Sophia Grene

Wealth management clients might well ask what they are paying for, and whether they are getting value for money.

Although traditionally wealth managers have prided themselves on inhouse research, they are starting to concede they may not be quite up to the job. Recent research found more than 39 per cent of UK wealth managers felt their equity research coverage was inadequate, whether sourced entirely inhouse or using a mixture of inhouse and external sources.

Although they admitted to qualms about the independence of research from the sellside, there seemed to be a general reluctance to shell out money for more independent material.

And as well as worrying about how independent the research is, the wealth managers who responded to Scorpio Partnership’s research for S&P were concerned it might get a bit heavy on facts, so likely to cloud the issue. Apparently what they look for is “the ability to tell an investment story as opposed to getting bogged down in the facts”.

Surely most of their clients, whose money they are managing, are quite keen for investment decisions to be based on those boring facts?

Sophia Grene

Apparently more than a thousand amendments have been tabled for the Alternative Investment Fund Management directive, Brussels’ attempt to bring private equity and hedge funds under its loving control.

This unprecedented level of rewriting during the legislative process is a testament to the inexorable sway of the alternative asset management industry. The original, draconian, draft of the AIFM was seen as a shy at the ever popular Aunt Sally of hedge funds, or ‘locusts’ as they are known in Germany. The usually painstaking and thoughtful asset management unit of the European Commission’s internal markets division had apparently come under political pressure to bring out a hardhitting draft directive in a hurry.

At leisure, however, even the European Parliament found regulating a European hedge fund industry too harshly might not be that good an idea. Its own impact study found implementation of the proposed directive as it stood could result in a 0.2 per cent contraction in the combined GDP of the European Union.

Possibly, however, the initial announcement and pained squawks for the industry were enough to satisfy the hedge fund haters, and now the tedious work of actually piecing together something actually workable can be done out of the glare of the media spotlight.

Certainly the number of journalists prepared to dig through all 1000+ amendments is likely to be as slim as the number of readers prepared to read about them.

Sophia Grene

Remember when exchange traded funds seemed like the good guys? When they were a cheap, efficient and transparent way for investors to track an index?

Those days are long gone.

Synthetic ETFs using derivatives, inverse and leveraged ETFs, unsecured exchange traded notes, all of these are muddying the waters for simple folks who just want good value investment. They do presumably all have their place, but they tend to undermine the proposition of ETFs as simple and transparent.

The latest is a reverse convertible ETF, shortly to be launched in the US by Rich Investment Solutions, run by Kevin Rich, who was previously responsible for Deutsche Bank’s initiative in bringing commodity ETFs to the US. Reverse convertibles are a structured product too complicated to explain here*. Press releases claim the ETF will simplify this structure, although I’m confused on how an index writing “down and in” options each quarter on the 12 most volatile stocks in the S&P 500 is really simple.

Again, there may be nothing wrong with this product at all, but if I were a physical ETF producer, I would be lying awake at night worrying about the brand. It’s hard to tell people you have a product they can understand when they can see something with the same name tracking reverse convertibles.

Sophia Grene

One in three Americans believes aliens have landed on Earth and are dwelling among us. There are quite a lot of things they do not believe in, however, including the importance of the fluffy stuff in investment.

Parallel reports from the European and US social investment forums on the perception of environmental, social and governance issues among investment consultants seem to show American consultants are much less comfortable with the concepts and less inclined to see them as a natural part of investment consultancy. This despite a general belief (expressed by 88 per cent of respondents) that client interest in these matters will increase in the next few years.

Sophia Grene

The Irish National Pensions Reserve Fund is getting a rough ride at the moment. Having been forced to pick up the tab for the recapitalisation of the Irish banks (some €7bn worth of preference shares in Bank of Ireland and Allied Irish Banks), it is about to lose its chief executive, John Corrigan, who moves upstairs to replace his boss, head of the National Treasury Management Agency, the NPRF’s parent body.

This will not be a pleasant job, but nor will running the NPRF. As well as easing in a new chief executive, it has to work on reconciling its responsible investment policy (it has signed up to the UN Principles for Responsible Investing and is a member of the Carbon Disclosure Project) with its legal mandate to “secure the optimal total financial return provided the level of risk to the moneys held or invested is acceptable”.

According to human rights advocate Mark Cumming, the contradiction between this and the NPRF’s own stated intention to “incorporate ESG factors into investment research, analysis and decision making” stands in the way of its developing coherent policies.

If the Irish government can push through amending legislation requiring the NPRF to bail out the banks, surely it should be able to rewrite the NPRF’s mandate in order to allow it to take long term non-financial risk factors into account and ensure Irish pensioners will not profit from destructive corporate practices such as human rights abuses or uncontrolled environmental damage.

Sophia Grene

Synthetic ETFs – an efficient way to use modern financial technology to do something useful for investors or a sinister investment banking kinda plot to cream off extra revenue from naive investors who just want to track an index?

In Monday’s FTfm, former Eurizon chief executive Francis Candylaftis called for these evil instruments to be cast into the outer darkness. This sparked a thoughtful explanation by FT Alphaville of precisely where the problem might lie (hint – it’s about the bit where you need collateral), using db x-trackers’ own diagram of how it all works.

Then blogger Andrew Clavell picked up the theme, suggesting a much firmer regulatory hand on the collateral would solve the problem.

Does anyone else have any suggestions?

Sophia Grene

Burglar makes off with swag in swag bag

The banks be stealing our ETFs!

Exchange traded products – everyone wants a piece of this pie.

Exchange traded funds started as an investment management product. They were run by investment managers, who had to build scale in order to make any money out of them.

Then the European regulations allowed funds to use swaps and investment bankers realised there was an opportunity to use their skills. Lyxor, an offshoot of Societe Generale, but not its asset manager, and db x-trackers set out to promote their synthetically replicated ETFs, but still claimed they were offering investment management.

Sophia Grene

This is very odd – instead of talking about how the last year has destroyed the efficient markets hypothesis and its friend modern portfolio theory, here’s someone pointing out that they couldn’t have been disproved because Nobody Believed In Them anyway.

It’s not the first time someone has pointed this out, but it is a nice succinct summary. This disposes very usefully of a strawman that has been brilliantly used by both sides to divert attention from the real problem, which is that markets have always been and always will be inefficient and clever greedy people like to capture the economic rent from this fact.

Sophia Grene

According to the research, most investors prefer full-replication exchange traded funds. That is, they prefer the straightforward product that does something relatively simple – tracking an index – by the most straightforward means possible – buying the underlying stocks.

But db x-trackers and Lyxor, two ETF providers that rely exclusively on synthetic replication, have found no shortage of investors, despite  using derivatives, oh anathema!

A recent survey by Credit Suisse and Deloitte reinforced the notion that investors want the simpler products. 78 per cent of respondents said they would prefer ETFs with full replication methodologies. So what is going on?

According to Oliver Schupp, head of alternatives at Credit Suisse, it is a question of uninformed versus informed opinion.

“When you really take a piece of paper and write down the pros and cons [of full-replication vs synthetic], it comes down to a toss of the coin,” he says. While investors cite increased risk, namely counterparty risk, as the reason for their declared aversion to synthetic ETFs, Mr Schupp points out that many full-replication products use security lending, which has its own counterparty risk.

“The general consensus is that when you sit down with professional investors and walk them through it, they’re comfortable with swap-based ETFs.”

At the moment, Credit Suisse’s growing ETF platform only has full-replication ETFs, but it is planning to introduce swap-based products early next year, so this issue is a live one for Mr Schupp.

Sophia Grene

Fund managers are in the unhappy position of being able to see the oncoming train but unable to move because their hands are tied. Even though they think climate change is a source of investment risk, their short-sighted clients are not letting them do anything about it.

According to research by FairPensions, nearly 90 per cent of fund managers think climate change is an investment issue, but feel they can’t do anything because of short-term analysis and lack of demand from pension funds.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.


Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.

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