Case Blog

This is a guest blog post by Daniel Enskat, Strategic Insight’s Head of Global Consulting Senior Managing Director.

By Daniel Enskat

$250 billion in net flows to equity and fixed-income funds in the first half of 2009, the best performance for stocks in any quarter since the late 1990s and the 20th consecutive week of positive long-term mutual fund flows through mid-August 2009 helped draw investors cautiously back into investments. Especially emerging markets and Asia are described as having turned the corner to once again lead the way as a growth driver for the industry.

Emerging Market Aggregate Demand Transforms Distribution Landscape

“Emerging markets are providing an increasing portion of our sales revenue”, Europacorp CEO Jean-Julien Baronnet said in a recent FT article, emphasizing that aggregate demand from emerging markets is transforming the landscape for distribution.

This could have been a statement from an asset management CEO, but in this case Baronnet was talking about film distribution. Europacorp was founded by Luc Besson and a recent animated movie, “Arthur & the Invisibles” (with Robert de Niro, David Bowie, and Snoop Dogg), brought in about $115 million at the box office worldwide, despite an only lackluster contribution of $15 million from the US.

Focusing on movies with cross-border appeal, Europacorp plans to produce more “melting-pot” movies, mixing actors and cultures in non-traditional ways. The importance of emerging markets and the success of “melting-pot” funds also dominated the global fund industry of late.

All of the ten best selling new fund launches in both May and June globally came from Asia. In June 2009, those ten funds, highlighted below, attracted in excess of $7 billion combined. Noticeably, almost all of the Japanese offerings were co-branded “melting-pot” funds, mixing actors and cultural themes, among them Nomura Pictet Genome, Nomura RCM Green Tech or Fortis Nikko China Equity.

Enter BRIC, the Dragon and the Komodo, But Don’t Forget the U.S. and Europe

In 2001 Goldman Sachs coined the term “BRIC” in a research paper to highlight the importance and growth potential for Brazil, Russia, India and China¹.

Then, Schroders at the end of 2007 within a few months raised over $10 billion in net flows to a local BRIC fund in Korea², and industry observers suggested to complete the “BRIC-K” by adding Korea to the mix.

Now the head of Indonesia research at CLSA Asia-Pacific Markets put out a research note entitled “Chindonesia: Enter the Komodo”³, hoping to push the triangle of China, India and his area of expertise, Indonesia (the Komodo is a reptile indigenous to eastern Indonesia).

And indeed, looking at the ten bestselling funds across Asia for the first half of 2009 below also shows products from Southeast Asia, albeit mostly institutional, including multiple entries for India and Thailand.

Yet, while emerging markets as an investment and distribution theme are becoming more important for the industry, it is still too early to announce the era of the “Komodo” - or the “Dragon”, for that matter. As highlighted in the table which follows, less than 10% of the $250 billion committed to long-term funds globally year-to-date came from Asia.

New vs. Old and Themes vs. Asset Allocation

Furthermore, comparing the top selling long-term funds in Asia to Europe and the US, we observe “New vs. Old” and “Thematic vs. Balanced” buying patterns.

As shown below, in the US, PIMCO’s Total Return fund alone gathered over $20 billion in net new money in the first half of 2009 ($25 billion through July 2009, to a total of $170 billion in assets), followed by the Vanguard Total Stock Market with over $6 billion in flows.

In Europe, boutique manager Carmignac topped the list with almost $7 billion in new money in France and across Europe to its Patrimoine product, alongside a number of institutionally driven corporate bond funds and selected themes including high yield, total return and world mining. Other funds with more than $1 billion in net inflows included capital protection vehicles (DWS Rendite Plus Garant, $1.3 billion) as well as themes (Julius Baer Physical Gold, $1.2 billion).

With top selling funds we currently see a mix of investment solutions around balanced and asset allocation strategies on the one end of the spectrum, and themes as well as sectors (often including ETF structures) as building blocks for such solutions on the other end of the spectrum.

By region the data shows an emphasis on existing products in the US, new funds in Asia and mix between the two in Europe. Those product development/management trends are mostly a function of whether an industry is primarily driven by retirement needs of retail investors (401k plans in the US, Superannuation in Australia, etc).

The US mutual fund association, ICI, in early 2009 published a study on “Characteristics of Mutual Fund Investors, 2008″⁴, finding that 95% of mutual fund investors were focused on retirement saving. Thus, while in less developed markets the focus is on getting investors to move from a savings to an investment mentality, often via new and exciting products, the US and Australia face a different set of challenges around investors’ retirement needs.

A recent study by the PewResearchCenter entitled “Different Age Group, Different Recessions” provides useful lessons for mutual fund companies on which type of client suffered most during the downturn and what it means for their retirement plans and investments⁵. Key findings from the report include:

Investment Losses, By Age Group: 71% of investors between 18-29 and 56% of investors over 65 had NO losses or NO investments, sharply different from the age group 50-64, called the “Threshold Generation”, where one third lost 20-40% of their assets.

As a result, 75% of those “threshold” investors say that the recession will make it harder for them to meet their retirement needs. Importantly, 58% of threshold investors stated that the recession has caused stress in the family, while 58% of investors over 65% stated is has NOT caused stress in the family.

Retirement savings took a substantial hit in 2008 and investment managers/distributors need to rethink how to connect with investors (before/throughout and after the crisis), how to educate them effectively and what kind of products to provide.

When it comes to emotional and behavioral aspects of investor decision making, Kahneman and Tversky pioneered so-called “Prospect Theory” and received a Nobel prize in economics for their work in 2002. One of Kahneman’s collaborators, University of Chicago professor Richard Thaler in a recent book called “Nudge” noted that it seems reasonable to say that people make good choices in contexts in which they have experience, good information and prompt feedback, for example ice cream flavors, while they do less well in areas where they are inexperienced and poorly informed and in which feedback is slow and infrequent, such as medical treatments or investment options.

His advice is for investment management companies and distributors to become “choice architects” - providing advice in a way that makes sense to the relevant client segment or age group and that solves the fundamental conundrum of choice: with too much choice investors get overwhelmed and fall into a state of inertia, too little choice leaves them bored.

Steve Jobs with his dislike of keyboards and manuals famously had the iPod created with only one button. One fund is not enough, but the increasing concentration of new flows to blockbuster products and managers highlights the importance of getting product design and advice right - or face extinction, like the komodo’s former next of kin, the dinosaur.

About Daniel Enskat, Head of Global Consulting and Senior Managing Director, Strategic Insight

For almost a decade, Daniel has led the development of Strategic Insight’s Global fund research and consulting effort, and is widely sought after for presentations, discussions, and his perspective on the global asset management industry by associations, academia, regulators, the media and management boards of the firm’s over 250 clients worldwide. He has written extensively on the fund industry, including various books on Asia, the Middle East and Global Fund Distribution (www.globalfunddistribution.com/about-the-authors).

^1. Goldman Sachs, Global Economics Paper: ‘Building Better Global Economic BRICs’, November 2001.
^2. Schroder BRICs Equity Feeder, a local Korea fund launched in late 2005.
^3. CLSA Asia-Pacific Markets: CIO Notes, July 2009 - https://www.clsa.com/assets/files/reports/CLSA-chindonesia-cioNotes-20090804.pdf
^4. Investment Company Institute, Research Fundamentals: Characteristics of Mutual Fund Investors, 2008; http://www.ici.org/pdf/fm-v18n2.pdf
^5. The report was released on May 14, 2009 - a full version of the report is available at http://pewsocialtrends.org.

In my last posting, “Goldman Sachs’ Swagger,” I received more feedback than usual and it was more mixed than usual, but I stand by my position that while the company’s over performance has resulted in some arrogant behavior, the firm and its partners are not evil.  One of the people I heard from was the famous journalist and columnist, Robert X. Cringely. Bob and I were colleagues long ago in the early ’90s at InfoWorld, where he wrote the well-read “Notes from the Field” column.  We have remained friends over the years, but we have always seemed to come at things from a slightly different vantage point.  My last blog inspired him to write “Is Technology Evil?” (www.cringely.com)  He clearly did not like my sports analogies and found wisdom and inspiration in the Google motto, “Don’t be Evil.”

Now I am not ready for a steady diet of point counterpoint with Cringe, but our exchange lead me to the question: Should President Obama appoint Fed Chairman Ben Bernanke to a second term when his current term ends on January 31, 2010? I am confident that Cringe and I will arrive at very different conclusions.

Alan Greenspan’s long tenure as Chairman of the Board of Governors of the United States Federal Reserve began when President Reagan appointed him in August of 1987. He was appointed to successive 4-year terms by President George H.W. Bush, President Bill Clinton and President George W. Bush until he retired on January 31st, 2006 and Ben Bernanke was appointed to succeed him. Today, historians are re-evaluating Greenspan’s tenure, particularly in light of the sub-prime crisis that shook the foundations of the financial systems around the globe.  Prior to this, though, he was heralded for maintaining stability and continuity in the global markets and for keeping down inflationary pressures.  (We should never forget the inflation of the Carter years.)  When faced with the option of reappointing a Republican appointee or replacing him, President Clinton twice decided that the country was better with Greenspan at the helm.  During this period, the country experienced unprecedented growth and actually ran large surpluses.

President Obama is faced with a similar choice: should he reappoint Ben Bernanke or go to his own bench for Larry Summers? Chairman Bernanke has studied and written extensively about the causes of the Great Depression and understands that one of the underlying causes was the lack of credit. When he saw the credit markets freeze after  Lehman Brothers filed for bankruptcy, he immediately worked to pull us back from the abyss with then Treasury Secretary Paulson and Tim Geithner, who was then head of the New York Federal Reserve and is the current Treasury Secretary. I sense that as confidence is slowly restored in our financial institutions globally, we would be best served, as would President Obama’s own interests, by his reappointment of Ben Bernanke to a second term.

Cringe, your turn at bat.

On a very long flight west last evening, I started Pat Conroy’s latest novel, South of Broad, which takes place as all of his novels do in Charleston, that charming, historic, southern city.  This is his first novel since Beach Music, which was published over 14 years ago.  I am finding it to be a very special way to end August, with Leo King narrating and bringing us back to the South Carolina coast.

This is a guest blog post by Kevin Ng, the Senior Managing Director of Retirement and Variable Annuity Research at Asset International’s Strategic Insight.

By Kevin Ng

On July 30, 2009, Strategic Insight (SI) announced its merger with Asset International (AI), adding to AI’s suite of services for the financial services market: PLANSPONSOR, PLANADVISER, Global Custodian, aiTrade, and ai5000. I am excited about this new partnership and the opportunity to find new ways we can serve our clients by leveraging expertise from both AI and SI.

I’ve been at Strategic Insight for over six years now, during which time I have led growth in the Variable Annuities area.  We see even more potential for expanding our existing product suite and offering innovative new products and services for our clients in the retirement, retirement income, and sub-advisory areas. My own my career has included positions in various capacities at Putnam, Fidelity, and Coopers and Lybrand (now PwC). The connection with PLANSPONSOR brings me full circle to the retirement industry, since my role at Putnam was to support the defined contribution business. SI has terrific core strengths that we can leverage through this new partnership.

Founded in 1986, SI is a mutual fund research and consulting firm with a long history of expanding its services and research expertise. SI’s visionary founder Joel Rosenthal wrote SI’s first mutual fund industry trends report, “Mutual Funds: Investing in the Future,” in that first year. Since then, SI has vastly broadened its research and services to a wide array of clients. SI went on to launch Simfund, the leading mutual fund, variable annuity, and global mutual fund net flow and research tool; introduced sionline.com, annuityinsight.com, and strategicinsightglobal.com, which house much of SI’s research reports and valuable research tools and services for competitive analysis; and added a number of new products and services, including 15(c) fee analysis, regional forums, an ETF report, and distribution channel analysis with Coates Analytics.

The AI and SI merger brings about a new era for Strategic Insight and our clients. This growth-oriented collaboration between AI and SI will result in additive synergies. In particular, the combined organization will leverage the retirement area expertise of PLANSPONSOR and the mutual fund expertise of SI to create value-added, retirement-focused services for businesses that operate within the retirement space. We also see a valuable synergy between PLANSPONSOR and SI’s variable annuity services, especially with growing interest in guaranteed retirement income within retirement plans. In addition to these organizational synergies, SI will have access to greater financial resources now that it is part of the Asset International, enabling us to accelerate the development of our database services and global expansion.

Expect more from the new and improved Strategic Insight.

About Kevin Ng

Kevin Ng is the Senior Managing Director of Retirement and Variable Annuity Research at Strategic Insight. Since 2003, Kevin has led growth in the VA area and oversaw the expansion of new and existing products for clients related to retirement income and sub-advisory services. Prior to Strategic Insight, Kevin was Vice President, Marketing Manager, at Putnam Investments, supporting their Defined Contribution business. Before Putnam, Kevin held positions in various capacities at Fidelity and Coopers and Lybrand (now PwC).

In the July 26th issue of New York Magazine, Joe Hagan raised the question: is Goldman Sachs (GS) just extremely good at what it does or evil?  This followed a July 2nd article in Rolling Stone by Matt Taibbi entitled “Inside the Great American Bubble Machine.”  Taibbi clearly came down on the evil side and tied Goldman Sachs to creating and then exploiting bubbles like the Internet bubble and the housing bubble. This one was written with a genuinely conspiratorial tone. Then on August 9th, an article written by Gretchen Morgenson and Don Van Natta Jr. in the New York Times raised the issue of how many times former Treasury Secretary and Goldman CEO Hank Paulson spoke to his successor, Lloyd Blankfein, during the fall credit crisis. Let us not forget that our global financial system was headed toward the abyss after the Lehman bankruptcy and the ensuing credit crisis. Both the outgoing Bush administration and the incoming Obama administration and their respective treasury secretaries, Paulson and Timothy Geithner, were in unchartered waters, and as we recover they should receive more credit than criticism.

Now I have a slightly different take than the authors of these articles and others. I do not buy into the conspiracy theories. (I do not currently own any GS stock.) I believe that Goldman’s partners have a definite swagger and this is reflected in how they do business.  Merriam-Webster online gives the definition of swagger: “…to walk with an air of overbearing self-confidence.”

Let’s look at swagger in this context. The New York Yankees and the Boston Red Sox, whom I write about frequently, have a certain swagger. Phil Jackson and Kobe Bryant’s Lakers have a swagger.  The Patriots under Bill Belichick and Tom Brady have it. Jamie Dimon and his team at JPMorgan Chase (JPM)  have it, particularly after paying back the TARP funds. (Goldman Sachs has paid back the TARP funds as well.)  Morgan Stanley (MS) under John Mack has not regained its swagger.

In the end, individuals and companies that outperform their peers do acquire a certain style or swagger that some will find arrogant. Those that don’t will find reasons to doubt how good they really are.  Great-performing companies and individuals do have self-confidence, but we should applaud their outstanding performance and excellence while we strive to have our own organizations become better at elevating our game.

It is also important to note that swagger can serve us when we hit the inevitable bumps in the road. Tiger Woods just lost the PGA Championship to Y.E. Yang, of South Korea. Yang becomes the first Asian golfer to win a major championship, with an incredible second shot on the final hole. I congratulate him, but I know that Tiger’s swagger will not abandon him as we move to the FedExCup.