1 / 27

Perspectives on Global Asset Management: Beyond mutual funds?

Perspectives on Global Asset Management: Beyond mutual funds?. Professor Massimo Massa BNP-PARIBAS. The Vanguard Approach Main Features. What type of approach? Main Characteristic?. “Mutualistic”. Customer focus, not product or performance. The goal is to serve shareholders.

ventana-hidalgo
Download Presentation

Perspectives on Global Asset Management: Beyond mutual funds?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Perspectives on Global Asset Management:Beyond mutual funds? Professor Massimo Massa BNP-PARIBAS

  2. The Vanguard ApproachMain Features • What type of approach? Main Characteristic? “Mutualistic”. Customer focus, not product or performance. The goal is to serve shareholders. • What is the market? Wholesale. • What type of service? • Low cost, no load, low fee pricing. • Plain vanilla products, which attempt to offer “dependable return”. • They have cornered the market on the low fee game – huge barriers to entry before someone else could try to compete with them. • Economies of scales means lower average fees in future.

  3. The Vanguard ApproachMain Features How is demand related to performance and fees? • Does it depend on star/dog strategies? No • Does it depend on load/fee based strategies? No • Is there a scope for tunneling? Scarce • Is there a scope for incubation? No

  4. The Vanguard ApproachMain Features • Is there a conglomerate strategy? Well it depends on size. But then liquidity effects. • What is the role of advertising? • Relies on Free Press • Little paid advertising or promotion. • Focus on candor • Is there a branding role of managers? • Well, more as a symbol of frugality. • What about Bogle?

  5. The Vanguard ApproachVulnerability • It brings price competition and alters (ruin?) the industry’s price structure • It has corned itself: the only way to improve is by offering lower and lower fee products. How much can they be lowered? • Difficult to get in sophisticated niche. • Management succession? Why are the top employees so young? Will the organization be able to keep the same focus when he leaves? • Given that they do not pay Fidelity’s scale wages, how will they be able to attract top quality personnel? • What is the money market fund has a default on one of its payment and the net asset value falls below $1? Vanguard has no capital reserves to cover the fund as others have. • Does the fact that they are a technology follower doom them to poorer service ad a reputation for being “behind the times”?

  6. The Vanguard ApproachResponse from Competition • Fidelity: • Introduce Spartan Index Line • Open retail stores around the country • Leading edge technology • Distribution • Continue to focus on the “star system” • More specialization. • Merril Lynch: • Specialize even more in sellers of convenience. • Emphasize customer service staff. • Lower fees. • ETFs and TRACKERs • Even lower costs.

  7. The Vanguard ApproachResponse from Competition Exchange Traded Funds Assets ($ Billions)

  8. The Vanguard Approach is therefore:the Henry Ford of the Industry: everybody can choose the color of the car…provided it is black20 years later another approach get prominence: the A+J+O Approach

  9. What is long/short investing? Assets Liabilities • “Leverage” = ($10 + $10)/$10 = 2 • What is required return on the whole portfolio?

  10. The A+J+O ApproachMain Features • What type of approach? Main Characteristic? A client’s base portfolio: • variable fraction of customer money: • % in riskless (or interest sensitive assets) • % in market index (or equity sensitive assets) • Or all in riskless + index futures • To match the customer consumption profile Enhancement • Use fraction (possibly >100%) of what is invested in riskless to put into L/S hedge funds, to enhance returns • It does not matter how (using what instrument) alpha is generated: alpha is portable • Or use futures to enhance.

  11. The A+J+O ApproachMain Features • What is the main benefit of the Long/Short? “Long/Short”. Focus on performance. • For Standard Mutual Funds portfolio selection is based in benchmarks • long portfolio will be evaluated against (style) benchmark (witness the use of tracking errors as a measure of active risk) => become “closet indexers” • Benchmark used and alpha constructed to measure the performance of a manager that is supposed to maximize utility of return. • But the measure is not “incentive compatible”. It changes the behavior of the manager • L/S will be free from any benchmark!!!

  12. The A+J+O ApproachMain Features • What type of approach? Main Characteristic? “Long/Short”. Focus on performance. • What is the market? Not clear yet. Presumably still niche market. Benchmark are used to describe to the clientele the kind of assets the L/S invests in. • What type of service? Stock-picking services • Value • Management (e.g., insider trading) • Earnings momentum

  13. The A+J+O ApproachMain Features • What are the main drivers of performance? Purely in-house, quantitative screening of firms • What approach to costs? • Since they don’t use outside research, no soft dollars needed to purchase this research  Forces brokers to compete on order execution   Get better execution. • Usage of package trading. • Communicate to clients on execution costs

  14. The A+J+O ApproachMain Features How is demand related to performance and fees? • Does it depend on star/dog strategies? No • Does it depend on load/fee based strategies? No • Is there a scope for tunneling? Scarce • Is there a scope for incubation? No

  15. The A+J+O ApproachMain Features • Is there a conglomerate strategy? Maybe. • What is the role of advertising? • Based on Absolute Performance. • Is there a branding role of managers? • Yes! Huge. It is mostly a name-based business.

  16. Packaged trading • What is packaged trading? • Why does it work/exist? • Double-blind auction idea • If package composition were disclosed, every bidder, including losing bidders, would be able to front-run the trades of either the asset manager or the winning bidder • If the broker’s book were known, the manager would know actual cost of execution and could bring bid down • By their measure, packaged trading one-way average cost is $.246 a share whereas traditional brokerage costs $.562

  17. Packaged trading

  18. Packaged trading

  19. The future • How can we envision future division of labor between types of funds? • Polarization into “beta” and “alpha” strategies: • Only two extremes should exist: • index funds or ETFs • hedge funds doing L/S • Everything else is a combination of these two, which is less transparent than the two extremes • No benchmarks • No soft dollars

  20. …the industry gets polarized. Polarization of Investments Process Polarization Market-Linked Products Alternative Investments Exchange Traded Funds Venture Capital & Private Equity Other Alternative Investments Leveraged Index Funds Inverse Index Funds Index Funds Hedge Funds Real Estate

  21. Alternative Investments Markets Assets Under Management ($ Billions)

  22. What is a Hedge Fund? • US • Hedge funds are private unregistered investment pools for wealthy individuals or institutional investors. • Hedge funds invest in a variety of securities and use return enhancing tools such as leverage, derivatives and arbitrage • Legally structured as a private investment limited partnership (LP) or a limited liability corporation (LLC) • Typically charges a management fee (1-3%) and an incentive fee (15-25%) • Europe • A fund management firm that charges an incentive fee. • Looks to create absolute returns, I.e. returns in excess of those predicted by CAPM or other asset pricing models.

  23. Key Differences Between Hedge Funds and Mutual Funds • Absolute return objective (10% to 25% per year) versus relative returns (out-performance of an index). • Often clearly stated risk objective, e.g. 20% p.a. • Market volatility presents opportunities since hedge funds can trade from both the long and short of the market. • Managers compensation is primarily based on performance, not based on the size of the assets under management (better aligning interests of managers with investors). • Many funds are closed or give an explicit size at which they will close • Limited capacity for most strategies, managers try to grow by steps, e.g. 100 MUSD, 400 MUSD, 1000 MUSD in order to avoid failure • Moore returned 3bn to investors in 2001

  24. Hedge Fund Fees • The fee structure is homogenous: • A management fee of a 1-3% p.a. and, • An incentive fee of 10%-30% of profits • Often a reference rate must be met before incentive fees are paid, e.g. 3 month T-bill + 200 bp. • Incentive fee gives incentive and protects from ``earnings dilution'' due to size constraints of a particular strategy. • High watermark • The manager only receives the incentive fee on new ``high-highs'‘, typically calculated monthly or quarterly. • Reduces risk taking incentives of managers • Locks in investors when the fund is in ``drawdown’’ (100% participation in first profits) • Gives managers a downside

  25. Hedge Fund Styles by Assets

  26. The Strategy Universe 40% Aggressive Growth Market Timing 35% Opportunistic 30% S&P 500 25% Event Driven Market Neutral 20% Fund of Funds MSCI World Equity Distressed 15% Equity Arbitrage Securities Income Convertible Arbitrage Emerging Markets 10% Average Bond Mutual Fund 5% Short Selling 0% -5% -10% 0% 5% 10% 15% 20% 25% 30%

More Related