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Complex factors

Equity markets rebounded strongly this month against a background that provided reassurance for investors. Fears over the European sovereign debt crisis persist but commentators were comforted by better-than-expected economic news from the US.

The economic surprise index for the US, calculated by comparing consensus forecasts and published data, returned to positive territory for the first time since May.

In Europe, the Greek debt agreement that emerged from the October 26 summit helped push volatility, as measured by the VIX (calculations based on the S&P 500 options) down from 45.5 per cent on October 3, close to its highest for the year, to 25 per cent towards the end of the month, before edging back up towards 30 per cent at the end of October.

From a multi-manager point of view, against continued volatility there are a number of endogenous or non-market factors that also have to be considered, and which in some respects are equally complex. This includes but is not limited to, fund manager turnover, product proliferation and corporate activity.

It is no surprise given the market that on a three-year basis, only 14 per cent of managers are outperforming their benchmarks. This leads to a fight for the managers who can attract assets and this hunt for talent is reflected in fund manager turnover currently operating at around 40 per cent a year in respect of those investing in Europe.

The full implementation of Ucits IV, the retail distribution review in the UK and Mifid II in Europe will dramatically change business models. The associated mutual funds will reflect this with many disappearing, either to become part of master feeder structures, merged on economic grounds or aligned to establish new share classes that are suitable for the incoming regulation.

Data would suggest that in respect of the Luxemburg market, which is the most dominant in Europe, fund turnover typically runs at around 18 per cent per annum. However, a look at some of the existing proliferation of share classes in different geographies suggests turn-over will run substantially higher from this point on.

Deloitte’s annual survey for the sector suggests that in terms of pure asset management firms, corporate activity has been reasonably stable over the past few years at around 18 per cent per annum. However, the longer the current economic malaise continues, the more likelihood there is of further enforced M&A activity.

From a multi-manager point of view, for every 10 funds selected to achieve in an appropriate level of diversification by geography, manager style and market capitalisation, four will change their manager in the next year, two will change their structure in the next year and two are likely to be acquired by another provider – and we have not even mentioned any investment performance yet.

Antony John is chief executive of FundQuest

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