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Cerulli: Predictable returns highly prized among fund selectors

Friday, November 02, 2012
Opalesque Industry Update - Tough market conditions require complex fund analysis and more exacting manager reviews. Fund selectors still have a long-term outlook for fund assessment, but they want to see predictable returns and solid risk controls, according to the November issue of The Cerulli Edge-Global Edition.

A Cerulli survey of European fund selectors shows that key selection criteria generally play to the advantage of larger players--particularly those attached to major life insurance or defined contribution platforms, but there are notable market differences. Consistent performance and risk controls are highly prized in the United Kingdom and Spain, whereas brand and stability of the parent group are key criteria in France. According to the survey, the United Kingdom is the only market wherefees appeared in selectors' top three selection criteria.

Performance is also a key selection criterion among Asian fund selectors, but brand is ahead of long-term track record and risk controls, according to Cerulli's 2012 Asian fund selector survey.

In the U.S. subadvisory space, perception that a sponsor hires "best-of-breed" managers is crucial. Brand is less important for subadvisor selection as it is the sponsor's brand and distribution capabilities that matter most.

"More than ever, selectors want funds to be predictable," said Barbara Wall, a director at Cerulli Associates. "They do not want cyclical managers to suddenly become value orientated. They want to know how a fund will perform in a given market environment. This means varying the time periods over which they examine fund performance. Also, as part of this, portfolios are reviewed more frequently."

"If anything, the market for generalist funds is diminishing and selectors are becoming narrower in their choice of funds," commented Yoon Ng, a Cerulli associate director.

Underperformance was cited as the main reason to axe a fund in Europe and Asia, though Asian selectors were less concerned by a change of investment strategy than their European counterparts. Asian institutions usually evaluate managers on an annual basis, but may choose not to see out a contract if a manager underperforms consistently. Cerulli has heard of Korean funds being axed after a quarter's unsatisfactory performance, although these are rare cases.

Generally, U.S. sponsors Cerulli surveyed will give an underperforming manager the benefit of the doubt over a "full market cycle", which typically lasts three years. However, underperformance combined with style drift will not be tolerated and could lead to a firing decision in as little as 18 months.

Other findings:

• U.K. fund selectors are most likely to have a large proportion of their assets managed externally. Approximately 15% of U.K. respondents said that 70% of assets were managed by third parties. Fund selectors from Italy and France are far more likely to have fewer assets managed externally. Nearly half of French respondents and more than four in 10 German respondents had less than 10% of their assets managed by third parties. This is expected to change as more specialized mandates are requested from clients.

• Large Asian institutions increasingly prefer partnerships where all partners have significant assets at stake and participate as co-owners. They seek an alignment of interests from external managers. Managers also have to deal with institutions that sometimes set unrealistically high returns that are not commensurate with the level of risk they are prepared to take.

Press release

These findings and more are from The Cerulli Edge: Global Edition, November 2012 issue.

CLICK HERE to request a press copy of this research .

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