Carmignac admits mistakes as it fights to staunch outflows
Patrimoine fund was once golden child of European finance but has consistently underperformed
In the space of a decade Edouard Carmignac went from being founder of a small French fund boutique to a favourite of the European investment community.
The star investor’s success during the financial crisis helped his eponymous fundhouse attract billions of euros from retail investors, taking its asset pool from €8bn in 2007 to €57bn at its peak in 2017.
Mr Carmignac also nurtured an image as an investment guru, which boosted the company’s popularity. He once told the Financial Times he “could be Warren Buffett’s son” and he still enjoys a celebrity lifestyle that includes annual concerts featuring performers such as the Rolling Stones.
However, 10 years after it shot to fame Carmignac is desperate to staunch heavy investor outflows after poor performance by Patrimoine, its flagship fund.
Carmignac’s asset base has sunk to €34bn, down from €53bn as recently as May 2018.
Patrimoine, which had won acclaim for preserving investors’ cash as the wider benchmark lost money in the 2008 downturn, has haemorrhaged assets. It stands at €12.6bn, less than half its 2013 peak, according to Morningstar data.
The company admits that some wounds have been self-inflicted and that a lack of discipline led to bad bets. Patrimoine’s woeful performance has caused people to ask if Mr Carmignac has lost his touch and even whether the company can survive.
Mr Carmignac, 71, stepped back from day-to-day management of Patrimoine in January while remaining chief investment officer, but investors’ rush for the exits predates his retreat from portfolio management. Patrimoine has never managed to repeat its 2008 success and, according to the Carmignac website, it has underperformed its benchmark over three, five and 10 years.
Didier Saint-Georges, managing director Carmignac, said “costly mistakes” led to the underperformance and blamed the failings on the company's decision making process.
Mr Saint-Georges said his team had not lost their skill at reading markets but grew weak at drawing “strong convictions” from research. “A number of decisions did not extract the best from our research,” he said. “[This led] to mistakes that were costly not just because they were mistakes but because the sizes [of the positions] were too large.”
Carmignac’s notable mis-steps included its exposure to foreign exchange. It was caught off guard by the rapid rise in value of the euro in 2017, which depressed its non-eurozone investments. In 2018 it cut its exposure to the US dollar to zero just as the currency strengthened; it then ramped up its exposure only to be caught out by the greenback’s reverse.
Mr Saint-Georges said the group now ensures that investment ideas are challenged in a structured way through a committee that was set up at the start of the year. The idea is to instil the “discipline we have been missing too often”, he said.
He recognises investors’ frustration at Patrimoine’s failure to deliver on its promise of preserving capital. “Last year markets were quite difficult and this was the context in which investors expected Patrimoine to perform because of its very specific [capital-preservation] mandate and its track record,” he said. “But the fund did not do its job.”
Mr Saint-Georges’ words will be scant comfort to investors nursing heavy losses. Patrimoine’s maximum peak-to-trough decline stands at 17.5 per cent, almost twice that of its peers, according to Morningstar. In February the rating agency downgraded the fund to neutral.
“Patrimoine is a word that means your entire assets. Investors use it as the core of their portfolio. It’s a concern that it has lost a lot more than the market,” said Mara Dobrescu, a Morningstar analyst.
Investors will also be uneasy about the fees they have paid during the period of underperformance. Carmignac applies a 1.85 per cent ongoing fee, takes a 10 per cent cut of any outperformance and charges a commission de movement, a small charge when securities are bought and sold.
The company, which posted net earnings of €171m in 2016 but did not distribute dividends to the Carmignac family, says its management fees are in line with the sector average.
Morningstar is critical of this approach, saying that Carmignac “could do more to share its economies of scale with investors”.
Carmignac is also one of the few asset managers to pass on research costs to clients rather than absorb them, which most have done since the EU’s second Markets in Financial Instruments Directive took effect in January last year.
Ben Willis, head of portfolio management at UK financial adviser Chase de Vere, said: “For a billionaire owner and business with billions under management, passing on research costs leaves a bad taste and is very poor on their part.”
He said shouldering these costs would improve Carmignac’s image and reward the investors who have remained loyal to the manager.
Mr Willis added that David Older and Rose Ouahba, the managers who took the helm of Patrimoine from Mr Carmignac, have to “repair the fund and return it to its old profile of producing consistent, solid risk adjusted numbers”. They had been co-managers alongside Mr Carmignac but their record as a duo is untested.
Ms Dobrescu said another concern was the high turnover in Carmignac’s equity team. The former head of European equities, Muhammed Yesilhark, left in 2016. His departure “for personal reasons” followed an internal investigation into his private investments connected to Lars Windhorst, the contentious German entrepreneur who is now in the spotlight over his links to H2O Asset Management, Carmignac’s rival.
Further clouds over Carmignac include reputational damage after a €30m fine ordered by the French authorities last month to settle an investigation into tax evasion.
There is also the question of succession. Mr Carmignac is expected to hand management of the business to his daughter Maxime, who has run the London office since 2013. However, she lacks strong investment credentials and the success of the London operation has been patchy on her watch. Mr Carmignac told the Financial Times last year that her stint was “OK but not outstanding”.
Mr Saint-Georges said Carmignac’s problems were a “mid-life issue” of the sort that afflicts any business after a period of success.
The company is counting on attracting flows into its other funds, such as Sécurité, the short-term bond fund that is nearly as big as Patrimoine. It also hopes that the tweaks to its processes will reverse Patrimoine’s outflows.
“You have to be honest about [what went wrong], take decisions and then start again for another 10 to 20 years,” said Mr Saint-Georges.