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Don’t buy funds, buy fund houses

Asset manager shares outperformed the MSCI in 20 of the 24 calendar years between 1990 and 2013

Canny investors have long wondered whether they should consign the fund industry’s ever-multiplying mounds of glossy marketing material to the bin, and simply invest in the shares of asset managers instead.

Research by a small UK-based fund house may have gone some way to answering this question for good.

Figures collated by Guinness Asset Management show that, since 1990, an equally weighted portfolio of global asset management stocks has returned 17.9 per cent a year, amounting to a healthy 5,053 per cent in aggregate. This comfortably beats the 6.5 per cent (356 per cent in total) mustered by the MSCI World index, which in turn will have outperformed virtually every equity fund.

Cynics will rightly point out that the 1990s was a decade of extraordinarily strong market returns; asset managers, as geared plays on the market, could hardly go wrong.

But even in the period since 2000, an era pockmarked by two nasty stock market crashes, asset managers have soared above the fray, returning 9.1 per cent a year, compared with the 5 per cent of the MSCI World index.

Asset managers outperformed the MSCI in 20 of the 24 calendar years between 1990 and 2013, as well as trumping the MSCI World Financials index in 16 of the 18 years since the latter’s creation in 1996.

But the asset management sector has proved more volatile than the wider market, with quarterly volatility of 13.2 per cent since 1990, against 8.6 per cent for equities at large. Moreover the sector’s beta has averaged out at 1.35, meaning it typically rises (or falls) 35 per cent more than the underlying market.

However, using perhaps more meaningful measures of risk, investors may not have had to take a particularly large gamble at all in order to achieve these outsize returns.

Following the 2000 stock market crash, the asset management sector suffered a maximum drawdown (peak to trough fall) of 42.9 per cent, compared with the 46.2 per cent of the MSCI World. It returned to its previous peak within 12 quarters, half the time it took the wider market to recover.

The maximum drawdown was admittedly a little higher after the 2007 market crash (55.8 per cent versus 48.4 per cent for the wider market), but asset managers still returned to their previous peak a fraction faster.

“On a rolling three-year period, we cannot find a period where the asset management sector underperformed equities,” says Will Riley, co-manager of the Guinness Global Money Managers fund, set up to exploit this apparent anomaly.

“That is something that quite surprises people. I think people have this idea in their mind that it is a fair-weather sector.”

And while it is early days, the concept of investing in the industry’s shares also appears to work in practice.

The Global Money Managers fund – believed to be the only vehicle of its kind worldwide, although there are a number of broader “financials” funds – endured a poor launch year in 2011, losing 18.7 per cent.

But in 2012 it came first out of 234 funds in the IMA Global fund sector, and in 2013 it was third out of 245. Despite its difficult first year, it is third out of 215 funds in the sector during the first three years of its life, returning 64.7 per cent, compared with the 41 per cent of the MSCI World.

The fund has proved a little more volatile than the market at large, but its Sharpe ratio, a measure of risk-adjusted returns, is 0.55, compared with 0.31 for the MSCI World.

Star performers have included Polar Capital, which delivered a total return of 313 per cent during 2011-13, Azimut (238 per cent), Liontrust (217 per cent), Affiliated Managers Group (119 per cent) and Waddell & Reed (106 per cent), although Artio Global Investors did its best to upset the apple cart, slumping 80 per cent before being rescued by Aberdeen Asset Management in May 2013.

But is there a logical reason to believe any sector can consistently outperform the wider market? In the case of asset managers, Mr Riley and Tim Guinness, founder and chief investment officer of Guinness AM and co-manager of the fund, believe so.

First, they point to the industry’s unusually high returns on capital, partly a reflection of its ability to scale up with relatively little additional investment. According to Guinness, asset managers with a market capitalisation above $500m enjoyed a median cash flow return on investment of 16.7 per cent a year between 1991 and 2013, compared with 7.6 per cent for the market as a whole.

The duo also argue that asset management, like the luxury goods sector, is a “special” industry that can grow at a higher rate than the global economy for multiple decades.

Since 1990, rising household wealth has seen the industry’s assets under management rise by 700 per cent, dwarfing the 150 per cent return on global equities.

“The amount of private wealth is going from one times gross domestic product to four or five times over a 70 to 80-year period,” says Mr Guinness, who argues such an asset pile is needed to fund retirements.

“Absent a war or two, it will carry on growing. [Investing in the asset management industry] is like putting your canoe in the fastest-moving part of the stream,” adds Mr Guinness, who previously built the £13bn AUM Guinness Flight Hambro business, bought by Investec in 1998.

The managers also point to the asset management industry’s ability to raise revenues without adding new customers when equity markets rise (although this is a negative when markets fall).

And despite its strong run, the sector does not appear to be unduly expensive, trading on 14.2 times consensus 2014 earnings forecasts, a fraction below the 14.6 times of the S&P 500 index.

Tom Brown, global head of investment management at KPMG, the professional services firm, is unsurprised by the findings. He says “the profitability and share prices of fund managers will outperform the funds themselves in a rising market”, as asset-based revenues increase faster than the relatively fixed cost base of a business.

Rob Mellor, asset management partner at PwC, the consultancy, says some people did invest in asset managers as a proxy for their funds, particularly where funds may be closed to new investors.

But he cautions that the industry faced a “battle” to maintain its current level of profitability, given the incursions by low-cost passive funds. Despite this, he believes asset managers should be able to increase their market share at the expense of competitors such as insurance companies.

The Guinness fund remains small, but with a three-year record under their belts, the managers are keen to begin marketing it in earnest. However, one obvious downside remains.

Given the equal-weighted nature of the fund, and its specialist remit, Mr Riley and Mr Guinness believe they can only run a maximum of $250m in the strategy, a tiny fraction of the sum invested in funds worldwide.

Moreover, investors cannot sidestep this limit by investing in Guinness itself, as it remains owned by Mr Guinness and his staff.

Franklin Templeton loses $5.5bn amid Ukraine turmoil

Investors have pulled $5.5bn from the funds of Michael Hasenstab, the star fixed income manager at Franklin Templeton, amid political turmoil in Ukraine.

Mr Hasenstab, who has gained fame for his aggressive bets on recoveries in the Irish and Hungarian debt markets, reportedly holds more than a third of Ukraine’s international dollar bonds.

With Ukrainian bond prices having fallen sharply on fears that Russia’s annexation of Crimea could lead to a wider conflict, investors have withdrawn $3.6bn from the Templeton Global Bond fund so far this year, according to figures from Morningstar, the data provider. The fund held $4.3bn of Ukrainian government bonds at the end of December. Around $1.9bn has also been pulled from Templeton’s Global Total Return fund, the best-selling mutual fund in Europe last year, which held just over $1bn of Ukrainian sovereign debt at the end of December.

However, the International Monetary Fund, which last week led a $27bn international support package for Ukraine, has said it does not envisage the country’s debt will have to be restructured at this point.

Franklin Templeton declined to comment, apart from saying that its global bond group, which manages $190bn of assets, often takes a contrarian approach.

Régis Chatellier, senior emerging markets credit strategist at Société Générale, said: “To the extent that no debt reprofiling is envisaged, the downside on Ukrainian bonds may be limited.”

Mr Chatellier added that Ukrainian bonds looked “well positioned” to outperform other emerging markets’ debt.

Dutch pension fund defends Israel stance

The second-biggest pension fund in the Netherlands has defended its asset management arm’s decision to dump its holdings in five Israeli banks in January.

PFZW, the €137bn pension fund, said it has completed a “review” into the decision made by PGGM to pull out of Bank Hapoalim, Bank Leumi, First International Bank of Israel, Israel Discount Bank and Mizrahi Tefahot Bank.

Ellen Habermehl, a spokesperson for PFZW, said in a statement emailed to FTfm: “The commotion caused by our decision has led us to carefully evaluate our decision-making process on this matter. We have concluded that there is no reason to reconsider this decision.”

Ms Habermehl added that the pension fund has close to €100m invested in 100 Israeli companies, and “plans to continue to invest in Israel as long as it is in line with our policy of responsible investment”.

PGGM’s decision, which was based on concerns that the banks finance illegal Israeli settlements in the occupied territories, prompted ABP, the largest Dutch pension fund, to issue a public statement saying that it would remain invested in three of the banks.

ABP, the world’s third-largest pension fund with €300bn of assets, concluded that the banks “do not act in breach of international laws and regulations, and that there are no judicial rulings that should lead to their exclusion”.

Ms Habermehl confirmed that PFZW’s management team met executives from Israeli and Palestinian companies as well as non-government organisations and government officials in April 2013 before deciding to divest from the five banks.

She said: “Yes, we did talk to [several pro-Palestine lobby groups], but we did much more during the five years of engagement on this issue.”

Taste the most perfect pastries in the capital of France, made by a new generation of artisanal bakers

THOUGH I HAVE zero medical training, I feel qualified to tinker with one of the most timeworn adages about health. Having lived in Paris for 27 years, I've concluded that a croissant a day keeps the doctor away. At the very least, it's the best way to start the day.

A croissant safari is also a delicious way to explore Paris—especially now. In a welcome rebuff to the many bakeries that use industrially made dough, a new generation of pastry chefs committed to top-quality ingredients and traditional methods is leading a renaissance of the emblematic indulgence. Sampling their wares will also not only get you out of bed early (croissants tend to be best in the morning, when they're freshly baked), but take you to parts of the French capital you probably wouldn't see otherwise. Some of today's best croissants are made in lovely neighborhoods where Parisians actually live, as opposed to the well-trod precincts around major museums and monuments.

The first thing I learned about one of the most quintessentially French of foods, by the way, was that they weren't originally French at all. Austrian-born Marie Antoinette is said to have introduced the kipferl, a crescent-shaped Viennese pastry, in the 18th century after she arrived to marry King Louis XVI. Another story attributes the croissant's French debut to Austrian baker August Zang, who opened a shop in Paris in the 1830s. What is certain is that local bakers refined the pastry by making it with a yeast-leavened dough that's layered and folded several times with chilled butter, a process known as laminating. This labor-intensive routine is what gives the croissant its flaky quality, and part of what made the pastry so popular.

My own croissant connoisseurship began under the tutelage of Maria, the Spanish concierge in the elegant Seventh Arrondissement building where I lived when I moved to Paris in 1986. I was an unlikely tenant; everyone else in the building was in bed by 9 p.m., and many of my genteel neighbors walked with canes. Every morning, Maria tied a black scarf over her head, went to early mass, then bought a morning baguette and croissants for my landlord, a retired British diplomat, and his French wife.

“ 'It takes 48 hours to make good croissant dough,' he said. ”

One morning Maria surprised me in my pajamas when she knocked on the door with my mail (she usually slid it under the doormat). When I peered around the heavy oak door, she handed me the post and a white paper bag. "Feliz cumpleaños, Señor," she said with a slight bow. Since she knew it was my birthday, I guessed she'd been paying keen attention to my mail, but any uneasiness vanished when I tucked into the best croissant I'd eaten in my life, a lightly buttery pastry turban with a crust that flaked apart in golden, rectangular crumbs and hid a delicate, cottony interior. That afternoon, when I stopped by to thank her with a bunch of rust-colored chrysanthemums, she crossed herself before taking the bouquet—unbeknownst to me, in France the flowers are seen as appropriate only for cemeteries—but we became friendly. I asked her where to find the best pastries in the neighborhood; that night I found a tidy hand-written treatise pushed under my door.

Maria bought her croissants at La Maison Pradier during the winter and Gosselin in summer, because, she explained, the latter's fours (ovens) were newer and therefore hotter when it was humid, which meant better crusting. Her favorite shop, though, was Gérard Mulot in Saint-Germain-des-Prés, often the destination of her midday walk.

"You should know from the smell that a croissant was made with good unsalted butter, but it should not be the dominant taste," she wrote. "They should be a nice golden color, but not too dark, which means they've cooked too long and could be dry."

I became an eager student of croissants. The key to spectacular examples is the dough, bien sur. "It takes 48 hours to make good croissant dough," said Fabrice Le Bourdat of Blé Sucré bakery in the 12th Arrondisement. "First you make the dough and let it rest for a day chilled. The following day you add the butter and do the feuilletage [laminating]. Then you spread and stretch it, roll it again, and let it rest so that it rises slowly. It's a very time-consuming process involving a lot of manual labor, and this is why so many Paris bakeries now buy their croissant dough ready-made."

Many, but not all. I recently embarked on a week-long tour des fours with a baker friend who was visiting from abroad. On our expedition, I learned how important the raw ingredients—butter, flour, milk, sugar and yeast—are to a great croissant. The new generation of bakers painstakingly sources minimally processed, often organic, components for dough. (Mr. Le Bourdat, for example, said he uses organic yeast, because "it contains no extraneous chemical agents and produces a slower fermentation, which allows the flavors to develop more fully.") I was also reminded of why Paris is the only city where I don't mind hearing the alarm clock go off.

Top Spots for Croissants in Paris

A fresh crop of bakeries serves up flaky delights—and other very tasty baked goods

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THE BOHEMIAN | GONTRAN CHERRIER

Tousled 30-something baker Gontran Cherrier came to Montmartre, the storied quartier the locals often call "Le Village," in 2010, and it's easy to see why he quickly found a following. Mr. Cherrier's croissant is a soft scroll of pale-yellow, butter-scented pastry tissues that are a pleasure to pluck apart. Another delectable choice at this simple, white-tiled bakery is his miso-seasoned rye bread, which makes flavorful bookends for sandwiches when lightly toasted. 22 rue Caulaincourt and other locations, gontrancherrierboulanger.com

THE CLASSICIST | SÉBASTIEN GAUDARD PÂTISSERIE DES MARTYRS

A sure sign of the new affluence of the Ninth Arrondissement, the central Paris district also known as "La Nouvelle Athènes" for its neoclassical early 19th-century architecture, is that it's attracting craftsmen like Sébastien Gaudard. He opened La Pâtisserie des Martyrs, which has a handsome Belle Époque-style décor with marble counters, glass lanterns and a check tiled floor, on its main market street at the end of 2011. It's since become a neighborhood institution. Mr. Gaudard's croissants have a gossamer glaze of sugar that brightens the taste of the butter in the pastry. When pieces are torn off, the fluffy interior remains fused to the crunchy outer layers, a sign of a transcendently good croissant. Mr. Gaudard's are the ones that end up on my own breakfast table most often. 22 rue des Martyrs, sebastiengaudard.fr

THE ARTIST | DU PAIN ET DES IDÉES

Not far from Canal St. Martin, the old industrial waterway that's become the aquatic spine of one of the hippest neighborhoods in eastern Paris, is baker Christophe Vasseur's Du Pain et des Idées. (Its magnificent painted glass ceiling from 1875, cast iron bread racks and gilded details bespeak his former career as fashion executive.) Since Mr. Vasseur relaunched the bakery in 2002, it's acquired a cult following for its bread—try the thick-crusted pain des amis—and fluffy, crispy-tailed croissants. For a perfect breakfast, pick up a couple and head over to Ten Belles, the coffee shop on the other side of the canal. And don't leave without one of Mr. Vasseur's apple tartlettes—a fine fan of sliced apple spread atop a smear of deeply reduced apple compote on a disk of crunchy pastry. They're what the French would call une tuerie (absolutely fantastic). 34 rue Yves Toudic, dupainetdesidees.com

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La Pâtisserie Cyril Lignac Beatriz da Costa for The Wall Street Journal

THE CELEBRITY | LA PÂTISSERIE CYRIL LIGNAC

As a main host of culinary programming for France's M6 television channel, Cyril Lignac is one of the country's best-known food television personalities. He also runs a cooking school and several restaurants in Paris. In 2011, he and former Fauchon pastry chef Benoît Couvrand opened the pretty but edgy La Pâtisserie. Its facade is painted oxblood red and the marble-faced counters are lighted by a forest of spotlights. Stopping by on a recent winter morning, I wondered if the croissants would live up to Mr. Lignac's somewhat hyped reputation, but the downy golden crescent I tucked into did him and Mr. Couvrand proud indeed; it just might be the lightest croissant in town. There are also seasonal offerings, like the éclair à la figue de Solliès, or fig-filled éclair, a riff on another great French classic. 24 rue Paul Bert (and 2 rue de Chaillot), lapatisseriecyrillignac.com

THE BAKER'S BAKER | BLÉ SUCRÉ

It was vexing to find a line at Fabrice Le Bourdat's Blé Sucré for its 7 a.m. opening, but once we withdrew to the adjacent Square Trousseau for our tasting, I realized that the wait had been worthwhile. My still-warm croissant had an alluringly brittle, shell-like crust, but it was the interior that was so good—fluffy but elastic, it tore apart in fine layers and was redolent of high-quality butter. My pal insisted I try one of her madeleines, which had delivered what she described as a "perfect Proustian moment." But I was still trying to figure out why Mr. Le Bourdat's croissant was so good, and then I got it: What the waking palate needs is a little salt, and that's exactly what this pastry almost imperceptibly delivered. Mr. Le Bourdat's shop is rightly vaunted as one of the best—maybe even the best—of the new breed of Paris bakeries. 7 rue Antoine Vollon, blesucre.fr

- German press- Sees much of the falloff in euro zone inflation attributed to energy and food prices. 

- Does not see euro zone in a cycle of deflation. 

**NOTE Mar 25th: (EU) ECB's Weidmann (Germany): ECB would be in uncharted territory if it were to adopt QE, ECB needs to respect the limits of its mandate 

- Markets are rewarding the eurozone for reform progress, and all indications are that the eurozone recovery will continue. 

- Still too early to say eurozone debt crisis is over. 

- Broad deflation risks are very limited. 

- Current EUR FX level does not warrant monetary policy action. Current ECB monetary policy remains expansive.

- Medication said to have a list price of $84K for a 12-week course; Seen as a breakthrough in the treatment of the serious liver disease.

- Evolocumab is an investigational fully human monoclonal antibody that inhibits proprotein convertase subtilisin/kexin type 9 (PCSK9), a protein that reduces the liver's ability to remove LDL-C from the blood.1 

- Cover story: Lower energy costs will have a salutary effect on the U.S. economy, while vast new discoveries of oil and natural gas in the U.S. and around the globe could drive oil prices to as low as $75 a barrel over the next five years from a current $100; as fuel choices are gradually introduced to the market, global oil consumption will slow.