Funds Hub

from Global Investing:

Winners, losers and the decline of fear

Lipper has released its monthly look at fund flow trends in Europe, and as ever, it throws up some intriguing results.

August saw bond funds again dominate inflows, pulling in a net 20.8 billion euros and just a tad down on July's record. Stocks funds continued to suffer, as British equity products led the laggards with close to 2 billion euros withdrawn by clients over the month. North American equity funds and their German counterparts also saw big outflows.

Looking regionally, the Italian fund sector continues to show some surprising strength. Net funds sales there topped the table for the second month running. You can see Lipper's heat map of sales and AuM below:

Now I plainly lack the analytical acumen of the Lipper experts like Ed Moisson, but inspired by their efforts I've been running some numbers for fund flows over the year to date, trying to dig a little deeper than the headline figures. There's no detailed data yet available for September so forgive me for looking back at the eight months to end August, where there is something of a confirmation that investors are losing some of their timidity.

I looked worldwide, but restricted the search to primary equity funds which were at least one year old at the beginning of 2012. The focus was on finding out the fund sectors which saw the most money coming in and going out relative to their total assets under management.

There are two numbers which immediately stand out. One winner; one loser.

from Global Investing:

Funds will find a chill Wind in the Willows: Lipper

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

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

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

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

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

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

FIDUCIARY DUTY 

from Global Investing:

Making the most of the shareholder spring

We've had a fair while to ponder the implications of a British AGM season which saw investors oust a few CEOs and deal bloody noses to a few others. We've also had some data which implies the revolt wasn't as widespread as advertised, but Sacha Sadan at Legal and General Investment Management thinks we have seen something important, and something that must be exploited.

His take is that austerity is at the heart of the matter. While the public suffers in a faltering economy, and investors stomach dwindling returns, it was never going to fly that pay deals for bosses should survive unchallenged. Add to that government and media pressure on remuneration, plus a new era of investor collaboration thanks to the stewardship code, and you get an ideal set of factors to drive the 'shareholder spring'.

Of course, austerity won't (let's hope) last forever; governments are unlikely to sustain a narrative around 'fat cat' bosses; and the media always moves on. For Sadan that makes it crucial for investors to strike while the iron is hot.

Governance chiefs at the big British fund houses are fond of saying that their best work goes unnoticed. They say that their diplomatic efforts behind closed doors, in delicate negotiations with CEOs and their boards, achieve far more than grandstanding AGM votes which grab front page headlines. All of which could imply that the 'shareholder spring' was a failure by investors to convince executives of their case.

But the way Sadan tells it, it is a line in the sand. And it's one which he says is already having an effect as executives hit the phones to their cherished investors, eager to make sure they don't become the new Andrew Moss or Martin Sorrell: "They don't want to be on that list next year," Sadan said during a briefing at LGIM's City headquarters on Wednesday.

And what will fund houses be telling those bosses that deign to call? Well it's a well worn story of better alignment of interests and simplified, open schemes for top level pay, skewed to medium and long-term performance. The Kay Review echoed their sentiments pretty well.

Sadan has also argued executives should own a "meaningful" amount of shares in their company. And back in July, Fidelity's Dominic Rossi called for a lock-in on shares paid to executives, preventing bosses from cashing them in for at least five years. He also floated the idea of executives receiving some of their pay in the form of 'career' shares which they must hold until they leave the company. Finnish central bank governor Erkki Liikanen, meanwhile, has proposed that bank bonuses be partly paid in bonds. In short, a lot of it boils down to getting more 'skin in the game' from executives.

from Global Investing:

No BRIC without China

Jim O' Neill, creator of the BRIC investment concept, has been exasperated by repeated calls in the past to exclude one or another country from the quartet, based on either economic growth rates, equity performance or market structure. In the early years, Brazil's eligibility for BRIC was often questioned due to its anaemic growth; then it was the turn of oil-dependent Russia. Over the past couple of years many turned their sights on India due to its reform stupor. They have suggested removing it and including Indonesia in its place.

All these detractors should focus on China.

China's validity in BRIC has never been questioned. Aside from the fact that BRI does not really have a ring, that's not surprising. China's growth rates plus undoubted political and economic clout on the international stage put  it head and shoulders above the other three. And after all, it is Chinese demand which drives a large part of the Russian and Brazilian economies.

But its equity markets have not performed for years.

This year, Russian and Indian stocks are up around 20 percent in dollar terms while China has gained 9 percent and Brazil 3 percent. In local currency terms however China is among the worst performing emerging markets, down 5 percent. Brazil has risen 9 percent.

Over the past five years, MSCI China. which makes up 40 percent of the BRIC index, has lost 18 percent, Thomson Reuters data shows.  That has pushed the broader BRIC into a negative return of almost 10 percent in this period.

The BRIC equity losses and BRIC funds' poor returns are now causing many to question the validity of the BRIC concept itself, a topic we explored in this recent article.  But clearly the problem with BRIC equities lies with China and as the economy slows, more losses are likely in the short-term.  The Shanghai market has taken little cheer from the Fed's money printing-announcement, focusing instead on falling property prices locally and potential problems at Chinese banks.

from Global Investing:

Pay votes update… Spring takes a fall?

A few months ago, at the height of the British AGM season, we ran some numbers on shareholder protest votes over executive pay.

It seemed striking at the time that despite all the talk of revolution, the average vote against FTSE 100 companies' remuneration reports had only edged higher, to 8.2% from 8.0% in 2011.

This week I've been catching up on the AGMs which have taken place since May, giving us a decent quorum of 92 companies, and the results are even more startling.

The average protest vote in 2012 now stands at 7.6% -- less than it was last year. Abstentions (or 'witheld' votes, in the language of the proxy form) were also down, at 2.5% against 3.6% in 2011.

As we noted previously, this doesn't blow out of the water the idea of proactive, emboldened investors. Aviva's Andrew Moss and WPP's Martin Sorrell would take issue with that, and it's worth noting that the 2012 number would likely have been higher without some scrambling by Boards to placate grumbling investors as it became clear that revolution was in the air.

It does, however, help tell a more level-headed story about the nature and extent of any uprising by the grey-suited fund managers of the City.

For the completists, you can get in touch with me on Twitter via @reutersJoelD to receive a spreadsheet full of deeply exciting data.

from Global Investing:

Emerging corporate debt tips the scales

Time was when investing in emerging markets meant buying dollar bonds issued by developing countries' governments.

How old fashioned. These days it's more about emerging corporate bonds, if the emerging market gurus at JP Morgan are to be believed. According to them, the stock of debt from emerging market companies now exceeds that of dollar bonds issued by emerging governments for the first time ever.

JP Morgan, which runs the most widely used emerging debt indices, says its main EM corporate bond benchmark, the CEMBI Broad, now lists $469 billion in corporate bonds.  That compares to $463 billion benchmarked to its main sovereign dollar bond index, the EMBI Global. In fact, the entire corporate debt market (if one also considers debt that is not eligible for the CEMBI) is now worth $974 billion, very close to the magic $1 trillion mark. Back in 2006, the figure was at$340 billion.  JPM says:

The international primary market for EM has transformed into a corporate debt market, with sovereign issuance now less than one-third of total EM external issuance.   

JP Morgan expects the $1 trillion milestone to be hit by year-end, when the total stock of sovereign dollar bonds will stand at $700 billion.

There are many reasons for this explosive growth. First, sovereigns are issuing less dollar debt, resorting instead to local bond markets where they can raise funds in their own currencies. Last year, governments raised $566 billion at home, compared to just $70 billion on dollar bond markets.  Their space has been filled by companies which have been emboldened by investors' enthusiasm for emerging markets and the prospect of cheaper capital than at home. And most recently, the syndicated loan market, previously the main funding source for corporates, has dried up -- JPM says loan volumes are down 90 percent from 2011.

from Global Investing:

Emerging corporate debt tips the scales

Time was when investing in emerging markets meant buying dollar bonds issued by developing countries' governments.

How old fashioned. These days it's more about emerging corporate bonds, if the emerging market gurus at JP Morgan are to be believed. According to them, the stock of debt from emerging market companies now exceeds that of dollar bonds issued by emerging governments for the first time ever.

JP Morgan, which runs the most widely used emerging debt indices, says its main EM corporate bond benchmark, the CEMBI Broad, now lists $469 billion in corporate bonds.  That compares to $463 billion benchmarked to its main sovereign dollar bond index, the EMBI Global. In fact, the entire corporate debt market (if one also considers debt that is not eligible for the CEMBI) is now worth $974 billion, very close to the magic $1 trillion mark. Back in 2006, the figure was at$340 billion.  JPM says:

The international primary market for EM has transformed into a corporate debt market, with sovereign issuance now less than one-third of total EM external issuance.   

JP Morgan expects the $1 trillion milestone to be hit by year-end, when the total stock of sovereign dollar bonds will stand at $700 billion.

There are many reasons for this explosive growth. First, sovereigns are issuing less dollar debt, resorting instead to local bond markets where they can raise funds in their own currencies. Last year, governments raised $566 billion at home, compared to just $70 billion on dollar bond markets.  Their space has been filled by companies which have been emboldened by investors' enthusiasm for emerging markets and the prospect of cheaper capital than at home. And most recently, the syndicated loan market, previously the main funding source for corporates, has dried up -- JPM says loan volumes are down 90 percent from 2011.

from Global Investing:

LIPPER-ETF tiddlers for the chop?

(The author is Head of EMEA Research at Thomson Reuters fund research firm Lipper. The views expressed are his own.)

By Detlef Glow

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

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

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

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

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

from Global Investing:

GUEST BLOG: The missing reform in the Kay Review

Simon Wong is partner at investment firm Governance for Owners, adjunct professor of law at Northwestern University School of Law, and visiting fellow at the London School of Economics. He can be found on Twitter at @SimonCYWong. The opinions expressed reflect his personal views only.

There is much to commend in the Kay Review final report. It contains a rigorous analysis of the causes of short-termism in the UK equity markets and wide-ranging, thoughtful recommendations on the way forward.  Yet, it is surprising that John Kay omitted one crucial reform that would materially affect of the achievability of several of his key recommendations – shortening the chain of intermediaries, eliminating the use of short-term performance metrics for asset managers, and adopting more concentrated portfolios.  What’s missing?  Reconfiguring the structure and governance of pension funds.

A major challenge facing pension funds in the UK and elsewhere is the lack of relevant expertise and knowledge at board and management levels.  Consequently, many rely heavily – some would argue excessively – on external advisers.  I have been told by one UK pensions expert that inadequate knowledge and skills within retirement funds means that  investment consultants are effectively running most small- to medium-sized pension schemes in Britain. Another admits that trustees, many of whom are ordinary lay people with limited investment experience, are often intimidated by asset managers.

Because these funds cannot afford to build in-house investment capabilities, they outsource this function to external managers.  What’s more, some pension funds will utilize intermediary “funds of funds” to help them make investment decisions, thereby extending the equity ownership chain.

Strengthening board and management capabilities at pension funds would bring substantial benefits to their schemes and the broader economy.  First, trustees and executives would be better equipped to make investment and other key decisions on their own, including questioning prevailing practices that may benefit investment intermediaries more than them.  For example, they could challenge their investment consultants and fund managers on why adequate diversification requires holding 8,000-10,000 stocks rather than a more manageable 3,000-4,000 (or an even smaller number).

Second, they would be more capable of assessing investment manager performance rigorously and thoroughly.  Presently, reflecting their trustees’ paucity of expertise on investment matters, many pension funds employ crude performance metrics (e.g., quarterly return against a pre-selected market benchmark) to evaluate fund managers.

from Global Investing:

Yield-hungry funds lend $2bln to Ukraine

Investors just cannot get enough of emerging market bonds. Ukraine, possibly one of the weakest of the big economies in the developing world, this week returned to global capital markets for the first time in a year , selling $2 billion in 5-year dollar bonds.  Investors placed orders for seven times that amount, lured doubtless by the 9.25 percent yield on offer.

Ukraine's problems are well known, with fears even that the country could default on debt this year.  The $2 billion will therefore come as a relief. But the dangers are not over yet, which might make its success on bond markets look all the more surprising.

Perhaps not. Emerging dollar debt is this year's hot-ticket item, generating returns of over 10 percent so far in 2012. Yields in the so-called safe markets such as Germany and United States are negligible; short-term yields are even negative.  So a 9.25 percent yield may look too good to resist.

Moreover Ukraine paid a substantial premium to compensate investors for the risk. Last June it sold a $1.25 billion 5-year bond, paying just 6.25 percent or 300 basis points less. Michael Ganske, head of emerging markets research at Commerzbank says:

At the moment investors are pouring money into emerging fixed income, they just want to get a better yield for their portfolios. People understand Ukraine is not a fantastic credit but it is a matter of value for money -- just look at the yield. I think this deal was positive for both sides: Ukraine were able to issue and get money in the bank and investors received an attractive yield.

Ukraine wasn't the only weak credit to benefit from the appetite for emerging debt. Sri Lanka, rated like Ukraine deep in junk territory, raised $1 billion in 10-year cash, paying 5.875 percent. Demand for the bond exceeded $10 billion.