Investment Management
Review - Issue 4
What's in Issue 4?
Review of 2005
‘2005 – A new dawn for the industry?’ examines the more important developments in 2005 that have long-term significance for the fund management industry.
Attack on structured product providers
Scott Levy, a leading authority on structured products, castigates their providers for not meeting investor needs. His arguments are set out in ‘A failing of structured product providers’.
Global pensions – measures for the coming crisis
The demographic crisis building up in pensions worldwide is a familiar topic. But Elizabeth Corley and Brigitte Miksa, leading experts at Allianz Global Investors, one of the world’s largest asset management houses, point to some startling facts which are less well known. Their article, ‘West European pension markets – Privatising pensions provides new challenges for asset management’, analyses the impact of privatising pensions, which is a widespread government response to the demographic changes. They argue that the consequent challenges to asset managers are enormous.
Investing for pension funds
It is well known that minimising risks for pension funds involves taking account of their liabilities in investment strategy. ‘Liability-driven investment’ (LDI) is the formal methodology of this approach. In ‘Liability-driven investment today’, Kathleen Currie, globally responsible for LDI at AXA Investment Management, another of the world’s largest fund management houses, provides a detailed expert explanation of the philosophy and practices of this approach.
Refco scandal - aftershocks
Last October’s Refco scandal caused ripples worldwide and led to much soul-searching in the financial sector. ‘A wake-up call in derivatives’ outlines what happened and comments on the concerns that have arisen about key players and practices in the industry.
Bringing Chinese finance up to speed
China’s backward financial system has long lagged behind its status as a global economic power. The enticing prospect of change is described in ‘China - the financial market of the 21st century?’.
Looking after the heirs
Private bankers need to take account of not only their existing wealthy customers, but also the next generation. The key issues arising are discussed in ‘Baby boomer problems for private bankers’.
Sell while the going is good
Asset management companies are doing well and the number of sellers has diminished. But Ray Soudah, the M&A expert, argues that now is actually the time to sell, in ‘Expert advises selling fund management companies’.
Prosperity might be bad
European funds enjoyed strong inflows in 2005, but this is not an unmitigated blessing, since it could delay much-needed changes. ‘Strong fund flows - set-back for the industry’ explains why.
Gunning for the Japanese wealthy
Private banking in Japan is largely undeveloped and ‘Problems in Japanese wealth management’ looks at the problems, opportunities and prospects.
Fund managers strike gold
The factors, stemming from key industry trends, that underlied the booming bonuses paid to fund managers in 2005 are outlined in ‘Fund manager incomes take off’.
Cross-border finance
In ‘Easier cross-border activity’, European Commission white paper aimed at facilitating cross-border activity is discussed.
Banks are the winners
The dominant role of banks in selling cross-border financial products in Europe, which has implications for their business strategy, is the subject of ‘Banks are beating IFAs’.
The single market is a sham
Fidelity International’s head of mutual funds in Europe attacks the workings of the European single market in ‘Fidelity head attacks the single market’, explaining why much of the ‘cross-border’ business is not really cross-border.
Emergence of emerging market debt
Emerging market debt is well on the way to becoming a respected asset class, but major obstacles impeding its progress are listed in ‘Structural evolution of the global bond market’.
Catering for small companies
A pan-European exchange is being mooted for small and medium-size companies, filling a much needed gap. The plans are reported in ‘European fledglings - filling a void’.
Copycat problems for successful funds
Well-known funds are hampered in their striving for performance by stalkers. The problems arising are outlined in ‘Information leakage’.
New approaches to research
The production of research is undergoing massive transformation and various new developments are reported in six articles. New regulatory requirements are covered in:
Upheavals in research - new regulatory demands’. Fidelity’s moves to anticipate regulation are outlined in ‘Fidelity's new experiment’. The supply of research from independent boutiques and the sell side are the focus of ‘Independent research - matchmaking problems’ and ‘Does sell side still offer value?’. New ways of providing research are outlined in ‘Outsourcing research’ and ‘Research - computers outperform humans?’.
Effectiveness of performance fees
Performance fees are supposed to provide an incentive for fund managers to perform, but the counter-arguments and problems are considered in ‘Performance fees- potential problems’.
A maverick bank
Macquarie Bank has come into the spotlight through its bid for the London Stock Exchange. Its antecedents are set out in ‘An unconventional investment bank’.
Unprofitable corporate governance rules
From Asia comes evidence that good corporate governance does not always lead to higher share prices and the details are given in ‘Asia questions corporate governance’.
Will portable alpha take hold?
Portable alpha is being put forward as a powerful tool for creating good returns. ‘Progress in portable alpha’ charts its progress in recent years and it is argued that there is room for doubt as to its continued growth.
Credit derivative bets against house prices
The phenomenal growth of the credit derivatives market is now reaching into US residential property. The whys and wherefores are explored in ‘Credit derivatives for residential bears’.
Structured products for German pensioners
The promotion of structured products as retirement vehicles for Germans, and its drawbacks, are the theme of ‘German public favours structured pensions’.
Hedge funds supplanting banks
The new role of hedge funds in undertaking certain types of bank lending is examined in ‘Hedge funds rush in where banks fear to tread’.
London’s dominance
The pre-dominant position of London in the European hedge fund industry, and the reasons for it, are the subject of ‘London dominates European hedge funds’.
Japanese jump on the hedge fund bandwagon
The extraordinary progress of the Japanese hedge fund industry from a standing start in 2000 is detailed in ‘Japanese love affair with hedge funds’.
Liquidity fears with structured hedge funds
Regulators are concerned that structured products linked to hedge funds might cause liquidity problems, because of special terms granted to some investors. These concerns are outlined in ‘Dangers of structured products’.
Advisors’ conflicting roles
The conflicts of interest arising from fund-of-hedge-fund managers also acting as advisors are analysed in ‘Conflicts of interest for hedge funds’.
Scope for dishonesty
‘Cheating with side pockets?’ focuses on the potential for hedge fund managers to cheat their investors through the use of special vehicles for illiquid investments.
Goldman Sachs outshines hedge funds
‘Is Goldman Sachs a gigantic hedge fund?’ is a slightly tongue-in-cheek article, but has serious overtones. It outlines the case for regarding Goldman Sachs as a very successful hedge fund, and touches on the availability of talent for the hedge fund industry.
An exit problem in Asia
Private equity investments ultimately need to be realised. Whether the Asian economies can provide exits in sufficient volume for private equity investors is addressed in ‘Shortage of exits in Asia’.
By-passing private equity firms
‘Pension funds as rivals to private equity firms’ looks at how some pension funds are adapting the DIY approach to private equity investment.
Private equity prospects in China
The potential and limitations for private equity investment in China are explored in ‘Chinese private equity problems and progress’.
Real estate derivatives taking off
The increasing use of property derivatives in the US and UK are the subject of two articles, ‘Derivatives and residential real estate’ and ‘UK property derivatives - on the way up’.
Academic corner
Beta – an unsound concept
In ‘Markowitz attacks beta’, Harry M. Markowitz, the father of modern portfolio theory, sharply attacks the capital asset pricing model (CAPM) and the related concept of beta.
This has profound implications for risk managers and performance measurers. The risk management departments of many investment institutions and performance measurement specialists, as well as those rating funds, place much emphasis on beta for the purpose of adjusting risk. Given that the CAPM has been around for 40 years, most people practising in the fund management industry today have been brought up on a diet of CAPM being true.
That students are being taught wrongly is another serious attack, The fact is that the CAPM has become conventional wisdom and it is not easy to shift entrenched opinions of academia and industry. Malkowitz’s stature might go some of the way.
Another profoundly disturbing conclusion is that the market portfolio is not the one ‘efficient’ portfolio for all types of investors, and that every investor should select stocks according to his own risk preferences. This restoration of pre-CAPM conventional wisdom is also revolutionary in its implications. This paper needs to be discussed and debated.
Hedge funds’ misuse of a risk measure
William Sharpe, founder of the CAPM and the Sharpe ratio, one of the most widely used risk measurement tools in finance, has castigated hedge funds for misuse of this ratio, as reported in ‘Sharpe attacks the use of the Sharpe model’.
Popular indices flawed
Another distinguished academic, Jack Treynor, points out that market-capital-weighted indices are flawed and suggest better alternatives. These comments by him in the Financial Analysts Journal are outlined in ‘Leading indices faulty’.
Snippets
These are recent news items of significance.
Statistical perspectives
As this section is drawn from several different sources, which might use different definitions and timescales, the figures should be taken to represent just orders of magnitude, not the precise picture.