THE UK FUND MANAGEMENT INDUSTRY

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  • Stock selection for core equity portfolios at Baring Asset Management is a team decision. In some investment teams the entire team votes on stock selection decisions. In other teams, a policy group comprising the most senior team members has the responsibility for the decision. In each region, we hold stock review meetings at least weekly where recent company visits and results are reviewed, as well as formal monthly portfolio review meetings, to review investment performance results and portfolio strategy Risk is controlled at two stages of portfolio construction: when the stock selection decision is made and then at a total portfolio level. We use a Barra risk model and our own Value at Risk model to quantify, measure and control fundamental risk. We monitor active risk on an ongoing basis through the monthly analysis of model portfolio characteristics , using Factset PMW software. This quantifies relative positions by country, sector, sub industry, stock, currency, number of stocks and market capitalisation; as well as by growth and valuation characteristics. At portfolio review meetings, we evaluate the Barra fundamental risk characteristics (measured in annualised standard deviations relative to the portfolio’s benchmark) of the portfolio positions and their contribution to overall risk. These factors include, for example, interest rate sensitivity, earnings momentum, size and growth. This risk management tool also ensures that our overall strategy themes get translated into the portfolio (i.e., to what extent buy and sell decisions have influenced our sector/thematic weightings). For our core equity portfolios as a whole, we generally target a valuation range of 90% to 120% of index valuation measured by price earnings ratios using consensus forecasts for the next fiscal year. At purchase, we generally target a holding period of 12-18 months during which time the catalyst for purchase is expected to generate premium returns as the market recognizes the growth prospects we have identified. This is consistent with our historical 75 % turnover in large cap portfolios. However, this average target holding period will not prevent us from selling a stock based on a rapid price increase or a recognized mistake.
  • THE UK FUND MANAGEMENT INDUSTRY

    1. 1. THE UK FUND MANAGEMENT INDUSTRY Roundtable on investment trusts & fund management Seoul, Korea 16 April, 2002 SYD BONE – Managing Director Baring Asset Management, Asia
    2. 2. Agenda <ul><li>The UK Market Today </li></ul><ul><li>The UK Pension System </li></ul><ul><ul><li>three tier approach </li></ul></ul><ul><ul><li>investment freedom </li></ul></ul><ul><ul><li>taxation incentives </li></ul></ul><ul><ul><li>protection of assets </li></ul></ul><ul><ul><li>challenges faced </li></ul></ul><ul><li>BAM as an example </li></ul>
    3. 3. The UK Market Today
    4. 4. The UK Market Today 1995 1997 1999 2001 Pension Funds 522 815 907 859 Insurance 507 744 935 1097 Unit & Investment Trusts 167 240 283 360 Private clients 65 131 341 410 Others 62 125 89 49 Total 1,323 2,055 2,555 2,775* * 79% UK clients, 21% overseas clients Source : ONS, Com Reer, Fund Managers' Asso, Moneynet Funds under management have doubled over the last six years GBP Bn
    5. 5. The UK Pension System Three Tier Approach
    6. 6. Spending on State Pension Systems Less dependence on tier one than other European countries Source : PricewaterhouseCoopers UK
    7. 7. Investment Freedom
    8. 8. Asset Allocation of European Pension Funds Prudent man approach UK
    9. 9. Pension Fund Holdings of International Securities Investment freedom UK
    10. 10. Performance of Pension Funds Excellent long-term results UK
    11. 11. Global Equity Risk Map 94 - 99 Source: Baring Asset Management Germany France Denmark Austria Switzerland UK New Zealand Spain Netherlands Finland Italy Japan Norway Hong Kong Singapore Eire Australia Canada Belgium Portugal Sweden USA Indonesia Taiwan Brazil Venezuela China Thailand Mexico Korea Korean investors have significant diversification opportunities
    12. 12. Taxation Incentives
    13. 13. Taxation of Pension Funds Taxation incentives work!
    14. 14. Protection of Assets
    15. 15. Protection of Assets <ul><li>Trust structure </li></ul><ul><ul><li>separate the pension fund from the employer </li></ul></ul><ul><li>Governing bodies </li></ul><ul><ul><li>Pension Schemes Office </li></ul></ul><ul><ul><li>Occupational Pensions Regulatory Authority (OPRA) </li></ul></ul><ul><ul><li>Pensions Ombudsman </li></ul></ul><ul><li>Legislation </li></ul><ul><ul><li>Pensions Act 1995 </li></ul></ul><ul><ul><li>Financial Services Regulations </li></ul></ul><ul><li>Expertise </li></ul><ul><ul><li>Fund managers, lawyers, actuaries & investment consultants </li></ul></ul>
    16. 16. Challenges Faced
    17. 17. Challenges Faced <ul><li>Pension mis-selling Personal pensions introduced in 1988 </li></ul><ul><li>Theft Maxwell case led to the Pensions Act 1995 and to OPRA being formed </li></ul><ul><li>Annuities Conversion rates are low, so pensions may less than desirable </li></ul><ul><li>Myners Report Broad based review of </li></ul><ul><ul><ul><ul><li>1. Investment process for pension schemes </li></ul></ul></ul></ul><ul><ul><ul><ul><li>2. Security of pension fund promise, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>3. Other collective investment vehicles </li></ul></ul></ul></ul><ul><li>Accounting May be the last straw for defined Standard FRS17 benefit plans. IAS 19 preferred </li></ul>
    18. 18. BAM as an example
    19. 19. Baring Asset Management <ul><li>Member of ING Group </li></ul><ul><li>US$34.6 billion assets under management </li></ul><ul><li>13 offices world-wide </li></ul><ul><ul><li>4 main investment offices </li></ul></ul><ul><ul><li>Hong Kong office set up in 1975; launched first ever Korean equity mutual fund for foreign investors </li></ul></ul><ul><li>125 investment professionals </li></ul>Taiwan Isle of Man Tokyo LONDON Boston Toronto San Francisco Hong Kong Dublin Frankfurt Guernsey Bahrain Jersey Paris Assets as at 28 th February 2002, Investment Professionals as at 31 st March 2002
    20. 20. Client Base Clients By Mandate Clients Assets Invested Fixed Income Equities Balanced 40% 33% 27% 28 th February 2002 United Kingdom 16% Continental Europe North America Emerging Asia Pacific Int’l Fixed Interest UK Fixed Interest Cash/Near Cash 12% 9% 4% 8% 33% 13% 3% 2% Japan
    21. 21. Client Base Clients By Type Clients Assets By Origin 28 th February 2002 *Middle East,Africa, Latin America Pension Funds Others Governments Private Clients Pooled Vehicles 52% 11% 11% 9% 13% 4% Charities/Foundations United Kingdom North America Continental Europe Offshore Pacific MEALA* 40% 25% 9% 4% 14% 8%
    22. 22. Investment Organisation 125 Investment Professionals Asia Pacific 6 Hong Kong 31 st March 2002 Director of Investment Process 17 London, Boston, Tokyo ASSET ALLOCATION REGIONAL EQUITY FIXED INCOME & CURRENCY Fixed Income & Currency Strategic Policy Group & Investment Management Teams 21 London, Boston Tokyo Hong Kong Number of investment managers. All teams share some resources. RESEARCH Global Sector Teams Quantitative Research Team 5 UK & Europe 13 London Japan 7 Tokyo North America 9 Boston PRIVATE CLIENTS Emerging Markets 13 London Boston Hong Kong CHIEF INVESTMENT OFFICER Healthcare Industrials Telecoms Media Consumer Goods Natural Resources Technology Financials
    23. 23. Investment Philosophy Inflation & Credit Fundamentals Applying rigorous fundamental research to identify unrecognised value in real yields and credit spreads Valuation HIGH LOW Growth CHEAP EXPENSIVE Equity Deteriorating Value Torpedoes Recognised Value Unrecognised Value Fixed Income IMPROVING DETERIORATING Real Yield & Spread HIGH LOW Torpedoes Value Traps Growth at a Reasonable Price We seek under-recognised growth companies that will deliver positive surprise
    24. 24. Four Step Investment Process A Structured Investment Process Global Model Portfolio Model Stock Portfolios Stock Research & Selection 1 Global Strategy 2 Client Portfolio Portfolio Construction 3 Client Portfolio Implementation 4
    25. 25. Portfolio Construction & Risk Control Note: From time to time, broad characteristics may be outside these limits/ranges. This is closely monitored and adjustments made when appropriate, to avoid unnecessary portfolio turnover. <ul><li>90-120% of benchmark P/E </li></ul><ul><li>(using IBES FY1 earnings) </li></ul><ul><li>± 5% relative </li></ul><ul><li>± 3% relative </li></ul><ul><li><5% guidelines </li></ul><ul><li>2% p.a. gross (over rolling 3 years) </li></ul><ul><li><80% p.a. target </li></ul><ul><li>Portfolio Valuation </li></ul><ul><li>Broad Sector </li></ul><ul><li>Stock </li></ul><ul><li>Predicted Tracking Error </li></ul><ul><li>Outperformance Target </li></ul><ul><li>Turnover </li></ul>Typical Weighting Bands (Relative to Index)
    26. 26. Implementation Market Operations confirm and settle deals Dedicated dealers execute orders Investment Managers authorise specific deals in each client’s portfolio Portfolio Control translates investment policy into monetary amounts and checks client restrictions Accurate, timely and cost efficient implementation
    27. 27. Excellent Mutual Fund Performance Standard & Poor’s Fund Management Ratings As at 28 th February 2002 AA Baring Global Bond Trust Baring International Bond Fund Baring Sterling Corporate Bond Trust Baring Eastern Europe Fund Baring High Yield Bond Fund Baring Hong Kong China Fund A Baring Korea Trust Baring UK Smaller Companies Trust Baring Emerging World Fund Baring Global Growth Trust Baring German Growth Trust Baring UK Growth Trust Baring European Growth Trust Baring North America Fund Baring American Growth Trust Baring Global Emerging Markets Fund
    28. 28. Regulatory Disclosure <ul><li>This document, provided as a service to professional investors/advisers, is issued by Baring Asset Management (Asia) Limited (regulated by the SFC in Hong Kong and the SEC in the US) and by investment advisor affiliates of Baring Asset Management Limited in other jurisdictions. It is published for private reference purposes only and is neither an offer nor a solicitation to buy or sell any investment referred to herein. </li></ul><ul><li>The issuer and any other company in the Baring Asset Management group may have acted upon or used research recommendations before they have been published. The contents of this document are based upon sources of information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. </li></ul><ul><li>This document may include forward-looking statements which are based on our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. </li></ul><ul><li>Baring Asset Management (Asia) Limited and its affiliates/staff may own or have positions in any investment mentioned herein or any investment related there to and from time to time add to or dispose of any such investment. </li></ul>Date Complied (HK): 28 February 2002

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