Considering the high fees, low transparency and disappointing performance of late, it’s a wonder that institutional investors continue to pour money into hedge funds.
 Just as surprising is the tendency for investors, particularly newcomers to alternative assets, to opt for funds of hedge funds that carry an extra layer of management charges without promising any greater bang for their buck.

UK pension schemes are failing to take account of the risk of default by their sponsoring company when determining funding and investment policy, thereby exposing scheme members to additional risks, according to research by Standard & Poor’s.
 But S&P pointed out that this practice should change as a result of the 2004 Pensions Act which requires trustees to take account of the strength of the sponsor’s covenant in setting fund principles.

UK pension schemes are failing to take account of the risk of default by their sponsoring company when determining funding and investment policy, thereby exposing scheme members to additional risks, according to research by Standard & Poor’s.
 But S&P pointed out that this practice should change as a result of the 2004 Pensions Act which requires trustees to take account of the strength of the sponsor’s covenant in setting fund principles.

Daniel Roy, CEO of Natexis Asset Management, tells Yuri Bender of his faith in the institutional market and of the firm’s prowess as a global balanced manager.

Several hedge fund strategies produced negative returns in January, results that will rile investors who contributed large flows to these alternative investments in 2004.
 The latest research from French business school Edhec has found that convertible arbitrage returned an average of -0.9 per cent for January, while global macro and long-short equity did little better, producing 0.38 and 0.53 per cent respectively.

European fund managers are becoming less certain about which investment styles work best in the current market, according to the latest report from Morningstar.
 In January, 65 per cent of those surveyed thought large capitalisation companies would be the best performers of the coming 12 months and only 20 per cent thought small caps were the way to go. Now almost 40 per cent favour small companies and the percentage of those who still believe in large caps has dropped to around half.

UK life protection firm Liverpool Victoria has shaken up its Asia-Pacific fund manager line up with the aim of reducing it and improving investment returns.

The smallest stocks offer the biggest long-term returns, according to research from the London Business School. An investigation into the past performance of British equities has shown that £1 (€1.42) invested in the UK market at the start of 1955 would, with dividends reinvested, have grown to £549 by end–2004. By contrast, an equivalent investment in micro-caps (the smallest 1 per cent of companies) would have yielded a massive £9834, revealed Paul Marsh, professor of finance at the School.

UK pension funds are increasingly opting to investment in real estate, according to a survey, with two-thirds stating that poor equity performance has driven them to explore non-traditional asset classes.
 The finding come in a JPMorgan Fleming Asset Management survey of 111 pension schemes, which has found that property is the most popular asset class. Real estate was in the portfolios of 65 per cent of the schemes and their average allocation to it was 8 per cent.

Emerging markets remain a good bet for this year, according to experts on the asset class. F&C Asset Management has heeded their advice, heavily increasing the allocation to emerging markets of one its flagship products.
 The Foreign and Colonial Investment Trust has raised its emerging equities weighting from 5 per cent to 15, one of the largest levels of exposure of any large international investment trust, according to F&C.

Several big names in the global investment community, including PGGM and BNP Paribas, have clubbed together to put pressure on brokers to provide better research. The pension funds involved are aiming to coerce further fund managers into joining the initiative by adding membership of the Enhanced Analytics Initiative to their fund manager selection criteria.

UK pension schemes are failing to take account of the risk of default by their sponsoring company when determining funding and investment policy, thereby exposing scheme members to additional risks, according to research by Standard & Poor’s.
 But S&P pointed out that this practice should change as a result of the 2004 Pensions Act which requires trustees to take account of the strength of the sponsor’s covenant in setting fund principles.

Life insurers, arguably the biggest potential source of new business for fund managers, are set to increase their allocations to fixed income even further, according to findings announced at the FT Business event Managing Assets for Life Insurers.

Investors should boost their exposure to Asian equities, particularly in Japan, to capitalise on a predicted revival in the Chinese economy over the coming months, according to Baring Asset Management.
 But the fund manager’s optimism for the region’s continuing growth potential are tempered by concerns about the negative impact of a revaluation of the Chinese renminbi.

After mounting criticism over unwise asset allocations, life insurers are finally starting to listen to external influences and outsource some of their business.

Life insurance companies have long had an image problem. According to popular perception their representatives are dusty, ascetic actuaries, old-fashioned, unimaginative fixed income managers or untrustworthy, high-pressure salesmen.

Bruno Crastes, chief investment officer at Crédit Agricole Asset Management, tells Henry Smith about his firm’s ability to create alpha.
Reclining cross-legged in his London office, sporting a casual, open-necked shirt and golden tan, Bruno Crastes positively bristles with confidence and self-belief. Charged with winning global fixed income and tactical asset allocation (TAA) mandates from pension funds in the UK, Ireland and the Channel Islands, the chief investment officer of Crédit Agricole Asset Management’s (CAAM) UK office is not slow to sing the praises of his firm’s products and performance track record.

Lothian Pension Fund’s strategy of high weighting in equities and SRI, driven by asset-liability modelling, is beginning to pay off. Roxane McMeeken reports.

Under the winter ice and snow in the north of the British Isles lies one of the UK’s largest retirement schemes. The £2bn (€2.9bn) Lothian Pension Fund is far from frozen, however. A high-risk-taking scheme, with a heavy allocation to equities and an emphasis on socially responsible investment, it is in hot pursuit of fund managers to run two new mandates.

Daniel Roy, CEO of Natexis Asset Management, tells Yuri Bender of his faith in the institutional market and of the firm’s prowess as a global balanced manager.
Natexis Asset Management (NAM), investment subsidiary of France’s sixth largest bank, Group Banque Populaire, has already put down its marker as one of the country’s fastest growing fund production units. Now it has received an extra shot in the arm with the addition of the bank’s self-selected pension fund business. The merger has boosted assets under management by €12bn to €83bn.

The European earnings season is well under way, and the pattern of positive surprises seen during 2004 has continued. Almost 60 per cent of companies reporting this year have matched or exceeded analysts expectations, reflecting greater than expected cost controls, a little more growth in some domestic economies and perhaps excess conservatism in the analyst community.

Commodity prices have surged in the past year, reflecting a global economic expansion and strong demand from China and other emerging markets in particular. While energy has dominated the headlines, other commodities such as metals – precious and industrial – have joined the rally.

Latin American currencies have their place in a currency portfolio positioned for a weaker dollar.
 The most obvious regional local currency opportunity at present is in Brazil. Despite low inflation, the central bank is over-prudent in raising interest rates because one-off supply side shocks have led to the expectation that inflation targets will be missed. The result is that the currency has rallied strongly and the central bank is trying to hold it back.

Asian analysts are suffering from optimism fatigue in 2005. After being almost excessively bullish on the region’s prospects in 2004 – when corporate earnings were forecast to expand by 45 per cent – they expect growth of just 5.6 per cent this year. The main reason for their caution: concern that slower global growth and higher US interest rates will put pressure on indebted US consumers, thus far the main driver of the US economy.

MetallRente, the Berlin-based pension fund for Germany’s metal industry, is pioneering a new approach to risk management in its two-year-old €360m Anglo-Saxon-style scheme. The new pension scheme uses a “real-time stress test-based” technique to determine asset allocation.

Diversification is the governing principle at the UK’s Leicestershire County Council £1.5bn pension scheme. From its equity investments to its real estate portfolio, each of the scheme’s strategies is aimed at spreading bets, according to investment manager Colin Prat.

Fixed income briefs have proved to be twice as popular as equity mandates. Paula Garrido writes:

Over the last year corporate pension funds have shown their renewed confidence in the equity markets by awarding almost as many equity mandates as fixed income mandates to external managers. However, according to data compiled by FT Mandate, the value of fixed income briefs was more than twice that of equity mandates.

For those smaller life insurance companies unable to afford bought-in expertise, outsourcing can offer an avenue to enhancing management capabilities. Roxane McMeeken reports:
 With $11,500bn (€8778bn) of assets in play worldwide, insurance is big business. Life insurers are by the far the most powerful players in the industry, controlling 82 per cent of the assets. Yet their sector has been weakened by poor returns on investments and low interest rates.

 As of February 12, all of Asia’s central banks/monetary authorities apart from China’s had published their end-of-January foreign exchange reserve numbers. These revealed a slight drop in the level of FX reserves of about $2.4bn (€1.83bn). On the face of it, this represented a sharp shift in behaviour, given that Asian (ex-China) reserves grew sharply throughout the fourth quarter of last year – between the end of September and the end of December they had increased by $91bn.

 A decline in the numbers of analysts covering small-cap stocks is fuelling opportunities for investors to earn extra return, according to Prashant Bhayani, head of European and international small cap equity at Goldman Sachs Asset Management.
 The small-cap market, he says, is more under-researched than ever before which means that more of the anomalies are going unspotted.

 Consultant Graziano Lusenti tells Yuri Bender that Swiss pension funds must break free of tradition if they want to have a truly active management approach.
 Graziano Lusenti, one of Switzerland’s best known pension fund consultants, may have been working in the investment market place for 20 years but things are not getting any easier for him and his ilk.

Sweden’s €15bn AP1 pension fund is putting £1bn (€1.45bn) out to tender following a decision to take more investment risk. The national fund is looking for emerging markets equity managers – both passive and active, and expert in either global or regional markets.
 Staffan Ifvarsson, investment specialist at the scheme, said it was still to be decided exactly how many separate mandates would be drawn-up and what each one would invest in within emerging markets.

Mandate losses and staff volatility have taken their toll on Deutsche Asset Management. But the firm’s European heads are confident a corner has been turned. Interview by Roxane McMeeken.

 Regrouping after a string of mandate losses, Deutsche Asset Management (DeAM) has won a small victory that could signal a turnaround in its fortunes. The firm has retreated to its heartland, moving its headquarters from London to Frankfurt, so it is fitting that its face-saving €25bn new mandate is from Zurich Group Germany.

Mandate losses and staff volatility have taken their toll on Deutsche Asset Management. But the firm’s European heads are confident a corner has been turned. Interview by Roxane McMeeken.

 Regrouping after a string of mandate losses, Deutsche Asset Management (DeAM) has won a small victory that could signal a turnaround in its fortunes. The firm has retreated to its heartland, moving its headquarters from London to Frankfurt, so it is fitting that its face-saving €25bn new mandate is from Zurich Group Germany.

 The origins of open architecture across Europe can be traced back to the private banks serving the needs of Europe’s wealthy. It is accepted among private banks and their clients that having relationships with multiple providers makes good sense; as such private clients have long been exposed to multiple product providers and to sourcing specialist products from specialist providers. The family office is the ultimate and most sophisticated expression of this.

It is not an easy time to be a pension fund trustee, with any mismatch between assets and liabilities coming under the regulatory microscope. But some careful playing with derivatives can close embarrassing holes in company balance sheets. Elizabeth Cripps reports.

 Given regulatory pressures over assets and liabilities, it should come as no surprise that derivatives are proving as popular as penicillin in a flu epidemic. Where big funds lead, smaller ones are likely to follow, and State Street Global Advisors (SSgA) has just launched its Pooled Asset Liability Matching Solution, a pooled product through which to access the new best thing.

Rupert Brindley examines some of the common themes driving pan-European ALM initiatives, noting some surprising differences in implementation.

Asset/liability management (ALM) transactions have had a major influence upon financial markets over the past five years, and this trend shows no sign of abating. Dutch and UK pension funds are now following in the footsteps of UK life companies and Danish pension funds as they seek to de-risk their funds. As we write in Q1 2005, fixed income and inflation markets are transfixed by the prospect of a wholesale reallocation out of performance assets and into long-term bonds, with a correspondingly profound impact upon long-term yields.

Joe Moody explains the mechanics of a possible solution to the issue of under funded pension schemes and risk management.

 As capital markets have continued to rise from the depths of late 2002, innovative investment solutions have surfaced that incorporate the lessons of the past. The conventional approach to strategic benchmarking was simply inadequate and too slow, as the equity bear market and fixed income bull market so efficiently demonstrated. Is it safe to assume pensions have fully recovered if a rising tide lifts all boats?

AIG Emerging Europe Equity Fund’s mathematical approach is producing outperformance against global peers. Roxane McMeeken explains.

 “I’m a bit of a nerd when it comes to looking at companies,” confesses David Molnar, portfolio manager of AIG’s Emerging Europe Equity Fund. He appears to know how to pick them. His $98m (€75m) fund has beaten the entire spectrum of global emerging market funds over both one and three years, according to Standard & Poor’s.

Structured credit products may offer higher yields to pension funds, but they are also subject to counter-party risk as well as downgrades of the underlying bonds. Nevertheless, as Simon Hildrey explains, their popularity in Europe is growing.

Spreads between corporate and government bonds have narrowed to historically tight margins, leaving institutional investors searching for extra yield. This partly explains the growing demand for structured credit products, particularly over the past three years.

Simple trend following in the currency markets will be far less profitable in the future than in the recent past, warn Dirk Morris and Paresh Upadhyaya.

This decade has been characterised by growing investor disillusionment with traditional equity and bond funds. With the bursting of the equity bubble in 2000 and the subsequent collapse in yields in most bond markets, the search is on for alternative strategies that offer higher yield and/or lower risks of losing money.

Fund trustees are beginning to see the risk in unmanaged exposure to currencies. Ian Barnes argues the case for an active approach.

Currency is a funny thing: almost all pension funds have a material, systematic exposure to it through their foreign investments, and yet few monitor and manage it to anywhere near the same extent as they do for other systematic exposures like credit or equity risk. Both of these risks are taken for a specific reason – there is an expected return over the risk-free asset by investing in these areas over the long term. Why else agree to accept risk, if it is not for an increased expected return?

Mandate loss comes in wake of poor rating for SSgA in R&M annual survey.

The Bank of New York has pinched a £1.5bn (€2.2bn) mandate from State Street after significantly undercutting its rival’s fees. The poaching comes as R&M’s annual report on custody client satisfaction has revealed that State Street’s service standards have declined more than any other provider in the eyes of clients surveyed.

All eyes are on Euronext now that Deutsche Boerse has withdrawn its bid for the London Stock Exchange in the face of shareholder opposition. A Euronext takeover of the LSE could prove easier to stomach for users and may bring more benefits than the potential German deal.

Competition is getting tough among hedge fund providers and new technology, along with skilled personnel, could provide the edge. Roxane McMeeken reports

As the hedge fund industry blossoms into an increasingly diverse and complex range of strategies, with a growing and changing client base, those in the business of supporting the industry must work hard to keep up. Hedge fund administrators and prime brokers face tough technological challenges as they compete to provide services to the investment world’s most dynamic and demanding sector.