Market Reports

"The markets are the most challenging I've seen in my 25 years of experience as an asset manager"

So said the Chief Investment Officer at one of the UK's 10 largest asset managers, speaking near the end of what had clearly been a long year.  A long and difficult year indeed for managing money - but not necessarily a bad year for being in the business of asset management.  As the Head of Fixed Income at a large Swiss asset manager said: "I've got more assets than I had at the start of the year, and I'm hiring."

Events, dear boy, events...

Events have made 2011 a tough year for making money from the markets. They have come so thick and fast it's almost hard to remember them all. The Arab Spring burst into life in January with protests in Cairo that, within four weeks, unseated Egypt's president of 30 years; protests and conflict ensued in Libya and Syria. March saw Japan hit by the fifth-largest earthquake since records began, and a related tsunami that all but caused a nuclear catastrophe.
May brought the assassination of Osama bin Laden and, with it, dangerous tension between the US and Pakistan. Greek riots in June were succeeded by fears the eurozone countries would not, after all, come together to support Greece, or any other member of the currency union including, critically, Italy. Where Greece is small, Italy is not; the possibility of an Italian default, triggering the collapse of banks holding Italian sovereign debt, triggering a European recession, fired the starting gun on an equity market sell-off. US Treasuries and gold hit record prices. Doubts were only heightened in September when UBS announced it had lost $2.3bn, accusing its employee Kweku Adoboli of unauthorised trading.

Asset managers found themselves constantly wrong-footed by these events, which for the most part could never have been predicted. Equity managers could identify cheap stocks - many companies have strong balance sheets, high profit margins and the lowest price/earnings ratio in 20 years - but they would buy them only to see the price fall in line with everything else. Some managers got it badly wrong. The highest-profile was Pimco, the world's largest bond manager. A year ago it called time on US Treasuries, believing that yields simply could not go any lower, particularly with the end of quantitative easing scheduled for the summer of 2011. Its decision to sell all of its US Treasury holdings was made for impeccable reasons, but yields continued to fall; by the middle of the year Pimco's returns had fallen far behind its rivals', and it had started to buy US bonds again. At least Bill Gross, Pimco's Co-chief Investment Officer and one of the most successful bond fund managers over the long-term, had the confidence to admit his mistake.

Pimco's bet went wrong because investors still see US Government debt as a safe haven, one of the few in existence. Investors' strong faith in the US has been undeterred by the failure of budget deficit talks on Capitol Hill and the decision, by one credit rating agency, to downgrade the US from triple- to double-A. Some other managers got it right. Among these was Carmignac Gestion, a French firm that in 2009 became the fastest-growing manager in Europe. It had positioned its flagship portfolio for trouble in the eurozone. It had moved too early, and for more than a year its performance steadily fell behind its more bullish rivals'; but from July, when the equity markets began to tumble, it made money. It made so much that its position in the performance league tables went from near the bottom to near the top within six weeks.

It's never as bad as it seems...

These were turbulent markets, indeed. But whilst very challenging, from the perspective of an asset management chief executive, the year has seen a mixed profile on returns. All things considered, the equity markets haven't done that badly: the S&P500 has fallen, but only by about 5% since the start of the year, while the FTSE100 is also down, but only by about 10%. Not good but not as bad as it could have been. Investor flows turned negative in the third quarter, with the European Fund and Asset Management Association, for example, reporting a net outflow of €83bn from Ucits funds in the three months to the end of September. This was the first quarterly net outflow since the second quarter of 2010. Hedge funds also reported net outflows for the first time in more than a year. This was not encouraging for asset managers. But the size of the net outflows was not large. The net outflows from Ucits amounted to 1% of assets under management, while those from hedge funds were about 2% of their assets. Moreover, October was better.

Hedge funds reported net inflows. The Investment Management Association said UK retail funds had been net gatherers of assets. Most importantly, the value of assets under management is far higher than they were at the asset management industry's worst moment, the end of March 2009. Then, the value of Ucits funds, for example, was just under €6 trillion. At the end of September, their value was just under €7.7 trillion - almost 30% higher. This means for those firms with a diversified product set, revenue is not under pressure in anything like the same way that it was three years ago. Some asset managers are hiring, especially for key roles. Others have deferred plans until the start of next year, but are clear this is a delay, not a cancellation. The general expectation is for more hiring than firing on the buy side, in stark contrast to the sell side. There is no anticipation that we'll see a repeat of the severe cuts seen in the months after Lehman Brothers' collapse as asset management chief executives who took decisive action with regards to their cost bases as well as bear market planning for the future in 2008 are much better set for the future's uncertainties than their investment banking peers.

Indeed, according to a recent survey by IMAS Insight, the number of people working in the buy side in London has risen by 8% in the last 3 years in comparison to a drop of c3% for those on the sell side. Undoubtedly, uncertainty in the markets in 2012 will require continued vigilance and there is no immediate outlook of positivity. However, our clients indicate to us an ability to look through short term issues and retain a real commitment to challenge their managers to diversify product ranges, further develop their distribution capabilities and seek out opportunities for alpha. The need for talent to deliver on these challenges remains critical for success.

Navin Raina leads executive searches across all asset classes and functions within the Asset Management industry.  He has almost 20 years experience working with global financial services firms to attract, retain and develop key leadership talent.

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