“If you have long-term liabilities, you should be in riskier assets. [In this context] I am not a huge fan of absolute return investment approaches for maximising long-term returns because ultimately I think that while such solutions have apparent attractions, they will limit your upside relative to riskier strategies,” he says.

Outcome-oriented products, including liability-driven investments, capital protected and income-oriented strategies, are more appropriate, he adds, for pension funds with a shorter-term horizon, which know precisely their liabilities and cannot afford to take any balance sheet risk.

“I sometimes wish the general debate [regarding outcome-oriented strategies] was a bit more differentiated than it sometimes appears to be. It seems to be driven by certain fashions.”

Mr Utermann further contends that the argument for separating beta and alpha is used to support the view that the long-only manager is “dead”.

“It is argued that because investors ought not to pay, in long-only strategies, for beta but only for alpha, that therefore alpha and beta should be separated. Well, that is not right at all because while a growing defined benefit pension plan with very long-term liabilities may only want to pay for the alpha, in my opinion, they also want alpha and beta combined in one holistic package. So then instead of asking whether long-only managers are dead because investors don’t want to pay for beta, we can discuss a combination of alpha and beta, for instance, European equity alpha combined with European equity beta but with very low base fees and high performance fees.”

Stockpicker’s nirvana

Active managers with a fundamental, bottom-up investment approach like to say that volatile market conditions present them with the ideal opportunity to generate excess returns. RCM is no different in this respect. Mr Utermann maintains that volatile market conditions “are nirvana” for stockpickers. He likes it when the Chicago Board Options Exchange Volatility index or VIX (a measure of the implied volatility of S&P 500 index options) is high as opposed to momentum conditions which he says every index fund and enhanced index fund can read, so making it tougher for stockpickers to outperform.

“Give credit to all the teams at RCM in the last three years; we were in a momentum market where quant strategies did well but stockpickers also did well.”

Performance concerns

A glance at the three year returns of a number of RCM equity strategies (see download file) shows that this was indeed the case. However, the shorter term performance data also reveals that RCM’s strategies have not done so well over the last 12 months and since volatility started hitting the market last Summer.

Would investors not be better off putting their money into an enhanced index fund offering a modest return of 1 per cent to 3 per cent over the index at a lower cost?

Unsurprisingly, Mr Utermann comes out in favour of the active manager, but while acknowledging that for every piece of research showing that active managers generate greater outperformance over a given time period or certain market conditions, another report can be produced to support a counter-argument.

“There isn’t one right answer in asset management,” he says. ”To a certain extent, this is a question of belief and to a degree fund management is an art. I recognise that not everyone can achieve [excess returns] because 50 per cent of managers underperform and 50 per cent outperform. But this does not mean that an asset manager, while they might be in the lower 50 one year and the higher 50 the next year, cannot outperform on a three, five or 10 year rolling basis.”

RCM, as reflected in its corporate logo – RCM Informed – is keen to tout the information advantage conferred by its fundamental research process. The firm has an additional proprietary research tool at its disposal – its “Grassroots” network of 300 independent researchers on the ground in target investment markets around the globe. This army of researchers is sent out, for example, to retail outlets to solicit the views of shop managers on the products they sell. The views and opinions gleaned are relayed in 40-50 company and industry-specific reports per month to RCM analysts to assist them in forming investment recommendations.

The Grassroots research process has been checked by the US Securities and Exchange Commission, which was concerned that RCM might be accessing insider information.

While asserting that Grassroots does not give RCM an unfair competitive advantage, Mr Utermann says there is a risk that it could.

“We have very stringent controls. We just need to be aware of Reg FD and all the other regulations that govern the availability of information. I would strongly argue that if you ask a store manager if he thinks a new Adidas collection of trainers is superior to Puma or vice versa, and he maintains the Adidas collection is superior and if you find the same opinion in every region and every market visited, that is not an unfair advantage, but rather good market research and simply the way you should be conducting market research.

“On the other hand, if one of the managers in the store says, you know what, (wink, wink) last year I was talking to the finance director of Adidas and they told me this is the best year ever because of the sales he has seen, that is something that we would hope that either the research professionals themselves would not include in the report or it would be picked up by our compliance officers and therefore we would not be able to report that sort of information. That is the risk. All the research professionals are trained; they know exactly what the rules of the game are. I am extremely paranoid about all that, so when I am close to any potential inside information, I just put the stock on the stop list for the whole firm. That is the standard we have to apply particularly when you have tools like Grassroots.”

Since the registration in January 2007 of RCM’s European equity and Asian equity strategies for distribution in the US, the SEC has been keeping a watchful eye on the firm’s business, including Mr Utermann’s emails.

130/30 funds

If long-only asset managers are not dead, that might be because they are adapting. Some managers have moved toward so-called “benchmark unconstrained” investing, while others have rolled out 130/30 long-short equity funds or variations thereof.

Over the last two years, RCM has championed the latter course (the firm also manages an unconstrained global equity portfolio) and launched what Mr Utermann says are short extension strategies in everything but name.

“We have got the lot. The funds are either seeded or launched in a model portfolio capacity or actually employed in a long portfolio. We just don’t call them 130/30, a term we view as a marketing gimmick.

“I truly believe that the ability to short and the ability to port alpha into portfolios is something that fund managers should do. And Ucits III has been very helpful in that respect because a number of our flagship funds in Europe such as the Industria Fund, employ derivatives instruments that essentially make them like 130/30 funds.”

He argues that the ability to go short does not transform long-only funds into hedge funds. “130/30 does not imply net leverage. You keep all the long characteristics with the beta exposure but the risk characteristics of the fund improves as does the information ratio which improves the alpha generation.”

He is disappointed by “the timid and tepid” take up of 130/30 strategies in the institutional arena, noting much interest but as yet little appetite. Some of the explanations for this are that traditional long-only houses have less credibility than hedge funds and that is why the hedge funds are getting the inflows. The traditional sponsors of long-only managers, such as the consultants, have not fully embraced 130/30 funds and that is why they are not promoted to their clients. Some investors are also reluctant to be the first movers into 130/30. Nevertheless, he is convinced that institutions will invest in 130/30 strategies eventually.

RCM does not yet have enough institutional investors in its 130/30 strategies to offer representative sample or a figure for assets under management.

Slow response

Institutional investors have also been slow to subscribe to RCM’s dedicated sustainability funds, although Mr Utermann says they are starting to ask how sustainability issues inform the company’s investment process. He observes that retail investors are showing more interest in the firm’s thematic funds. RCM, which managed a modest £1.53bn (€1.96bn) of assets in its EcoTrends fund and a paltry £80m (€102.9m) in its Global Sustainability Fund at end-2007, has signed up to the UN Principles for Responsible Investment. In doing so, the firm has formally pledged to take environmental, social and corporate governance (ESG) considerations into account in its investment decision- making.

“We have an important focus on ESG in every region,” he says. “The biggest team is in London and we treat it like a separate sector. We have capital goods research, financial research and sustainability research. And the team’s engagement with companies flows into our research. This information will influence the way we make decisions; it won’t be the driver, but it will be a significant input for us.”

Mr Utermann identifies global equity investment as a big trend, and going forward, RCM will put a special emphasis on promoting its global equity strategies, including global small cap and global emerging markets.

1990: Joins Merrill Lynch Investment Managers (formerly Mercury Asset Management) where he was the Global Head and CIO, Equities.

Before joining MLIM, Andreas worked for two years with Deutsche Bank AG.

Holds a BSc in Economics from the London School of Economics and an MA in Economics from Katholieke Universiteit Leuven. He is an Associate of the Institute of Investment Management and Research.

Printer friendly version