lipper Fund Award.

    Lipper Fund Awards methodology

    Lipper Fund Awards are based on the Lipper Leader ratings for Consistent Return. The awards are calculated using a utility function based on the effective return over multiple non-overlapping periods: three-, five-, and ten-year horizons. The calculations over multiple periods ensure all periods in which a fund underperforms the average of its peer group are identified.

    In addition, Lipper uses a utility function based on behavioural finance theory to penalise periods of underperformance, with more significant weightings given to excess negative returns. This methodology ensures the winners of the Lipper Fund Awards are funds that have provided superior consistency and relative risk-adjusted returns compared to a group of similar funds.

    The winning mutual funds in the U.K.

    Twenty single funds from the largest peer groups by assets under management in the U.K. fund universe were honoured for the three-year category during the ceremony.

    Baillie Gifford was well represented this year, collecting the Bond GBP Corporates and Equity U.K. Awards for Baillie Gifford Strategic Bond A Inc and Baillie Gifford U.K. Equity Alpha A Inc, respectively. HSBC also picked up two awards in the Equity Emerging Mkts Global and Mixed Asset GBP Balanced categories with HSBC GIF BRIC Equity M1C USD and HSBC Global Strategy Balanced Portfolio Ret X Acc.

    Ballie Gifford’s Grant Walker collects the Lipper Award for Bond GBP Corporates. (Henrik Andersen/ Refinitiv)

    First-time winners in the U.K. this year included Lindsell Train Japanese Equity A, which won the Japan category, and LF Miton Worldwide Opportunities A Acc, which won in Mixed Asset GBP Flexible.

    The popular Equity U.K. Income category was collected for a second year in a row by TB Evenlode Income A Acc, with Seilern clocking up a third consecutive win in the Equity US category with Stryx America USD.

    The group awards

    For the prestigious group awards, a large group must have at least five equity, five bond, and three mixed-asset portfolios, and a small group must have at least three equity, three bond, and three mixed-asset portfolios.

    Exhibit 1. Group award winners and commendations

    Category Winner
    Bond Small Lord, Abbett & Co.
    Bond Large Royal London Asset Management
    Equity Small NFU Mutual
    Equity Large Baillie Gifford
    Mixed Assets Small Momentum Alternative Investments
    Mixed Assets Large Liontrust
    Overall Small Banque de Luxembourg
    Overall Large Royal London Asset Management

     

    New faces this year included NFU Mutual, which won the Equity Small Group category and Momentum Alternative Investments which won in Mixed Assets Small.

    RLAM’s Phil Reid collects the Lipper Award for Overall Large Group. (Henrik Andersen/ Refinitiv)

    The big winners of the evening, however, were Royal London Asset Management (RLAM) and Baillie Gifford. RLAM not only collected a single fund award, but won two group awards for Bond Large Group and the coveted Overall Large Group—a second year of winning twice in the group awards.

    Baillie Gifford, in addition to two individual fund awards, also collected the Group Equity Large award.

    A full list of the individual and group award winners can be found here.

    Refinitiv will see you at the Lipper Fund Awards in 2020

    Followers of social media can follow some of the posts of the evening on Twitter, with many members of the audience sharing their views via the hashtag #LipperFundAwards.

    Lipper by Refinitiv takes this opportunity to congratulate all the individual sector and group award winners. A full photo gallery of the event is available here and we look forward to seeing you all again for another successful evening in 2020.

    Lipper looks forward to welcoming you all in in 2020! (Henrik Andersen/ Refinitiv)

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    Absolute return (AR) funds generally seek to generate a specified return over a given period. This can be an amount over a rate of interest, such as LIBOR, or an inflation metric. Often, the given period is stated as three years, but terms can be less transparent, such as “market cycle” or another loosely defined rolling period.

    The attraction of these types of products for many investors is the potential for lower volatility on returns and the perception they will not produce sustained periods of capital loss.

    However, investors must proceed with caution here. These are not guaranteed investments (they are generally market-linked) and they may contain a considerable dispersion of assets.

    They may also have complex derivatives, currency and alternatives positions, as well as short exposures. AR funds form a very broad church indeed and require considerable research analysis prior to investing.

    High tide was in 2015

    According to Lipper data, estimated net flows (ENFs) into AR funds (defined as funds in the Lipper Absolute Return GBP classifications) peaked at slightly more than £12 billion at the end of 2015.

    By the end of 2018, the tide had turned almost completely, with these same funds returning -£9.4 billion in ENF. There has been ENF of some -£5 billion in Q1 2019 alone, a sign which doesn’t augur well for the rest of the year.

    Recent performance has been stormy

    Exhibit 1. below reveals that recent performance of AR products in aggregate has been challenging and very likely the main driver for the huge outflows outlined above.

    In what is a damning performance outcome, for the five years to the end of December 2018, one-year LIBOR had bettered or equalled the three Lipper AR categories in this analysis.

    Exhibit 1. Relative Performance of Lipper AR Classifications v LIBOR & Mixed Asset Conservative (5-year to March, 31, 2019 in GBP)

    Source: Lipper by Refinitiv. Lipper for Investment Management. Past performance does not indicate future performance.

    Over that same period, of the 362 funds with a five-year performance history, 122 experienced a negative return. That is more than a third of funds experiencing a loss of capital over five years.

    What is behind the AR headwinds?

    Potentially, AR funds face a crisis of investor confidence at two ends. Firstly, where equity markets are very buoyant—such as in 2016 and 2017—lower volatility is not as attractive when investors in a single strategy equity fund, for example, are participating fully in a rally.

    Secondly, when market returns are negative and AR fund returns are also negative, there is the perception that AR funds are not performing as intended. This was largely the situation in 2018, where correlation across all assets was high and the benefits of asset diversification and more complex strategies less evident.

    Exhibit 2. Five-Year Growth & Risk Table (to March 31, 2019 in GBP)

    Source: Lipper by Refinitiv, Lipper for Investment Management.

    Arguably, we have experienced three years of markets which might not have been most conducive for AR funds. This shouldn’t come as a great surprise. We are in a period of unprecedented market distortion where typical assumptions about the “cycle” are more difficult to evaluate.

    However, that will be of little comfort to investors who witnessed the Lipper Global Mixed Asset GBP Conservative classification outperform considerably over the last five years with a comparable risk profile. See Exhibit 2. above.

    Sharpe ratio analysis

    Looking at a simple Sharpe ratio metric (the average one-year Sharpe ratio [rolling monthly] of all the funds in the Lipper AR GBP categories)—with one-year LIBOR as the risk-free rate—reveals the decline of fund manager ability to outperform over the last five years. See Exhibit 3. below.

    Exhibit 3. Average One-Year Sharpe Ratio (rolling monthly) of Funds in Lipper AR GBP Categories.

    Source: Lipper by Refinitiv. Lipper for Investment Management.

    In aggregate, AR funds have only experienced positive Sharpe ratios from the start of 2017 to the first quarter of 2018.

    Has the tide turned?

    It is difficult to infer much from short-term performance. However, the first quarter of 2019 has seen a brighter start for AR funds in the UK from a performance, rather than a fund flow, perspective.

    There has been a material uptick in the rolling Sharpe ratios, and the average return of AR funds for the period has been 2.1%. Additionally, only 10% of all AR funds have returned a negative amount over the quarter.

    It will undoubtedly require a sustained improvement in the fortunes of AR funds before investors return in large numbers. However, for many investors attracted to the “concept” of absolute returns, a rising tide may not be enough to encourage another swim.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    In 2018, the Pan-European mutual fund industry suffered its first annual outflow in six years, haemorrhaging some €129.2 billion. Performance-wise, the story was similarly dire—the Lipper Global Equity U.S. classification returned -6.3%, Lipper Global Equity Europe ex-U.K. returned -13.0%, and Lipper Global Equity U.K. returned -11.0% (all in GBP).

    Exhibit 1. Pan-European Fund Flows (in € billion)

    <em>Source: Lipper by Refinitiv.</em>

    Source: Lipper by Refinitiv.

    Active fund managers in aggregate did not cover themselves in glory in 2018, with only a small percentage of funds within major Lipper classifications beating the best-performing tracker fund in those respective classifications.

    Q1 2019 – quicker out of the blocks

    Lipper data reveals that fund flows have not reversed their medium-term trend, with estimated net outflows of €58.3 billion for the quarter.

    From a performance perspective, however, the markets have been considerably buoyant, with the Lipper Global Equity Europe ex-U.K. classification returning 7.03% for the quarter, Lipper Global Equity U.K. returning 8.87%, and Lipper Global Equity U.S. returning 10.79% (all in GBP).

    Active funds performance comparisons

    In terms of relative performance, for 2018 passive vehicles secured a comprehensive victory over their active counterparts. Q1 2019, however, has seen a marked improvement in active-fund relative performance against passive peers.

    Exhibit 2. U.K. Performance

    Source: Lipper by Refinitiv, Lipper for Investment Management

    Looking at the graph on the left of Exhibit 2, only 8% of active funds in the Lipper Global Equity U.K classification beat the highest ranked broad-based tracker fund in this classification in 2018. However, this figure has more than tripled in Q1 2019, with 29% of active funds beating the highest-ranked tracker peer.

    Exhibit 3. Europe ex-U.K. Performance

    Source: Lipper by Refinitiv, Lipper for Investment Management.

    Looking at the graph on the left of Exhibit 3, only 14% of active funds in the Lipper Global Equity Europe ex-U.K. classification beat the highest ranked broad-based tracker fund in this classification in 2018. This figure has improved to 22% in this classification for Q1 2019.

    Exhibit 4. U.S. Performance

    Source: Lipper by Refinitiv, Lipper for Investment Management.

    Looking at the graph on the left of Exhibit 4, in perhaps the most difficult classification to outperform—the Lipper Global Equity U.S. classification—24% of active funds beat the highest ranked broad-based tracker fund in 2018. This has improved marginally, to 28%, for Q1 2019.

    Opportunity cost remains material

    When it comes to performance comparisons, it is important to consider the “opportunity cost” of investing in a passive vehicle (i.e., the potential outperformance of an active fund over a passive peer). This is clearly seen by observing the bar charts to the right of each of the above exhibits.

    For example, in Q1 2019, the best-performing active fund in the Lipper Global Equity U.K. classification outperformed the best-performing tracker peer by 7.4 percentage points. In the Lipper Global Equity Europe ex-U.K. classification, this difference was 5.7 percentage points and for the Lipper Global Equity U.S. classification, it was 7.4 percentage points.

    The longer-term compounding effects of these differences are even more evident when comparing the performance of active over three and five years.

    Can active funds remain buoyant in 2019?

    The thesis is that, typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks in which they invest, providing fertile ground for active stock pickers.

    However, quantitative measures have been distorting the market cycle considerably. Judging where we are in a “normal” market cycle is more art than science, and the complexity today is incalculable.

    It is impossible to draw too many inferences into three-month data and there is little comfort overall in the recent market for acolytes of the active-fund management industry. However, if the relative performance trend of Q1 2019 can continue, the story may be very different by year end.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 


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    The Volatility Managed sector was launched by the Investment Association (IA) in April 2017. This was undertaken to reflect the increasing popularity of “outcomes”, “solutions”, and “time-horizon” based products.

    Performance variation in this classification may be considerable

    Generally, these types of funds are multi-asset vehicles which target a specific volatility or risk measure. It is, therefore, a sector which has potentially more vagaries of comparing like-with-like than a more homogeneous classification—even within the standard mixed-asset classifications.

    Whilst a fledgling classification, its constituent funds (some 124 or so) were largely pre-existing funds in other IA classifications. The variation in performance outcomes in this sector due to differing asset allocation profiles is potentially considerable. For example, the top performing fund over the three-year period has returned 46.5%, whilst the poorest performing fund over the same time has returned 4.1%.

    Lipper Global Classifications are granular

    Lipper classifications are highly granular, and for this broad-church IA sector, using Lipper Leaders metrics can assist investors in making relevant like-for-like comparisons. In this single IA classification, there are funds drawn from eight of the Lipper Global Classifications including Mixed Asset GBP Aggressive, Mixed Asset GBP Conservative, Absolute Return GBP Aggressive, and Mixed Asset GBP Flexible, to name a few.

    Exhibit One. Top performing IA Volatility Managed funds ranked over 3-years (with 5-year history)

    Source: Lipper by Refinitiv, Lipper for Investment Management. Past performance is no indicator of future performance

    Source: Lipper by Refinitiv, Lipper for Investment Management. Past performance is no indicator of future performance.

    Each of the Lipper Leaders metrics are compiled based on comparisons of funds within their Lipper classifications rather than the IA classification. This effectively applies an additional layer of analysis for investors or analysts who require a high-level appreciation of a fund in this IA sector.

    In this month’s table, we see very high Lipper Leaders scores across all the funds and metrics. The clear exception is for the Preservation metric, where all the funds score poorly.

    Higher equities content means potentially higher volatility

    This should point investors immediately to a high equities content. Indeed, all but one of the funds in this month’s analysis sit in the Lipper Mixed Asset GBP Aggressive classification, where the equities component must be greater than 65% of the portfolio.

    This means that the “winners” currently topping the charts in this IA classification are at the riskier end of the investment spectrum where investors could be exposed to considerable drawdowns.

    The IA Managed Volatility classification has been created in specific response to an evolving trend in product development – and one which reflects reasonable complexity. Within this IA classification, investors should be especially wary of presuming any broad-based performance characteristics.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.


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    On July 3, 2019, Refinitiv hosted the fifth Annual Lipper Fund Selector Forum at Canary Wharf.

    At this event—run in partnership with the Chartered Institute of Securities and Investment—Lipper convened nine mutual fund leaders and influencers to share their views with an audience of 180 financial service industry participants drawn from private wealth, gatekeepers, fund selectors, financial advisers, fund managers and trade journalists.

    After a welcome by Leon Saunders Calvert, Head of Sustainable Investing & Fund Ratings at Refinitiv, Jake Moeller, Head of Lipper UK and Ireland Research, hosted three panels covering a wide range of topics relevant to the European mutual fund industry.

    Leon Saunders Calvert welcomes the audience.

    Leon Saunders Calvert welcomes the audience.

    The State of the European Mutual Funds Industry

    Detlef Glow presented his popular overview of the current state of the European mutual funds industry, outlining the current trends in flows and products following a state of volatile and challenging markets in 2018.

    You can access the most recent Lipper European Fund Flows report on which this presentation was based here.

    Detlef Glow presents on Lipper fund trends.

    Illustrating his presentation with Lipper data, Detlef revealed that despite a respite in international markets, European mutual fund investors were still investing with considerable risk aversion.

    Future Directions for Fund Selection & Funds-Based Portfolio Construction

    Jake Moeller moderated a panel of fund selectors discussing the changing nature and increasing prominence of this role following the recent high-profile travails faced by Woodford Investment Management.

    Jake Moeller interview (l-r) Richard Philbin, Victoria Hasler, Bish Limbu.

    Jake Moeller interview (l-r) Richard Philbin, Victoria Hasler, Bish Limbu.

    Panelists discussed their selection process, what makes a good fund investment, and how they are going to evolve to remain relevant in a changing product market.

    The panelists were:

    The Diversity Dividend

    Jake Moeller moderated a panel on the importance of workplace diversity. As this issue has become increasingly prominent, the asset management industry has been indicted as one of several industries suffering from a lack of diversity in its workforce.

    Jake Moeller interviews (l-r) Bev Shah, Selena Tyler, Abbie Llewellyn-Waters

    Jake Moeller interviews (l-r) Bev Shah, Selena Tyler, Abbie Llewellyn-Waters

    This panel discussed the various initiatives that the asset management industry is undertaking to improve diversity and outlined how improved levels of workplace diversity benefit shareholders and result in a more effective workplace.

    The panelists were:

    ESG and the Funds Distribution Chain

    Jake Moeller moderated a panel which examined the importance of ESG criteria for investors and participants in the mutual fund industry.

    Jake Moeller interviews (l-r) Mona Shah, Chris Welsford, Craig Bonthron

    Jake Moeller interviews (l-r) Mona Shah, Chris Welsford, Craig Bonthron

    The panel considered the influence of ESG throughout the mutual fund value chain from product manufacturer, gatekeeper, and fund distributor and outlined how ESG criteria are able to add value for end investors without compromising potential returns.

    The panelists were:

    Concluding remarks

    Refinitiv’s Lipper marque holds considerable gravitas in the mutual fund industry. This is reflected by the number of high-level industry participants who are willing to share their views and thought leadership expertise for the wider benefit of the asset management industry.

    A full house followed proceedings closely

    A full house followed proceedings closely.

    The Lipper Fund Selector Forum has established itself as a flagship industry events which provides a showcase of Refinitiv’s skill in engaging the entire mutual fund value chain.

    The popularity of the event was also reflected in the social media coverage on the Twitter hashtag #LipperFSF19 and a number of videos of the panel sessions will soon be available via this website.

    We look forward to welcoming you and your clients again in 2020.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.


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    The Investment Association (IA) Flexible Investment sector came about in 2012 as the Association of British Insurers (ABI) and IA sought to further harmonise their classification systems.

    The Flexible Investment sector was largely borne from the former IA Active Managed classification. Today there are some 160 funds in this classification.

    This is a dynamic classification

    This is a sector where for investors the clue is in the name. It is one where there is no minimum equity, fixed income or cash requirement and it has become increasingly popular for fund managers who want a “go anywhere” mandate.

    This poses some difficulty for investors when trying to make like-with-like comparison. Most of these funds in this classification are mixed-asset mandates (although mandates run from conservative portfolios through to aggressive) and there are also several equity-only products.

    Considerable performance variation is possible

    It should not surprise investors then that the variation in performance outcomes in this sector due to differing asset allocation profiles is potentially considerable.

    For example, the top performing fund over the three-year period to the end of May 2019 has returned 57.3%, whilst the poorest performing fund over the same time has returned a paltry 0.3%.

    Exhibit One. Top performing IA Flexible Investment funds ranked over 3-years (with 5-year history – to May 2019)

    Source: Lipper for Investment Management, Lipper by Refinitiv. Past performance is not a reliable indicator of future performance.

    Each of the Lipper Leaders metrics are compiled based on comparisons of funds within their Lipper classifications rather than the IA classification and our classifications are based on the actual asset allocation of the fund.

    Lipper Leaders help distill a diverse classification

    In this single IA classification for example, there are 50 funds from the Lipper Mixed Asset GBP Aggressive classification, 27 funds drawn from the Lipper Global Equities classification and 16 funds from the Lipper Mixed Asset GBP Balanced classification. Where there is evidence of genuinely flexible mandates these are placed into Lipper Flexible classifications (currently around 30 funds).

    In this month’s table, we see quite a mixed bag of results which reflects the considerable style variation in these portfolios (although all ten funds contain a high equity content). Typically, this makes maintaining a high Preservation and Consistent Return more challenging.

    Some funds have performed strongly across all Lipper Leader metrics

    Remember that we are ranking these funds based on 3-year returns. A low Consistent Return metric such as that exhibited by Sentinel, Ruffer and M&G suggests that there have been higher levels of shorter-term volatility in these funds.

    It is worth noting that Liontrust Sustainable Future Absolute Growth 2 Acc has scored top marks across all four metrics (BMO Multi-Manager Investment Trust C Acc and LF Miton Worldwide Opportunities B Acc only fall one short). It is quite a feat to have achieved such strong scores across a five-year period.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.


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    The recent announcement that one of the best-known fund managers in the U.K., Neil Woodford, has had the suspension of his flagship LF Woodford Equity Income Fund extended may be unwelcome to those investors who currently hold units in the fund.

    Why invest in mutual funds in the first place?

    Mutual funds are a popular form of collective investment which allow investors to own a proportion of an instantly diversified pool of investments held by an independent custodian.

    Many investors do not have the time or resources to build up a researched share portfolio and rightly believe that they might be exposed to too much stock-specific risk. For them, the mutual fund solution (in either an active or passive approach) might be the best solution.

    The instant diversification and general subsequent reduction in unsystematic risk of a mutual fund is ostensibly the greatest benefit. Investors are, however, still potentially exposed to other risks such as market, liquidity, and style risk.

    Fund closures such as Woodford’s are unusual and rarely garner so much publicity. The noise surrounding this closure is amplified by Woodford’s reputation, track record, and the popularity of this fund.

    However, it is worth reminding ourselves how mutual funds are designed and the built-in mechanisms which afford some investor protection.

    What causes a suspension?

    The travails of Woodford’s fund have been well documented, but any mutual fund may experience temporary suspensions. Where sustained and material outflows disrupt the day-to-day running of the fund to the detriment of remaining investors, suspension is an important defence mechanism.

    Most mutual funds can meet normal client redemptions—a proportion of cash in the portfolio is often sufficient. Where there are many redemptions, they must be funded through the sale of securities in the portfolio.

    Is portfolio management compromised?

    If the portfolio is constructed of, say liquid large-cap stocks, this should not be a problem. Where the portfolio contains less liquid investments, it can potentially force the fund manager to sell these assets while simultaneously reducing their prices, further compounding performance issues.

    Where a fund manager is exhausting liquid stocks to fund redemptions, this leaves an increasing proportion of illiquid stocks in the portfolio. The fund’s composition and style bias could be distorted considerably. It can also force a fund to potentially breach its mandate or regulatory requirements. A suspension prevents this problem amplifying.

    Mutual fund investors—equality is important

    Sometimes mutual funds will discourage large individual redemptions from a fund via a mechanism called a dilution levy—a charge applied to that specific client rather than across the mutual fund. A temporary suspension is another mechanism which will protect the investors who remain in a fund from the trading costs incurred by those who wish to leave. This is important when many investors are selling.

    Why suspend?

    A suspension gives a fund manager the opportunity to potentially restructure the portfolio without having to meet redemptions by selling underlying assets at a loss. It also allows a fund manager time to reassure investors and break a bad news cycle if that is also a contributory factor.

    Importantly, it potentially allows the natural forces of the market to increase the value of constituent securities, addressing the most likely cause of the redemptions in the first place.

    Many investors in the U.K. will be familiar with the temporary suspensions of funds exposed to commercial property prior to the Brexit vote in 2016. Most of those funds were trading normally within months and performance has since stabilised.

    A suspension is essentially a “time out” for a fund manager to consider options for remaining investors and should not necessarily be a reason to panic.

    Undoubtedly, any fund manager who is operating through a fund suspension faces challenges and there is no guarantee that investor sentiment, or the portfolio, can be turned around.

    Suspensions are not ideal, but better than chaos

    Investors should take some comfort that the mechanisms of a mutual fund (including suspension) aim to provide a chance for a fund to change its fortunes.

    The wording of the specific announcement referred to above states that the extension of the Woodford fund suspension provides “a realistic amount of time for Woodford to complete a measured and orderly re-positioning of the Fund’s portfolio of assets ensuring that there is adequate liquidity whilst preserving or realising the value of the assets“.

    It also concludes that this “would represent the best outcome in terms of value, time and fair treatment for all investors“.

    Is there any silver lining?

    The wording of the suspension extension announcement seems appropriate and appears to be in the best interests of remaining investors.

    The fortunes of a suspended fund are not predictable. In the unusual and worst case where a mutual fund no longer remains viable, its structure and a suspension allow for the orderly unwinding of its assets. This at least gives remaining investors the likelihood of recouping some capital.

    There will rightly be much more debate and analysis about how and why we got here, and it is very hard to provide comfort to any investor currently trapped in a suspended fund. However, a mutual fund structure affords more protection to an investor than if they were exposed materially to a single stock which went bust or a bond which defaulted.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. This work is the opinion of the author, not Refinitiv. The author does not own shares in this investment.


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    China has rarely been out of the news since its “Black Monday” correction in 2015 caused ripples in the global economy. More recently, the Trump Administration’s ongoing trade war with the country has amplified volatility in equity markets generally and China-based securities in particular.

    China volatility higher than other classifications

    Looking at the average of the monthly rolling three-month volatility of various IA fund classifications (over five years to June 2019), the IA China/Greater China classification has been 46% more volatile than the IA North America classification, 62% more volatile than the IA UK All Companies classification, and 216% more volatile than the IA Mixed Investment 40-85% Shares classification.

    In addition to this higher level of volatility, investors wishing to obtain exposure to China must also consider the unique complexities of the different regional markets. Hong Kong “H-shares” have very different liquidity characteristics from those listed on the Shanghai and the Shenzhen Stock Exchange (“A-shares”), and these differences need to be accounted for.

    Exhibit One. Top performing IA China/ Greater China Investment funds ranked over 3-years (with 5-year history – to June 2019)

    Source: Lipper by Refinitiv, Lipper for Investment Management. Past performance is not a reliable indicator of future performance.

    Plenty of choice, but beware performance variability…

    There are now nearly 40 funds in the IA China/Greater China classification, which gives investors a reasonably deep universe of choice for the region (interestingly there have only been four fund launches since Black Monday), but variability of performance is considerable. In the three years to the end of June 2019, there has been a difference of 49.8 percentage points between the best and worst performing funds.

    Exhibit Two. Three-month standard deviation of selected IA classifications (rolling monthly) for five-years to July 2019

    Source: Lipper by Refinitiv, Lipper for Investment Management.

    Look for strong Consistent Return and Total Return scores

    Importantly, there are several funds in this classification which exhibit strong Consistent Return Lipper Leaders metrics over five years. A good Consistent Return score combined with a strong Total Return score is a robust signal of fund manager skill. Good consistency of performance is even more credible when markets (such as China) have exhibited more volatility.

    It is a dangerous investment strategy to select funds on past performance alone. Chasing returns alone is rarely a successful strategy. In this instance, the poor Preservation scores that we see across the board for five years serve as a stark reminder that the risk of losing capital in this region is considerable. The loss in one fund of nearly 10% in the year to June 2019 despite good three-year performance is revealing.

    China is a complex, volatile region. Don’t rely on short-term metrics

    However, we are examining five-year Lipper Leaders metrics which allow for the “washing out” of some shorter-term volatility. The funds in this month’s table should warrant some further investigation as a potential long-term investment.

    The China/Greater China classification is one of considerable opportunity, but also complexity and volatility. An active fund manager with strong five-year Lipper Leaders scores is probably a decent place to start for any investor considering a fund in this region.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.


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    2018 was a difficult year for the European mutual fund industry– active and passive vehicles alike. The market witnessed poor performance across most asset classes and outflows of €129.2 billion. This constituted the first annual outflow in Europe after six consecutive years of net inflows.

    For 1H 2019, there has been a turnaround with the industry enjoying net inflows of €41.3 billion and performance data improving.

    Figure 1. Pan European Estimated Net Flows 2004 to 1H2019 (in € billion)

    European Fund Flow and Fund Market Review H1 2019

    Source: Lipper by Refinitiv.

    Over the same time period, the Lipper Global Equities ex UK classification has returned 14.3%, Lipper UK Equities 17.9%, and Lipper UK Equities 12.6% (in local currency).

    Figure 2. Lipper Global Equity Fund Classifications 1H 2019 Performance (local currency)

    Source: Lipper by Refinitiv. Lipper for Investment Management

    Source: Lipper by Refinitiv. Lipper for Investment Management.

     

    Active funds too, have begun to show signs of improving performance relative to their passive peers after a sustained period of relative underperformance.

    UK equity performance

    At the end of 2018, only 14% of active funds in the Lipper UK Equity classification had beaten the highest ranked broad-based tracker fund in the same classification for the 12 months.

    For three months of Q1 2019, this figure had improved to 29% and for 1H 2019, the figure now stands at 40%.

    Figure 3. UK Performance

    Source: Lipper by Refinitiv, Lipper for Investment Management.

    European – ex UK equity performance

    At the end of 2018, only 13% of active funds in the Lipper European Equity classification had beaten the highest ranked broad-based tracker fund in the same classification for the 12 months.

    For three months of Q1 2019, this figure had improved to 22% and for 1H 2019, the figure now stands at 26%.

    Figure 4. Europe ex-UK Performance

    Lipper for Investment Management

    Source: Lipper for Investment Management. Lipper for Investment Management.

    US equity performance

    At the end of 2018, 26% of active funds in the Lipper US equity classification had beaten the highest ranked broad-based tracker fund in the same classification for the 12 months.

    For three months of Q1 2019, this figure had improved to 28% and for 1H 2019, the figure now stands at 30%.

    Figure 4. US Performance

    Source: Lipper for Investment Management. Lipper for Investment Management.

    Longer periods improve the numbers, but not by much

    Advocates of passive investing will not feel threatened by these short-term numbers, despite the improvement for 1H 2019.

    If we look at the three and five-year data (to the end of 2018) on each of the above left-hand side graphs, in aggregate for each of the three classifications above, investors statistically had a better chance of outperforming if they had chosen a tracker fund.

    Opportunity cost remains material

    That is not to say those investors would be better off. When it comes to performance comparisons, it is important to consider the “opportunity cost” of not investing in an active fund (i.e., the potential outperformance of a fund over an index). Often this can be considerable.

    The blue bars in each of the graphs on the right-hand side reveal this. For 1H 2019, the best-performing active fund in the Lipper UK Equities classification outperformed the highest-ranking broad-based tracker by 4.6% percentage points.

    In the Europe ex UK classification, over the same six-month period, that figure is 20.5% and for US equities, 9.6% points—quite decent out-performance if indeed you were able to choose those winning funds in advance.

    2019 – Improving fortunes for active?

    The thesis is that typically, late-cycle environments precede a rotation out of momentum-biased ETFs and the increasingly expensive large-cap stocks in which they invest, providing fertile ground for active stock pickers.

    1H 2019 has shown a marked improvement in the relative performance of active funds against their passive peers. Although coming off a low base, perhaps there are signs that we are finally beginning to enter that period in which the market is more conducive for active funds in aggregate.

    There is considerable noise in the market and judging where we are in the cycle is not easy. Active fund performance has a lot of ground to make up. It will be interesting to watch their fortunes throughout the rest of 2019.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Views expressed here are those of the author, not necessarily Refinitiv. Past performance is not a reliable indicator of future performance.


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    Do you remember when Targeted Absolute Return (TAR) funds were the darling of the U.K. fund industry? Lipper estimates revealed that in 2016, there were nearly £6 billion of net inflows into this classification, 2017 saw a further £2.6 billion and 2018, £1.6 billion. However, in the year to July 2019, there have been nearly £2.6 billion of outflows.

    TAR funds are a nebulous collection and pose some potential pitfalls for the unwary investor. Many will be drawn to the classification to dampen volatility, some to the attraction of positive returns in all types of markets, others even as a cash proxy.

    TAR funds form a very broad church

    To illustrate the diversity here there are 26 of the more granular Lipper fund classifications within the Investment Association (IA) classification. These include mixed asset funds, global bond funds, multi-strategy vehicles and long/ short vehicles to name but a few.

    Exhibit One. Top performing IA Targeted Absolute Return Funds ranked over 3-years (with 5-year history – to July 2019)

    Source: Lipper by Refinitiv. Lipper for Investment Management. Past returns are not a reliable indicator of future returns.

    Source: Lipper by Refinitiv. Lipper for Investment Management. Past returns are not a reliable indicator of future returns.

    The IA themselves recognise the potential variation in product strategy and complexity by qualifying their definition of the classification with cautious footnotes and the incorporation of a twelve-month screen. This acknowledges the “wide expectation” among consumers and advisers that funds in the TAR sector will aim to produce positive returns after twelve months.

    Many TAR funds have not met investor expectations

    2018 was a tough year for all markets, the IA TAR classification returned -2.7% which is better than the Lipper Global Equity return of -6.8% (in GBP) over the same period. Year-to-July 2019 as markets have rallied, 19.4% (global equities) v 3.5% (TAR) may not be quite as satisfying an outcome. Therefore, it is likely the failure of many of these funds to meet the expectations of their investors that has caused their fall in popularity.

    Looking at our table, we can see considerable performance variation – consider the extremes just in the three-month data of our table. This reflects portfolio composition differences. For investors grappling with this broad church of funds, Lipper Leader scores (based on the granular Lipper Global Classifications) can offer some assistance.

    Preservation of capital is key

    For investors attracted to this classification for the preservation of capital, the Preservation score is obviously most significant and funds with a good score here have shown they have protected capital against their peers over the last five years.

    However, for investors who are likely to suffer from “market rally envy”, the combination of a strong Preservation and Total Return scores implies that not only is the fund meeting the qualifications set by the IA in this classification, they have not forgone upside whilst doing so. Throw in a good Consistent Return score and you are really in the sweet spot.

    Be sure to lift the bonnet

    The IA TAR sector requires considerable analysis. It is far from a homogeneous sector and this is reflected by the considerable variation we see in performance outcomes. Investors really need to lift the bonnet here. There are some great funds in the classification who have stood the test of time and delivered what investors might expect. Plenty too which haven’t.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.


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    Investors and advisers will remember the old IA Cautious Managed sector as it was to the end of 2011. The collapse of the ill-feted Arch Cru Fund in 2009 (which was classified in that sector), may have been a contributor to the desire for the IA to make the managed sector names less prescriptive and more informative for investors. This certainly is the case for the Mixed 20%-60% Shares classification.

    This is a popular home for investors seeking broad exposure

    The IA Mixed Investments 20-60% Shares classification as it is now known remains a popular home for investors who seek a broadly mixed exposure of assets with both an eye on capital growth and capital preservation. The sector’s importance is reflected in its considerable size with over £53 billion of assets (as at September 30, 2019).

    There is a considerable risk difference in funds at either end of the asset allocation spectrum in this classification. This is reflected in the variation of returns: Over the three years to 30 September 2019, the best performing fund returned 30.8% whilst poorest performer over the same period returned -0.9% against the sector return of 13.7%.

    Exhibit One. Top performing IA Mixed 20%-60% Shares Funds ranked over 3-years (with 5-year history – to September 2019)

    Source: Lipper by Refinitiv. Lipper for Investment Management. Past returns are not a reliable indicator of future returns.

    Source: Lipper by Refinitiv. Lipper for Investment Management. Past returns are not a reliable indicator of future returns.

    This is a favourite classification of mine. There is a good selection of well-respected funds here many of which can form a solid foundation for a diversified investment portfolio. The key Lipper Leader metrics here are Consistent Return matched with a decent Preservation metric.

    Kames Diversified Monthly Income Fund scores full marks in each Lipper Leader metric (this is very unusual) and there are strong offerings from RLAM, Liontrust, Seneca and M&G.

    Most funds are currently at the higher end of permissible equities exposure

    It is worth noting here that most of the funds in this month’s table are at the higher end of the permissible equity allocation. The average split for these 10 funds is over 50% equity. Investors should always be checking fact sheets to see how their funds asset allocations compare.

    On this basis, I think the IA was right to do away with the “cautious” label. Certainly, a portfolio with 50% equities could be quite volatile, although the strong Preservation metrics for these 10 funds, suggest they are doing something right across their asset allocation strategies.

     


    Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

    Disclaimer: 
    This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. Past performance is no indicator of future performance.


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