Edhec European Asset Management Practices Survey
Noel Amenc
Professor of Finance,
Director of the “Edhec Risk and Asset Management Research Centre”
Head of Research, Misys Asset Management Systems
21st May 2003
© Edhec 2003
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Outline
•
•
•
•
•
•
Objectives
Methodology
Investment services
Portfolio management process
Performance analysis
Risk management
© Edhec 2003
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Objectives of the study
• Assess the degree to which European asset
management firms’ practices correspond to the most
recent research in the asset management field;
• Identify the potential gaps with regard to the strategic
and regulatory environments of the respondents;
• Establish a basis for a permanent observatory of asset
management companies’ practices.
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Methodology
Organisation of the research
• “Industry Intelligence” - Edhec/MAMS cooperation;
• “Legal Intelligence”;
• Detailed summary of strategic, institutional and
conceptual challenges (June 2002);
• Survey of current practices of the 400 leading European
asset management companies (July to October 2002);
• Construction of the report (December 2002 to March
2003).
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Methodology
Survey on asset management companies’ practices
How the questionnaires were administered:
3 questionnaires:
– Strategy and Management Process
– Risk Management
– Organisation and Information Systems
• Anonymity guaranteed;
• 1,200 professionals contacted within the 400 largest
European asset management firms (CIO, IT Director,
Risk Director, etc.).
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Methodology
Survey on asset management companies’ practices
Sample
• 60 asset management firms responded to the survey;
• AUM of respondents totals 6,211.62 billion Euros;
• The structure of the sample is very similar to the
structure of the whole survey population;
• The number of responses allows for a pan-European
analysis;
• Comparisons between countries should be considered
with care.
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Methodology
Survey on asset management companies practices
Appropriateness of the sample
• The sample shows a size bias but a fairly good
geographic representation
Percentage of AUM by country in the group of respondents
and in the group of contacted companies
Breakdown by size in terms of assets under management
(USD)
43
42
United Kingdom
11
France
12
Germany
10
49
48
AUM between 10bn and 50bn
15
AUM between 50bn and 100bn
10
AUM in excess of 100bn
10
28
20
In the group of respondents
30
33
40
In the group contacted
50
31
17
15
Others
0
AUM between 5bn and 10bn
0
Percentage of respondents
10
14
21
20
30
40
50
60
Percentage in the group contacted
• 38% of respondents have an AIMR or GIPS certificate
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The management offerings
Global or niche offering
© Edhec 2003
60%
50%
40%
30%
20%
No answer
A service that is mainly based on
delegation and selecting specialists
(subcontracted multi-management or
partnership
An active investment service
0%
A service mainly based on index or
passive investment
10%
A global service covering all
investment styles and strategies
• Most asset management
firms
position
their
offering as global offers,
whatever their size;
• Strategic thinking on the
question of critical size
has not yet had a
dramatic impact on the
market.
How would you best describe the investment
services proposed by your company?
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The management offerings
Active vs Passive
• Development of passive offerings
– Passive offerings represent 23% of “Equity” products and nearly
10% of all products;
– These results are consistent with other market analysis (Morgan
Stanley, Watson Wyatt)
Country
Index Management - Equities
Index Management - Bonds
Active Investment - Equities
Active Investment - Bonds
Multi-Management - Traditional
Multi-Management - Alternative
Alternative Investment
Currency overlay
Private equity
Money market Investment
Others
No answer
© Edhec 2003
France
Germany
UK
3.18%
4.25%
2.06%
0.75%
36.25%
27.95%
36.42%
45.66%
0.53%
2.50%
0.86%
1.25%
1.16%
1.25%
0.12%
7.64%
0.00%
0.00%
17.22%
3.00%
2.35%
5.75%
28.57%
0.00%
13.06%
0.45%
46.40%
29.00%
1.73%
0.00%
0.88%
0.00%
0.81%
3.87%
3.79%
0.00%
Others
Europe
11.55%
9.89%
4.97%
2.29%
25.85%
35.45%
33.09%
33.65%
7.54%
3.64%
0.60%
0.50%
1.06%
1.03%
1.26%
1.41%
0.58%
0.50%
9.23%
7.69%
4.30%
3.98%
2.08%
8.57%
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The management offerings
Active vs Passive
• The drivers for the growth of passive offerings:
– Active products seen as too passive, too close to indices =>
what justifies the fee premium ?
– Current difficulties of “Stock Picking” approaches in the “Long
Only” universe;
– Cost of portfolio turnover not always offset by an enhanced
risk/return profile (cf. Fitzrovia study 2003)
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The management offerings
New forms of organisation: core-passive/active-satellite
Organisation of “core passive – active satellite” allocation:
– Clear separation of a major portfolio (core) managed passively
from one or more very actively managed satellites;
– Approach tightly linked to the development of ETFs;
– Approach favoured by consultants for cost reasons.
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The management offerings
New forms of organisation: core-passive/active-satellite
– Example of cost reduction for an “International Equity” portfolio
(€100m, 4% tracking error)
• Traditional approach: 100bp = €1m
• Core-satellite approach
–
–
–
–
Core portfolio management fees: 20bp
Satellite portfolio management fees: 100bp
Core portfolio tracking error: 0%
Satellite portfolio tracking error: 20%
• In order to obtain ex-ante a core-satellite with a 4% tracking error,
20% of the invested capital should be allocated to the satellite and
80% to the core portfolio;
• Overall management costs: 20 x 80% + 100 x 20% = 36bp
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The management offerings
New forms of organisation: core-passive/active-satellite
• Favoured by consultants for performance reasons:
– Allows for a better distinction between good and poor
performers
– Allows for manager diversification in the satellite portfolio
– Ease the risk management process, a 20% tracking error limit is
easier to respect than a 4% limit
• The core-satellite approach can result in a new
segmentation of management offerings:
– Core-satellite assembler
– “Core” producer or “Beta” factories
– “Satellite” producer or “Alpha” specialists.
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The management offerings
Multi-management
• Despite its popularity and success, multi-management
only represents 4.14% of the existing offerings;
• Alternative multi-management is barely present with
0.5% of responses;
• Funds of funds represent the most popular way of
implementing multi-management offerings (46% of
responses)
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The management offerings
Multi-management
• Arguments used by funds of funds promoters are
different from the ones used by multi-managers:
– multi-managers = fund pickers
• Selection by style, objective to avoid poor managers, diversify the
best managers
• Belief in a certain level of performance persistence for the best, or
“the least bad”
• The ongoing relationship with the managers does not allow for
active allocation (style neutrality)
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The management offerings
Multi-management
As regards to multi-management in the traditional
universe, which investment services do you favour?
– Funds of funds = fund
timer
50
• Use of both fund
picking and tactical
allocation
• Use of allocation as
main explanation
factor for performance
(style, geogra-phic or
industry sector)
40
46
45
34
35
30
26
25
20
20
20
17
15
11
10
© Edhec 2003
No answer
Multi-mgmt based
on geogr
diversification
Multi-mgmt based
on diversification
)*(
Multi-mgmt based
on sector
diversification
Multi-mgmt based
on style
diversification
Managers'funds
0
Funds of funds
5
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The management offerings
Multi-management
• New forms of multi-management: fund trackers
– “Pure allocation” logic;
– Low management fees;
– Facilitates control over the risk of delegating management (no
style drift).
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The management offerings
Alternative Investments
Perception of Alternative Investments
© Edhec 2003
50%
40%
30%
20%
10%
As an excellent diversification tool
As a source of return that exhibits
low correlation with traditional
stock and bond markets
As a more valuable source of
alphas than that of the traditional
universe
0%
As an asset class that is part of
global asset allocation
– Only 17% of respondents
mention the superior
“alphas” of AI
– 60% of respondents put
forward the diversification
and de-correlation
properties of AI.
60%
As a turn of events related to the
general economic climate
• A diversification approach
rather than a quest for
out-performance
70%
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The management offerings
Alternative Investments
• The development of Alternative Investments favours
outsourcing
– Acceptance of the specifics of this form of management, including
for alternative multi-management
– The low level of volumes does not justify internalisation of the
activity.
Implementation of alternative investment services
With a subsidiary company or a department within the asset management firm
With the investment bank of the group the asset management firm belongs to
With an external organisation
No answer
© Edhec 2003
37%
11%
31%
31%
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The management offerings
Structured products
• Structured management is perceived as a strategic
offering for 34% of respondents and of interest for 31%.
Do structured products play an important part in your company's strategy for the future?
Country
Yes
No
Of some interest
Don't know
© Edhec 2003
France
Germany
57%
0%
29%
14%
0%
50%
50%
0%
UK
Others
25%
50%
25%
0%
Europe
42%
25%
33%
0%
34%
31%
31%
3%
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The management offerings
Structured products
• Structured management does correspond to a more
significant need for “risk profiling” from investors
– Managers have to be able to manage the different moments of
return distributions (especially the symmetry and extreme
losses);
– The use of derivatives appears as a new source of addedvalue;
– The UCITS III directive should allow for “risk profiling” based on
derivative instruments.
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The management offerings
Structured products
• The investment bank is a partner/competitor for asset
managers in this field.
The future of structured management products and the investment bank
Management of the guaranteed part
Investment Bank
© Edhec 2003
Management of the underlying
Underlying with "alpha", the Investment Bank acts like a
multimanager
Underlying without "alpha", the Investment Bank is a provider
of ETFs or derivatives
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The management process
Asset allocation
• Confusion between benchmark and index
– The benchmark can be different from the index. The academic
studies very often mentioned by passive managers (Brinson,
Singer, Beebower, 1991) did not say that nothing could be done
outside of the indices, but that the benchmark, i.e. the strategic
allocation, was a determining source of performance.
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The management process
Asset allocation
– The study does not conclude
that one should not alter the
initial allocation, but only that if
one does not modify it, there is
little hope of beating the
classes in which the portfolio is
invested.
– This tautology has very often
led management companies to
neglect
active
allocation
techniques
which
remain
determinant.
Explanation of return differences
between funds
3.5%
11%
40%
45.5%
Stock Picking
Tactical Asset Allocation
Strategic Asset Allocation
Fees
French mutual funds (1999-2001)
(Source: Edhec 2001)
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The management process
Asset allocation
Which investment process do you
favour? (Europe)
• United Kingdom and Europe
– Active asset allocation is favoured
in the management process for all
European countries, with the
exception of United Kingdom
(Investment Bank / Broker-Dealer
culture)
33%
64%
3%
Country
A top/down approach separating the strategic and tactical
allocation phase from the stock picking stage
An opportunitic approach based on stock selection without
reference to a process or to asset allocation constraints
A bottom up approach based on stock selection with
allocation constraints
France
Germany
UK
100%
75%
37%
0%
0%
0%
0%
25%
63%
A top/down approach separating the strategic and tactical
allocation phase from the stock picking stage
An opportunistic approach based on stock selection without
reference to a process or to asset allocation constraints
A bottom up approach based on stock selection with allocation
constraints
Percentage is established based on number of responses, eleven percent of respondents did
not answer this question
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– The allocation privileges
macro-economic forecasts
(80%);
– Despite academic results,
quantitative approach for
tactical allocation is not
widely used (17%), with
investment management
firms preferring a qualitative approach.
© Edhec 2003
0%
Does it incorporate
sector or microeconomic
Forecasting?
France
Germany
United Kingdom
Others
Is it mainly based on a
quantitative process for
tactical allocation?
Is it mainly based on a
quantitative process for
strategic allocation?
Does it include a tactical
dimension by holding a
monthly or quarterly
investment committee
Meeting?
Does it take into account
the extreme risks of
allocation by means of
simulations and/or
Scenarios?
Does it incorporate
macroeconomic
forecasting or scenarios?
• Tactical allocation is
widely used by asset
management firms
Is it associated with one
or several allocation or
investment committees?
The management process
Asset allocation
The Asset Allocation Process
120%
100%
80%
60%
40%
20%
Europe
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The management process
Portfolio construction
80%
70%
60%
50%
40%
30%
20%
France
© Edhec 2003
Germany
United Kingdom
Others
No quantitative methods for optimisation
Others
A relative risk approach compared to a
benchmark that represents the long-term
allocation policy
The minimisation of extreme risk
The minimisation of volatility risk
0%
An approach based on a minimum
acceptable level of risk or return
10%
Optimisation of absolute risk based on a
mean-VaR approach
– This approach is usually
supported by a Black &
Littermann approach which
compares the market portfolio (neutral view) to a
market capitalisation
weighted index.
90%
Optimisation of absolute risk based on a
mean-variance approach
• The benchmark relative
risk approach is favoured
by respondents (74%)
Is portfolio composition for one or more asset classes,
categories or styles based on:
Europe
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The management process
Portfolio construction
• Despite its weaknesses, 23% of management firms use
the mean-variance approach;
• Only 22% of respondents take extreme risks into
consideration in the portfolio construction process.
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Performance analysis
Success of GIPS standards
• Implementation of “Country
Version” (CVG) or
“Translated Version” (TG)
within most European
countries
• Acceptance of the
unification process by
European players (Gold
GIPS - 2005)
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Performance analysis
Risk-adjusted measure
• An unsophisticated approach to measuring managers’
alphas
– Low level of usage of multi-factor models (17%)
– General use of Peer Groups (51%)
– Measurement of out-performance with regard to a benchmark
(97%)
• The benchmark is usually a market index (97%) and
rarely a normal portfolio representing the true risk
exposures of a portfolio over the period (6%).
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© Edhec 2003
France
Germany
United Kingdom
Others
No answer
By analysing absolute
performance in a peer group
By Sharpe-type style analysis
By using market models (CAPM
and Jensen's alpha)
By analysis based on relative
performance compared to the
benchmark (information ratio,
etc)
By using a multi-factor model
Performance analysis
Risk-adjusted measure
How are the manager's alphas analysed?
80%
70%
60%
50%
40%
30%
20%
10%
0%
Europe
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Performance analysis
Performance attribution
• Not a genuinely global
approach, strongly linked
to “equity” offerings
Are the sources of performance broken down?
(Europe)
6%
14%
51%
29%
For all investments
No
© Edhec 2003
For certain investments
No answer
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Performance analysis
Performance attribution
• Absence of international
standardisation
Favour GIPS/AIMR-PPS recommending
disclosure of attribution statistics?
90
80
70
60
50
40
30
20
10
0
Yes
No
Money Managers
Investment Consultants
Source: Spaulding (200)
© Edhec 2003
Don't know
Other
Plan Sponsors
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Performance analysis
Performance attribution
• Multi-factor models for performance attribution
dominate;
• The arithmetic approach (Brinson et al.) is more often
used for “client” reporting;
• Multi-factor models sourced from the risk management
discipline, also widely used for performance attribution
(49%) are nevertheless neglected for published
measures of managers’ alphas.
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Performance analysis
Performance attribution
Which performance attribution method and/or performance
decomposition model do you use?
80%
70%
60%
50%
40%
30%
20%
10%
France
© Edhec 2003
Germany
United Kingdom
No answer
Others
Model based
on multi-factor
analysis (such
as Barra)
Arithmetic
model ( such
as Brinson,
Singer or
Beebower)
Style analysis
model (such
as Sharpe)
0%
Others
Europe
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© Edhec 2003
France
Germany
United Kingdom
Others
8
8
9
14
20%
0%
0
0
0
33
29
25
23
29
25
40%
No answer
Measurement of operational risk
Ensuring that risk regulations and restrictions
set by the client and/or investment firm are
being respected
Consolidation and evaluation of risk
associated with off balance sheet positions
per portfolio, per client, per manager and for
the whole investment firm
42
42
57
51
50
50
83
83
71
75
77
71
69
67
80%
Credit risk analysis
29
58
58
51
100
100
100%
Measurement of the risk-adjusted return for
each investment
43
60%
portfolios are exposed
25
• The measurement of risk as
required by the regulator or
the mandate is a key
constituent of the risk
monitoring function;
• Only 51% of respondents
monitor
the
portfolio’s
extreme risks;
• Only 23% of respondents
consolidate and assess the
risks of off-balance sheet
operations.
Analysis of the extreme risks to which
Risk management
Risk monitoring
Which of the following does risk analysis include?
120%
Total Europe
030521 - 36
Risk management
Future investment
• Investment priorities are consistent across the various
geographical zones:
– Management of allocation constraints and risk limits (60%)
– Measure and analysis of extreme risks (46%)
– Evaluation and monitoring of off-balance sheet positions (52%)
• It is also interesting to note that client reporting is widely
seen as a key investment (71%)
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© Edhec 2003
France
Germany
United Kingdom
Others
No answer
Others
Measurement and analysis of extreme
risks
Measurement of operational risk
Risk reports designed for clients
Ensuring that asset allocation rules
and risk limits are being respected
Ensuring that the investment firm's
guarantees are being respected
0
0
0
3
8
8
14
17
17
14
14
25
25
29
25
25
43
43
42
42
50
50
50
46
43
37
33
33
29
33
31
29
26
26
50
60
58
67
75
71
75
75
75
75
92
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Monitoring off balance sheet positions
Improving models for OTC operations
evaluation
Risk management
Future investment
Which areas of risk management or analysis do you intend to invest in over the next three years?
Total Europe
030521 - 38
Risk management
Risk measurement
• Two types of risks are not well represented:
– Volatility risk (56%), for which the score is probably linked to the
low usage of derivative instruments. France is an exception with
regard to this question;
– Liquidity risk (59%), for which the challenges are both
conceptual (definition of a model for measuring liquidity risk) and
technical (implementation of the consequences of liquidity risk
on instrument pricing) (cf. CMRA study, 2001).
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Risk management
Risk measurement
Which financial risks do you take into account when analysing
portfolio exposure?
market risk
interest rate volatility risk
risk
France
Germany
FX risk
credit risk
United Kingdom
liquidity risk
Others
Others
22%
0%
3%
0%
0%
0%
12%
20%
0%
0%
20%
© Edhec 2003
25%
59%
50%
40%
44%
40%
83%
100%
80%
78%
75%
82%
100%
88%
100%
40%
44%
60%
67%
58%
56%
75%
88%
92%
91%
100%
100%
78%
78%
80%
100%
100%
100%
100%
94%
120%
No answer
Total Europe
030521 - 40
Risk management
Value at Risk (VaR)
• Usage not widespread (51%)
– No regulatory framework;
– The systematisation of VaR requires the adaptation of complex
tools initially designed for investment banking
• Need to adapt the VaR calculations to the specific context
of investment management firms (simple calculations but
real inclusion of non-Gaussian risks)
– VaR Cornish Fisher (Favre Galinao, 2000)
– Style VaR (L’habitant, 2001)
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Risk management
Risk measurement
• An approach not really tailored to the measurement of
extreme risks
– Respondents favour parametric VaR (44%)
– Very low usage of extreme value approaches (6%)
– 21% of respondents trust the normal distribution laws to analyse
the consequences of extreme risk variations.
How do you assess the risk of extreme loss for your portfolio?
31%
No answer
18%
No VAR carried out
6%
Extreme Value Theory
15%
Simplified Monte Carlo VaR + scenarios
26%
Monte Carlo simulation based VaR
Historical simulation VaR
32%
Parametric VaR
44%
0%
© Edhec 2003
5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
030521 - 42
Risk management
Multi factor analysis
• Factor Analysis is one of the areas where asset
managers have invested the most so far. The usage of
multi-factor models is consistent with the “risk relative”
asset allocation approach.
56
50
53
18
0
0
0
0
6
8
11
15
17
15
20
25
20
20
22
13
9
0
0
10%
0
8
12
20%
13
20
30%
22
25
33
40%
22
50%
40
60%
0
70%
63
Do you base your portfolio risk anlysis on a multi-factor model?
© Edhec 2003
France
Germany
United Kingdom
Others
Total Europe
No answer
No, we do not
consider this
useful
No, but we are
planning to do
so
Yes, others
Yes, implicit
type (APT)
Yes, explicit
macroeconomic
type (BIRR)
Yes, explicit
microeconomic
type (BARRA)
0%
030521 - 43
Risk management
Multi factor analysis
• Even though explicit models (BARRA, BIRR, etc.) still
dominate the market, the implicit approaches are
growing in importance (9% in Europe and 22% in the
United Kingdom).
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Risk management
Credit risk
• Quantitative approach not well represented;
• Financial analysis privileged despite its “backward
looking” approach.
60
70%
67
67
Is the specific approach to credit risk based on:
50
50
60%
12
11
No answer
Others
0
0
0
risk
between credit
risk and liquidity
Others
8
8
8
United Kingdom
the links
A modelling of
department
analysis
the financial
0
0
An analysis,
Germany
carried out by
published rating
on the
A model based
approach
0
based
France
© Edhec 2003
25
15
15
13
an option-
A model using
0
10%
0%
21
22
25
22
30%
33
33
38
33
40%
20%
38
50%
Total Europe
030521 - 45
Risk Management
Compliance: Level of compliance
• The level of compliance is quite high so far due to
regulatory evolutions;
• Increasing importance of “contractual” compliance;
• Implementation of financial constraint monitoring (VaR
53%, risk factors 24%).
© Edhec 2003
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© Edhec 2003
30%
20%
10%
0%
3
6
Others
None
6
Tracking error
Extreme risk constraints (VaR)
Leverage effect constraints
Constraints linked to a risk factor
identified by multi-factor analysis
Counterparty limits
50
53
62
71
40%
Constraints relating to the asset class
defined within the allocation framework
50%
71
24
60%
Constraints relating to an investment
category
65
70%
Constraints relating to a specific asset
80%
79
76
90%
Mandate-related rules
Company-related rules
Risk Management
Compliance: Level of compliance
What risk constraints do you take into account?
030521 - 47
Risk Management
Compliance: Pre or Post trade compliance
• Pre-trade compliance becoming a strategic challenge for
organisations and their portfolio management systems;
• This pre-trade compliance takes not only regulatory
requirements into account but also financial constraints.
In your opinion, which of the
following constraints require
periodical control (post-trade) or
alternatively should be
systematically taken into account
for each new trade (pre-trade)?
© Edhec 2003
Total Europe
Post trade
Pre trade
Both
Type of investment
7%
32%
Class or category related to allocation
11%
19%
Counterparty
11%
22%
Risk factor
27%
15%
Leverage effect
16%
20%
VaR
35%
12%
61%
70%
67%
58%
64%
54%
No answer
18%
21%
21%
24%
26%
24%
030521 - 48
Risk Management
Operational risk: What attention is given to Operational Risk ?
• Only 50% of European management firms feel impacted
by the consequences of Basel II, despite the CAD III
initiative;
• This lack of interest can be understood:
– Investment Management companies
are not the most exposed to
operational risks (custodian role);
– The implementation of new capital
requirements to cope with an
idiosyncratic risk is not supported by
academic research, nor is it
supported by industry studies (Oxera
2001, Biais et al., 2003);
Do you think the Basel II Accord, which allows
for the allocation of share capital to cover
operational risks of banks and their asset
management subsidiaries, will affect your
activity?
3%
24%
50%
24%
Yes
© Edhec 2003
No
Don't know
No answer
030521 - 49
Risk Management
Operational risk: Measures taken to respond to the new regulatory
requirements
• Despite their usefulness with regard to capital savings,
internal models have not yet received attention from our
respondents;
Country
Yes
No
We have not examined the issue yet
France
Germany UK
0%
20%
0%
0%
100%
80%
0%
22%
78%
• Loss data collection is the current priority for investment
management firms (53%). By definition, however, the
data collection cannot serve as a basis for analysing
extreme risks, which are supposed to be covered by
capital charges. As a result, the question of operational
risk is tackled from the operations efficiency angle.
© Edhec 2003
030521 - 50