Quantitatives and specialists steal the show

The world of fund sales is becoming increasingly polarised. The products that are selling fall into two camps: either so-called “plain vanilla” mathematically-managed passive funds or at the opposite end of the scale, spicy specialist products such as hedge funds and structured investments.

This is the key finding of the latest survey of European asset management from Morgan Stanley’s equity research department. The report says the top 50 hedge fund of funds were found to have increased their assets by 45 per cent in 2004. They are thought to hold $1000bn (e763bn) globally. “In our universe, UBS, SocGen, Credit Suisse and Man Group have been strong beneficiaries of this trend”, says one of the report’s authors, Huw van Steenis.

Quantum profits

Quantitative specialists were found to have outperformed in 2004. Mr van Steenis cites Barclays Global Investors, as the “world leader”. The quant giant won $106bn (or 11 per cent net) of new money last year. This alongside top margins expanding as more active strategies were used led to profits being up by a huge 85 per cent. Morgan Stanley estimates that index managers now run $4000bn of assets worldwide.

In terms of profits, the best performing fund houses were found to be those specialising in particular strategies or those leading the way in structured products (see graph).

The report praised a number of fund distributors and promoters for capitalising on the growth of structured investments. Dexia Asset Management’s success last year was put down to its money market plus structured products as well as good growth in institutional mandates. Spanish banks BBVA and Santander, both leaders in structured products, each saw revenue growth of about 12 per cent in 2004, according to Morgan Stanley.

UBS Asset Management was commended for responding well to the new polarised environment by transforming its product offering from multi-asset mandates to high-yielding specialist mandates. Barclays Global Investors was picked out for growing its active quant business. Such mandates yield two to four times as much revenue as pure passive mandates thanks to higher performance fees. Other managers were deemed by the Morgan Stanley analysts to be “insufficiently nimble to navigate the significant changes in client portfolios, including Amvescap, Deutsche Asset Management, F&C and Henderson.

On F&C Asset Management, which is still consolidating its merger with Isis, the report stated: “Risks are investment returns and market volatility and relationship with key clients.” Positives for the firm were thought to be the opportunities and diversification that would result from running insurance and institutional money at once. “We also see a highly credible management with credibility on cost cutting.”