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Sub-Advisory

Is the party over for private equity managers?

Through the latter part of 2006 and the beginning of 2007, the UK press was full of reports about the good returns enjoyed by what were termed ‘the barbarians at the gate’ – private equity managers. By taking advantage of freely available and modestly priced lending over the past few years, deals became increasingly leveraged and the market witnessed a wealth of large public-to-private transactions.

Capitalising on credit risk

The global fixed income markets have seldom offered more attractive opportunities than investors will find in today’s environment. Since the summer of 2007, trading activity has been far from normal in many fixed income sectors as concerns about the US housing market and economy set off a widespread flight from almost every form of credit risk.

Assets we can all relate to

In last month’s column, we spoke about diversifying your portfolio to protect it from recent high levels of volatility in the market. This month we focus on one of the most liquid and inefficient markets which can be central to that diversification strategy – currency.

Benefits of diversification

When constructing a portfolio, two main challenges present themselves – picking the right asset classes and then picking the best managers to run those assets. Choosing an asset allocation strategy can help protect you from downside risk as well as helping to ensure that you maximise the benefit from potential upside. Interestingly, diversification is one of the few elements in a portfolio that is also free.

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Exposing the closet indexers

The traditional way of analysing managers has been to measure their tracking error by looking at the volatility of the difference between a portfolio return and its benchmark index return. This works with managers who take a thematic approach to their fund. But a fund which is a pure stock picker and looks for a good company will be quite diversified by industry. In this case, their tracking error may be quite low and lead us to (wrongly) assume that they aren’t taking much active risk.

Return to market volatility

Having experienced a positive market environment for both the economy and equities for some years now, the climate is starting to change. Among the biggest changes is that earnings growth is ­decelerating and financial companies are suffering the consequences. There are ­indications of a re-pricing of risk, while volatility has returned to its old levels, much more in line with long-term averages. And since not all stocks will do well, investors will seek out stock pickers who can make a difference.

When knowledge is power

Recent market movements have had an unsettling effect on some money market funds, and investors found they were carrying more risk than they had assumed. To avoid nasty surprises, you need to ask the right questions of your funds at the outset. These include: is the fund a stable NAV fund? And what of its ­independent rating? Since the term money market fund has been applied to a variety of product, where MMFs are ­concerned, ­information is key, and the key to a sound investment is knowledge.

Derivatives: old tips, new tricks

From exotic to the norm The march of derivative usage from niche strategies into mainstream asset management now seems inexorable. With the convergence between the absolute return focused hedge fund community and the mainstream asset management market, this increase in derivative use is mirrored by a growing sophistication in the markets that they serve.

Mutual funds’ velvet revolution

New sophisticated techniques While not immediately apparent, the mutual fund industry has been undergoing a quiet transformation as the full impact of the Ucits III regulations are felt. Once the privy of the large institutional investor base and hedge fund industry, sophisticated investment management techniques are now being employed in mutual funds.

Learning from behavioural finance

Expected returns versus actual returns Portfolios are built on what are believed to be carefully thought out and well-researched ideas. However, investment performance often falls short of expectation and investors are disappointed with the actual returns achieved. Is this because we invest too little too late? Have we become too attached to individual stocks? Are our portfolios not diversified enough? This gap between expectation and reality is not limited to a few individuals who may perhaps be inexperienced or fall prey to faulty information but is often widespread. This is demonstrated by the formation of ‘bubbles’ in the market – most famously in recent times in the technology sector on the back of the rise of the dot com. Investors both amateur and professional were affected by the subsequent drop – no-one is immune from less than objective decision-making.

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