Wary investors threaten active managers’ recovery
Concerns over performance linger despite the improved mood of the equity markets
Active asset managers sound much happier than they did three months ago, especially in Europe, and their actions are beginning to match the buoyancy of their mood. The underlying picture, however, is less than rosy.
There are at least two reasons for active managers to cheer. First, equity markets have been rising. The FTSE 100 is up 30% on three months ago, as are the Dax, the CAC 40, the Dow Jones Industrial Average and the Nikkei 225. In the developing markets, Brazil’s Bovespa is up 10% over the period, the Shanghai Composite has risen 25%, the Bombay Sensex is up 75% and Moscow’s RTS has almost doubled.
Second, investors have returned. European retail investors pumped a net €5bn into mutual funds in the first quarter, according to data provider Lipper FMI. The comparable figure from a year ago was a net outflow of €38bn.
The figures are particularly encouraging since they exclude flows into money market funds. Lipper FMI’s figures show risky assets were popular in the first quarter, with corporate bond funds taking in €3.5bn of new money while emerging market equity funds gathered €1.3bn.
The mood has improved so much that several companies, including Aberdeen Asset Management, Baring Asset Management, BNP Paribas Investment Partners and Investec Asset Management, have started hiring again.
But a closer look at the hiring shows it is selective. Much of the demand for staff is coming from smaller boutiques acting opportunistically and companies setting up asset management operations in the UK, such as Macquarie and Vanguard. Moreover, the job cuts are not over.
Lisa Wyss, a headhunter specialising in UK asset management at Blue Square Consulting, said: “The larger companies are still making cuts: they have always been top-heavy and middle-management roles are the first to go. They have used the downturn as an opportunity to reassess their businesses.”
The caution of the larger asset managers is well founded and is not based solely on fears that equity markets might fall back. The wariness arises because, regardless of the short-term bounce, active managers face an acute, medium-term problem: investors have lost confidence in them.
Warren Buffett may, last year, have forgotten his first rule for successful investment – “never lose money” – even if his second rule was never to forget his first rule. But Buffett’s record of returns before 2008 is so good investors are likely to forgive him. Other active managers’ results have been more patchy and investors are taking a less charitable view.
It was only in the first quarter of this year, after 18 months of financial crisis, that global equity managers serving UK pension schemes beat the market, according to performance measurer BNY Mellon Asset Servicing. In fact, they failed to beat the index over three, five and 10 years.
Many investors have concluded that active asset management is a waste of their money. Exchange-traded funds, perhaps the cheapest and most passive way of investing, have taken off, with more than $110bn flowing into them last year in the US alone, according to Deborah Fuhr, head of ETF research and implementation at Barclays Global Investors.
Alan Miller, a former investment chief of once-listed UK manager New Star Asset Management, is launching a wealth management boutique, Spencer-Churchill Miller Private, which will use ETFs as the basis for its investments.
Just keep going
Active asset managers can only suffer during this shift towards passive investment. Longer-term, however, those active managers that are still around have something to look forward to: less competition.
The hedge fund industry, where everything always seems to happen more quickly, is already feeling the benefit of a reduction in the number of long/short equity funds from 650 a year ago to 400, and investment banks’ proprietary trading desks scaling right back.
Equity hedge funds’ returns have shot up this year, with several making between 20% and 40% in the first five months.
The same will come true, in time, for the mainstream asset management industry. For now, however, the task is just to keep trying.
Don’t look back
If all else fails, try to find a buyer. The chairman of a UK asset manager told the story last week of an investment bank trying to sell a mainstream fixed-income manager with £200m in assets under management.
There seems to be little to sell, however. The boutique’s performance is ordinary, which perhaps explains why client redemptions have caused its assets under management to fall from £1.8bn.
Beyond the facts of mediocre returns and evaporating clients, there is a sense of the established companies enjoying the suffering of their smaller rivals. Many of the boutiques were created by managers who left big companies complaining about bureaucracy and funds that were too large to make interesting returns. In many cases, their departures caused their former employers a bad headache.
It seems a warm welcome does not await those lucky enough to find new owners.
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