Fund launches in the first quarter of the year reflect an effort by the industry to provide diversification and alpha. The launches take place as managers come under increased pressure to offer alpha funds at a lower cost, says Nick Fitzpatrick ...
THE EFFORT BY traditional asset managers to diversify returns is reflected in some of the fund launches seen in 1Q of this year, with First State trying to escape “crowded” asset classes through an infrastructure fund, while State Street Global Advisors (SSGA) plans to bring diversified strategies, including synthetic hedge fund-type strategies to smaller investors.
Aberdeen Asset Management has also diversified its fixed income range with emerging markets bonds, and BNY Mellon has launched an equities fund that is not tied to benchmarks.
First State Investments says the launch of its Global Listed Infrastructure Fund to European investors highlights its ambition to move from competing within crowded traditional asset classes and to provide more global and specialist products to European investors.
The investment objective of the fund is to deliver inflation-protected income and strong capital growth, using the S&P Global Infrastructure Index as a benchmark.
Infrastructure assets include toll roads, airports, ports, utilities and pipelines. These assets typically operate in less competitive environments and can offer attractive characteristics for investors, including high barriers to entry, pricing power, sustainable growth and predictable cash flows, the firm says.
Pension funds are starting to recognise the value of infrastructure assets in protecting long-dated liabilities from the impact of inflation, First State says, while retail investors are attracted by the essential nature of the assets and their predictable income.
Peter Meany, head of global infrastructure securities at the firm, says: “Infrastructure securities should deliver good risk-adjusted returns given the quality of the underlying assets, the need for significant new capital expenditure, increasingly supportive regulatory stances and ongoing privatisations.”
Global listed infrastructure has materially outperformed broader equity and property markets during the current credit crisis, highlighting the opportunity the sector offers to those looking for a defensive asset class with sustainable growth, he adds.
The fund invests in around 900 global listed infrastructure and infrastructure-related stocks and diversifies its investments by sector and geography, allocating approximately 40% to transport, 40% to utilities and 20% to energy infrastructure.
SSGA announced in February that it would launch a Diversified Growth Strategies range that is predominantly passively managed and, for a lower cost than many actively managed funds, provides exposure to a wide range of asset classes, thereby reducing volatility.
The strategies are meant to be an efficient way to achieve the benefits of asset allocation by investing in one fund, rather than a series of individual investments in multiple asset classes. The strategies will invest across a combination of asset types, including equities, property, high-yield bonds, commodities and infrastructure. They will also be the first multi-asset strategy to include exposure to synthetic hedge funds through allocations to SSGA’s hedge fund replication strategy.
”Diversified growth strategies reduce the risk of exposure to a single asset class by offering a portfolio of diversified assets, without compromising the long-term return objectives,” said Kanesh Lakhani, managing director of SSGA in the UK. “They also provide access to alternative asset classes traditionally only accessible by larger investors.”
SSGA believes the strategies could provide the ”ideal default” fund option for defined contribution (DC) pension schemes. Research by the National Association of Pension Funds, the UK trade body, has revealed that 83% of DC schemes use a default fund and, according to Mercer Investment Consulting, 90% of employees and individual savers for retirement choose the default fund, even when provided with a range of investment options.
“Trustees and personal pension providers have a responsibility to design a default fund that can meet the needs of the vast majority of their schemes’ members,” continues Lakhani. “Diversified growth strategies make the ideal default fund as they seek to spread risk and thereby reduce volatility by investing in a wider range of uncorrelated asset classes than traditional balanced funds.”
“We believe the most effective way of offering this diversification is by applying our skill as a passive manager to deliver the returns of both traditional and alternative asset classes by means
of modern indexing techniques.”
Investors will initially have the choice of two different SSGA diversified growth strategies, depending on their investment objectives. Diversified Beta is a 100% passively managed portfolio that aims to deliver a target return in line with traditional balanced portfolios, with lower volatility. Diversified Beta Plus incorporates a 20% active element, and seeks to deliver equity-like returns in the long term but with lower volatility than an equity-only portfolio. SSGA also plans to launch a third strategy in this range, Diversified Alternatives, which will provide exposure to a portfolio consisting only of alternative asset classes.
WestLB Mellon Asset Management, part of BNY Mellon Asset Management, has launched a ‘best ideas’ stocks fund. The Mellon Dynamic Europe Equity Fund incorporates the strongest ideas from a team of
16 experienced investment professionals to create a focused portfolio of 40-60 undervalued stocks with no benchmark constraints, and a balanced risk/reward profile.
It combines three European strategies already implemented across WestLB’s Compass Fund range: Emerging Europe, Pan Europe and Small Cap. WestLB will utilise fundamental-driven stock selection and quantitative analysis to identify mispriced investment opportunities with long-term value.
Quant funds have come under fire lately after losses. WestLB flags up the risk management of the fund, saying risk is controlled by a proprietary system that “optimises the balance between the risk and reward of the best ideas that have been identified”.
Piers Hillier, head of European equities at WestLB, says: “We believe European equities represent an attractive opportunity for 2008. Even though earnings growth has begun to slow, equity valuations are very attractive. We are confident that our stock selection approach focusing on structurally resilient earnings and attractive valuations should provide attractive rewards in [current] conditions.”
In the fixed income arena, Aberdeen Asset Management has launched three funds benchmarked to traditional UK indices, saying the funds will cater for UK pension schemes moving from traditional core fixed income mandates – primarily invested in gilts and highly-rated bonds – to ones invested in ‘Core Plus’ strategies offering higher performance targets through a broader fixed income universe, including emerging markets.
The funds are the Aberdeen Core Plus Sterling Credit Fund, the Aberdeen Core Plus Index Linked Bond Fund and the Aberdeen Core Plus Sterling Bond Fund. They will have higher performance targets than Aberdeen’s existing Core UK pooled funds, aiming to outperform by between 1.25%-1.5% annually gross of fees rather than by 0.75%.
Expansion of parameters
Charles McKenzie, head of fixed income in Europe at Aberdeen, says: “The new funds complement our successful swap indices-benchmarked Fixed Income Alpha range, but cater for investors who prefer to measure performance against traditional indices.
“There is a growing recognition by UK pension schemes that to achieve consistently strong returns in the current environment, investment parameters need to be expanded to capture global alpha opportunities.”
There is also a growing recognition among pension scheme consultants that so-called alpha is expensive. In February, Watson Wyatt, a consultancy, said pension funds around the world are paying on average 50% more in fees than they were five years ago. Paul Trickett, European head of investment consulting at Watson Wyatt, says: “One of the main reasons for this upward cost spiral is investors’ focus on alpha, which has increased their appetite for alternative assets. Investors have naturally assumed that they are paying these fees to reward manager skill, but in many cases they are wrong.”
© funds europe 2008