Dec 2009-Jan 2010

FUND LAUNCHES: managers dive in

Recent fund launches have focused on US equities, alternatives and emerging markets, as managers look for opportunities out of the recovery, reports Angele Spiteri Paris
divingboard.jpgFund launches over the past few months inevitably reflected what investment managers think about the direction of the global economy and which are the asset classes or strategies that clients should depend on to make the most of it.

The US led the world into the economic downturn, meaning it should lead the world out of it too. At least this appears to be the belief of a number of fund managers that have launched US equity products to take advantage of economic restoration.

Other managers have focused more on inflation fears, while still more managers expect alternatives to return to their exalted position.

Meanwhile, emerging market fund launches reflect the unstoppable appetite for these countries and the increasing power they will wield in the post-crisis landscape.

JP Morgan Asset Management says the consensus among many investment professionals is that, having led the world into the downturn, the US could well be the first out of it.

The manager noted in September that price-to-earnings ratios in the US were very distorted by write downs and by the deep recession – but as these effects fade, stock valuations should look much more attractive.

In the third quarter of 2009, the US market maintained the upward trajectory it had been on since its March low, advancing 58.2%.

Jupiter Asset Management is one firm that is positive about US equities and it launched a North American Sicav fund in November.

Sebastian Radcliffe, the fund’s manager, says: “The US equity market has rallied strongly and extensively from its March 2009 low. I believe that although we will continue to see volatility in the short term following the rally, the market offers excellent long-term investment opportunities.”

Pictet Funds, the fund distribution company of Swiss private bank Pictet & Cie, also pounced on the opportunity in the US with the launch of its US Equity Value Selection Fund in July.

Laurent Ramsey, CEO of Pictet Funds, says: “This fund offers investors the opportunity to diversify US large-cap equity exposure through a pure value style approach at a time when the US equity market has the potential for one of the fastest recoveries among the developed nations.”

Westwood, a US asset manager, manages the fund for Pictet. Susan Byrne, CEO of Westwood, says: “We believe the groundwork is in place for a US economic recovery and that the US market is therefore undervalued. At present, we are selecting attractively priced, high-quality companies for our portfolios consistent with our value-oriented investment style.”

For American Century Investments, the interest in the US was fortuitous as it seeks to expand its non-US client base. The firm launched two US equity Luxembourg Sicavs in November.

Tom Douie, vice-president in American Century’s London office, says: “The fund launches are part of our long-term plan to develop our non-US business. If anything, the tumultuous conditions of last year and the opportunities that have sprung out from that are more coincidental for us.”

Legg Mason sought to open the US opportunity up to a new client base. In July, the firm made its LMCM Opportunity Fund available to UK investors.

The fund invests primarily in US stocks but is unconstrained in terms of geography and in terms of investment style, types of security, industry sector, size or market cap.

The product is aimed at investors who are more comfortable with the levels of risk exhibited by more aggressive portfolios.

If investor risk appetite is returning, then alternatives could benefit, and the numerous alternative managers launching hybrid products under the Ucits III banner seems to bear witness to this.

Middle ground
Facing regulatory pressure on standard hedge funds, more alternative fund managers have launched hedge fund-like strategies within mutual fund wrappers. The concept of a more ‘regulation-friendly’ hedge fund is by no means new. It has been kicking around in the US since the fall of Lehman Brothers.

But it seems that the looming Alternative Investment Fund Managers (AIFM) directive has pushed more alternative managers to adapt their strategies to the Ucits regulation.

Shiv Taneja, head of international practice at consultants Cerulli Associates, says: “Fund manufacturers need to respond to this change, and overcome regulatory obstacles as necessary if they want to grab a bigger share of business in the alternatives sector in the future.”

Ken Heinz, president of Hedge Fund Research, says: “[Ucits] is a sensible medium and it wouldn’t be considered an overly restrictive process. The Ucits structures are a little bit different strategically from the actual hedge fund run by the same firm, but those differences are reasonable given the accessibility benefits that Ucits structures offer investors.”
One of the key characteristics of a Ucits fund is the restriction on leverage.

Hans-Olov Bornemann, head of the global quant team at SEB Asset Management, says: “Within a Ucits III framework you’re not allowed to borrow money on a permanent basis, except to make up for short-term outflows…

“Because of the poor performance of traditional hedge funds in 2007 and 2008 many clients have come to the conclusion that it may make sense to have stricter regulation. This would at least reduce the amount of mistakes that hedge fund managers can make.”

According to Bornemann this explains the number of Ucits III absolute return funds launched in 2009.

SEB made it’s Asset Selection fund range available to UK investors this year. The multi-asset strategy offers three risk levels in the form of three funds – the SEB Asset Selection Defensive (5% volatility), SEB Asset Selection Original (10% volatility) and SEB Asset Selection Opportunistic (20% volatility).

Bornemann says the funds aim to offer investors the best that a hedge fund and a regulated fund offers in one strategy.

Hedge-like Ucits funds use various alternative strategies to try and generate returns. In 2009, the long/short approach seemed to be one of the more popular ones. Liontrust, RWC Partners, Veritas and Cairn Capital were just some of the managers who launched funds in this space.

Each of these funds aims to make money for investors in all market conditions. The investment philosophy of the Liontrust fund, for example, is based on the mistakes of forecasters, particularly about profits. Investment decisions taken by company managers in line with profit forecasts often create unsustainable profit expectations.

The Veritas fund focuses on China and Hong Kong and seeks to achieve long-term capital growth with a target return of 15-20% per annum.

The fund has a strong thematic approach focusing on the social, political, economic, cultural and technological factors which Veritas believes are behind growth in the region.

At the time of launch, Ezra Sun, manager of the Veritas China Fund, said: “Our decision to launch the Veritas China Fund is to provide investors with a flexible vehicle that offers access to what we believe is one of the most exciting markets for the next decade…

“We are launching a Ucits fund within an environment where greater regulation and liquidity are the strongest drivers. This also gives us the opportunity to make the fund accessible to a wider investor base.”

The RWC Partners fund actually brings together two of the key trends observed in the market over the second half of 2009. The RWC US Absolute Alpha is a Ucits III US equity long/short fund.

Managed by Mike Corcell, this fund seeks to deliver consistent absolute returns through investment in large capitalisation US stocks.

In October the firm announced it had raised significant assets for the new strategy and it will start with investing with in excess of $100m.

Future inflation
Quantitative easing, where governments in Europe, the US and the UK effectively pumped money into economies while at the same time kept interest rates low, has led to uncertainty about inflation later down the line, as far out as 2011 and 2012.

In reaction, Crédit Agricole Asset Management (Caam) – which has launched a global-inflation-linked bond fund – believes that annual inflation was likely to rise by the end of 2009 due to the year on year impact of higher energy prices.
The firm adds: “In 2010 inflation is expected to stabilise as core drivers abate due to the recession. This may also provide attractive levels to position oneself for the risk of seeing inflation rise in 2011.”

Northern Trust Global Investments (NTGI) launched a Euro Government Inflation-linked Bond Fund focusing on the highest quality government bonds. This fund aims to allow investors to hedge inflation without taking on the credit risk associated with exposure to lower rated countries.

NTGI investment strategist, David Rothon, said that this passive fund would provide institutional investors the opportunity to choose their type of bond exposure depending on their inflation expectations.

Emerging appetite
One thing the financial crisis has not done is derail the case for investing in emerging markets. It may even have increased it.

Pioneer Investments has launched a local currency emerging market bond fund, while FFP Asset Management put an emerging market equity fund to market, and Thames River Capital has made available an Africa and Middle East manager-of-managers product.

The investment opportunity in emerging economies has been accentuated throughout the crisis as these regions are still, by and large, on their growth path and have been practically untouched by the toxic assets that poisoned the developed world.

Managers from the emerging markets themselves also are making inroads. Indian asset manager Kotak Mahindra launched an India infrastructure and real estate fund. The fund complies with Ucits regulations and will primarily invest in listed shares and equity-linked instruments of companies directly or indirectly linked to the Indian infrastructure and real estate sectors.

Paul Parambi, head of international business at Kotak Mahindra, says: “The desire to invest in specific sectors such as infrastructure highlights growing confidence in the India growth story. Whereas a few years ago most investors might only have exposure to India through an emerging market or global fund, they now recognise that India is an asset class in its own right.”

And, equally, homegrown emerging market fund managers are becoming a global industry in their own right too. As European asset managers continue to launch products over the coming year, they may increasingly find their offering is jostling for shelf space with emerging market rivals.

©2009 Funds Europe

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