Money is in jeopardy, but only if you store it in the wrong place. World Finance explores which asset management companies can keep the wolves from the door
When a storm’s brewing, seek a safe haven. That’s what investors in Europe and other parts of the vast universe of fund management are doing right now, as the latest report on the state of the European investment fund industry attests. World Finance found this the perfect time to analyse and recognise the best managers in the industry, in the World Finance Investment Management Awards 2012.
According to the European Fund and Asset Management Association (EFAMA), whose members count a collective €13trn under management, there was a €47bn surge in net inflows into their coffers in March this year. More than doubling February, the rush of funds is mainly explained by a stampede into bonds and money market instruments – historically classic safe-haven investments.
With turmoil raging over the eurozone, fund managers are benefiting from a flight to safety: the numbers tell the story of this exit to security. Most of the €47bn flood of investment capital came from a €26bn increase in bonds (fixed-income instruments), nearly three times more than February, and a €15bn gain in money-market funds (an astonishing 15-fold increase). Also, there was a surge into trust funds – UCITs – that are marketable right across Europe and seen as relatively liquid assets.
It’s not that investors are totally ignoring the share markets of Europe, but their level of interest has dipped. At €1.5bn compared with February’s €4bn, net inflows into equity funds just scraped into the black. “The demand for equity funds continued to be low,” explains Bernard Delbecque, EFAMA’s Director of Economics and Research. “[That] signals lingering concerns about downside risks to prospects of growth.” As fund managers around the world would agree, there’s nothing quite like turmoil in the global markets to fuel the flow of investment capital into relatively mundane classes of assets. And also, into more promising areas.
Mañana no more
For fund managers, the Latin American-wide belief that tomorrow is soon enough to solve any problems is fast becoming irrelevant. According to State Street, the US-based custody bank, tomorrow has come for the booming, commodity-based economies of the region as investment capital pours into funds based there. The coffers of the central banks, sovereign wealth funds, pension funds and mutual funds of Brazil, Mexico, Chile, Colombia and Peru are overflowing with money seeking assets in which to invest.
Consider the numbers. Collectively, these institutions already hold $2.2trn, not bad for economies that, in some cases at least, were considered troubled a decade or so ago. Yet, estimates State Street, with compound annual growth of 15 percent, the $2.2trn will turn into about $4.4trn over the next five years as Latin American investors pile into much more advanced investment opportunities than the mainly fixed-deposit accounts they have relied on in the past.
As State Street’s analysis points out, one of the catalysts for this trend is regulatory reform. Now that Latin American governments are overcoming their predilection for protectionism in investment, they are allowing and even encouraging funds to invest abroad because it buttresses portfolios against domestic downturns. One of the countries in the forefront, Brazil has recently relaxed its offshore investment limits. As a result, predicts State Street, its mutual fund industry with current assets of $1.1trn is looking for more offshore investments.
Similarly, Chile’s pension funds ceiling on cross-border investments will soon be lifted from 60 to 80 percent of assets while Colombia will within three years probably double the permitted overseas allocation for mutual funds and pension funds to around 30 percent. Privatised pension funds are showing the way. Between them, Chile, Colombia, Peru and Mexico have invested about $120bn of a total $400bn in assets outside their borders.
Queuing for infrastructure
Some Latin American-oriented funds can barely cope with the influx of investment money. After all, 70 percent of growth in the global economy is happening in emerging markets and much of that originates from Latin America. “People are queuing up to give us money,” says the chief executive of a fund that invests in a variety of projects in countries such as Argentina and Bolivia of which many investors are normally nervous.
The trick, say professional investors, is to anchor such assets with institutions such as the World Bank and the European Bank for Reconstruction and Development, which have a lot of experience in piloting pipeline construction and other essential infrastructure. Also, these institutions have a record of not losing their money and making good long-term debt partners.
In fact, the flow of money into funds should prove a boon to infrastructure projects just about everywhere. Once seen as a relatively humdrum avenue for investment, the sector is now seen as a highly suitable and lucrative home for pension funds in particular. Many funds in the UK, North America and the Middle East are looking to invest deeply in projects that deliver reliable – if not spectacular – returns for investors as part of a shift towards socially beneficial investments.
In this, funds are following the lead of sovereign wealth funds, especially those in emerging markets, which are now pouring billions of dollars every month into landmark projects such as roads and bridges, ports, rail networks and airports that offer medium-to-long-term returns for investors, but permanent improvements in quality of life for citizens.
Boom in ETFs
The rapid acceptance of exchange-traded funds is another factor boosting funds under management right across the globe. Another haven in a climate of uncertainty, Exchange-traded funds (ETFs) are designed to track the performance of the equities and (as we see) other type of investments. This is because such instruments take an essentially neutral view of where markets are heading.
According to global consultancy Cerulli Associates, over 60 percent of world fund managers expect even more investors to pile into ETFs this year and they also expect that trend to keep right on going. By 2016, estimates Cerulli in a recent analysis of the market, assets held in exchange-traded funds globally will top $3.8trn in a massive injection into the industry. And as ETFs become more widely adopted, they are expected to mature into variants that will fuel further growth. For instance, predicts Mark Wiedman, Global Head of iShares, which dominates the ETF space, bond-based funds are looming on the horizon.
“Fixed income markets are the next big frontier for the ETF industry,” he says.
Fixed-income ETFs would wrap up a wide variety of instruments such as high-quality investment grade debt, secondary debt (a vast market that provides the credit for many of Europe’s biggest companies) and municipal bonds. The attraction of such bonds is their inherent security in an unstable investment world. For instance, a good return from fixed-income assets is considered to be in the high single figures compared with the 30-40 percent return that a private equity fund would expect, albeit with much higher risk.
The medium-term prospects for funds are significant. At the end of April this year, according to iShares, assets held in fixed-income ETFs totalled nearly $300bn. Within four or five years, that figure could double. “ETFs are only toddlers in bond land,” iShare’s Wiedman told the Financial Times. “We expect to see explosive growth.” But for McKinsey group, even that estimate’s too conservative. With money pouring into fixed-income ETFs at a rate of $25.5bn in the first four months of 2012, the global consultancy believes the class could hit $600bn by 2015.
All by itself, China presents a massive current and future opportunity for funds, especially pension-based ones. According to Howhow Zhang, Head of Research at Shanghai-based consultancy Z-Ben Advisors, funds in the Heavenly Kingdom’s giant pension pot are set for stratospheric growth as increasingly affluent Chinese seek to give themselves a comfortable old age instead of working until they drop, as most still do. Assets under management in pension funds currently stand at $1.2trn but will, predicts Zhang, grow nearly four-fold to over $4trn by 2020.
Certainly, China’s state-run investment authorities, led by the National Social Security Fund, are anxious to tap overseas expertise in fund management. It’s been handing out mandates to offshore funds for the last six years in a bid to broaden the investment base, and is expected to put more mandates on the table in coming years. American funds have been the biggest beneficiaries, securing some 60 percent of the offshore slice of China’s pension investments, roughly three times as much as Europe.
Hedge funds are alive and well
The predicted demise of much, if not most, of the hedge-fund sector in the wake of the financial crisis has not yet happened. In fact, far from it. Heavily reliant on debt-based techniques, the industry has been attracting investors at a great rate. In the strongest opening quarter in six years, total hedge-fund capital soared to $2.13trn in early 2012, mainly on the back of the biggest net asset flow since the industry was in its infancy over 20 years ago.
According to consultancy Hedge Fund Research, this growth was achieved despite dismal results in classic industry techniques such as shorting the share markets (selling equities to buy them later at a lower price and profit from the difference). Certainly, the hedge fund industry’s current performance belies the fears of George Soros, one of the great investors, that 75 percent of it would be wiped out.
The healthy state of most of the fund management industry shows that it is emerging from the financial crisis in good shape. And it’s done so by adapting to a more fraught investment environment by offering products that gun-shy investors want. As such, World Finance is proud to announce its Investment Management Awards 2012.