The Big Story: Thirty years ago the fund management sector was largely the preserve of the big clearing banks and the life insurance companies. Not any more. The first invaders came from the investment banking sector as the likes of Merrill Lynch and Barclays Capital started to stake out the sector and start big asset management divisions. The next wave of competition came from new, independent fund management groups such as Invesco Perpetual, F&C and Hendersons which started to build up strong consumer franchises. This consumer-led renaissance meant the older generation of titans, such as M&G, were snapped up by players such as Prudential and a new generation of more brand-focused players such as New Star and Hargreaves Lansdown emerged.
The biggest change, however, has come in the alternative investment world where the hedge funds have aggressively opened up new, specialised niche markets - according to Barclays Hedge Fund research there's now an astonishing $2.074bn of funds under management in the hedge fund sector with much of that money run from London. A growing number of these hedge fund managers are choosing to list on either the UK or US markets - Man Group was very much the pioneer followed by newer outfits such as BlueBay. This growth in alternative assets has been mirrored further afield in even more esoteric assets such as stamps (Stanley Gibbons) coins, fine wine and of course property. Alternative methods of trading have also taken roo. Spread betting and contracts for difference (CFDs) have been powering the huge success of outfits such as IG Group Holdings and London Capital.
Many fund managers in the more traditional long-only sector are beginning to look more and more like hedge fund managers. These smaller managers are coalescing around a new sub-sector of boutique funds - smart players in this space include traditional players such as Liontrust and newer outfits such as Polar Capital.
The Big Fact 1: The global fund management industry is growing at a phenomenal rate. Philip Coggan in the Economist recently pointed to a Watson Wyatt report that claimed the global value of all professionally managed assets at the end of 2006 was $64 trillion.
The Big Fact 2: All this growth doesn't necessarily translate into success for fund managers. John Bogle of Vanguard has shown that, over the 25 years from 1980 to 2005, the S&P 500 index returned an average of 12.3 per cent a year. Over the same period, the average equity fund returned 10 per cent and the average private fund investor (thanks to his regrettable tendency to buy the hottest funds at the top of the market) earned just 7.3 per cent, five percentage points below the index.
How to access the theme: There is a FTSE asset managers sub-sector, but there's no specific index that tracks this sector globally. One interesting share worth some research is Asset Management, a small UK-listed closed-end fund that invests in fund management companies of all shapes and sizes - investee companies include City of London Investment Group, Integrated Asset Management and Lombardia. Invesco is the biggest player in this sector and has a strong reputation for developing new brands within the fund management space - in the US its Powershares franchise is one of the key players in the fast-growing exchange-traded fund (ETF) sector. Its approach is portfolio-based - it's almost like an investment fund based on the fund management market.
Leftfield ideas: In the alternative asset space watch out for Stanley Gibbons in stamps and Noble in coins, while in the mainstream hedge fund sector Record is worth watching in terms of forex as an asset class. In emerging markets the star has to be Ashmore, which has carved out a niche for itself in emerging market equity and debt. A slightly more traditional play on this emerging markets theme is Aberdeen Asset Management, which has managed to put the split-capital trust fiasco behind it to carve out a superb Asian equities business as well as a strong position in the venture capital space.
Caveats: The sector has benefited from a massive increase in fees and profits - the Economist's Philip Coggan quotes a report from veteran sector observer Charles Ellis, who says that fees in the industry tend to grow at around 15 per cent a year. Yet academic research has also shown that most fund managers consistently fail to beat the index. This creeping up of fees is inspiring a huge growth in the number of tracker funds or ETFs with no upfront charge and annual fees in the 0.2 – 0.8 per cent range, a full 1 per cent below the average actively managed fund. This huge change could completely destroy the financial model of the industry over the long term, although Barclays, SocGen and State Street could be huge winners due to their vast index-tracking asset management divisions. In the short term, asset management is unlikely to be the sexiest sector in a bear market - funds are flowing out of the major providers at an alarming rate and newish entrants like New Star have seen their share price fall back hugely.
