In a world of disappointing hedge fund returns, the secret of successfully investing assets on behalf of private clients lies in identifying new assets, uncorrelated to bonds and equities. These classes, which can be traded long or short, can then become underlying investments for a new generation of structured products.

The costs of European cross-border funds are continuing to rise, according to a recent study by Lipper Fitzrovia. The asset-weighted-average Total Expense Ratios (TER) of an actively managed Luxembourg equity fund has increased by 13 per cent since 2001 and by 2 per cent since last year to reach 1.81 per cent in 2006.

In the last two years, Italian distributors have embraced the concept of an open platform and are beginning to offer clients third-party products. Elisa Trovato gauges industry reaction at latest our European Fund Series in Milan

Unless fund selection is conducted professionally and independently, by a dedicated team or company, economic factors can interfere in the selection of managers and products. “In an extreme model, where distributor takes the total control of the selection process, interests of bilateral agreements, also based on cost, can prevail,” said Eugenio Namor, chief executive officer at Eurizon Capital, previously Sanpaolo IMI Asset Management.

In the predominantly captive Italian funds market, distributors still command a very significant share of retrocessions, which can represent up to 90 per cent of Italian banks’ management fees, it emerged at the most recent in the European Fund series of PWM’s afternoon conferences, held in Milan and attended by over 150 delegates from the Italian industry.

Financial advisers or promotori finanziari networks play a key role in opening up the fund range to retail clients in Italy. The open platform, which is currently just a hyped trend will grow significantly, however. This was the message conveyed to the Milan audience by Vincenzo Bafunno, chief executive officer at UniCredit Xelion Banca.

The recent M&A; deals for corporate finance adviser Hawkpoint and private client firm Tilney Investment Management herald a new round of activity in the UK private banking marketplace. While the former is a merger of interests between Hawkpoint and Collins Stewart PLC that could provide interesting new opportunities for high-net-worths (HNWs), the latter is an even more interesting case study in MBO success following Deutsche Bank’s swoop on a business that just two years ago traded hands from Refco to management.

After getting its products on the shelves of fund selectors, Schroders believes the time is right to step up its marketing in order to get closer to consumers. Yuri Bender speaks to the group’s head of business expansion on his quest for a broader mix of European business

Schroders continues to lose institutional funds under management, yet profits continue to improve. This year saw £4.6bn (e6.2bn) in institutional outflow in the first six months, although Schroders also received £2.3bn in new retail money over the same period. Institutions withdrew another £1.8bn in the third quarter and retail investors redeemed £100m.

Diversification is the key word in the asset allocation world. However, the demands from private investors for greater returns means banks are taking increased risks to bring in expected performance of assets. Elisa Trovato reports

Dynamic asset allocation strategies are now widely used by investors as a way to maximise exposure in equities, while maintaining a good level of protection. During the last 10 years, investment banks have launched sophisticated alternatives to the basic Constant Proportion Portfolio Insurance structure (CPPI), which dynamically allocates capital between riskier assets such as equities and safer assets such as government bonds, with the objective of recovering the initial investment at maturity. When investors put ?100 in a CPPI structure, a certain proportion of it is invested in a zero coupon bond.This zero coupon bond will be redeemed at 100 per cent maturity and will thus enable investors to recover their entire initial capital in the most adverse market scenarios. A multiple of this available part is invested in more risky assets. Everyday the difference between the zero coupon bond price and the NAV structure (eg the addition of the zero coupon bond and the risky asset investments) is closely monitored and the amount invested in the riskier assets is adjusted.

Loosening the constraints

How do some equity fund managers make more money than others? The essential principle is easy to understand: buy the right stocks at the right time and you should generate outperformance.

But how do managers structure these multiple stock bets to create equity portfolios with the ability to access the highest potential returns? Traditionally the approach has been to take fewer bigger bets, constructing a more concentrated portfolio. This means a fund with just the stocks the fund manager really likes – their high conviction ideas with the strongest upside potential. However, the concentrated nature of these portfolios also means that they experience high levels of volatility due to the increased level of risk.

Is there an alternative which can be offered to meet the demand for strong fund performance but with potentially less risk exposure? Can’t high returns be created from a more diversified portfolio?

PWM aims to examine the role of banks, wealth managers and fund houses as asset allocators, to ascertain which asset classes are best suited to the sub-advisory model and which are best managed in-house, to estimate the optimum mix between internally managed and outsourced assets, and to evaluate changing distribution models in the light of depolarisation. To do this, we have invited a selection of wealth managers and investment providers to share their sub-advisory secrets with us

Interest rates have remained very low for many years. Investors were able to achieve good returns when rates declined, but what should they do now? Will rates continue to decline, or will they rise? Many investors want to invest in fixed income, no matter what the prevailing market conditions. ING Investment Management’s new Target Return Fixed Income Strategy can provide a fitting solution

Asian equities are no longer the bargain they once were, but investors remain convinced of new opportunities going forward. However, the potential global slow down has a few funds biting their fingernails. Simon Hildrey reports

There’s no doubt that straight-through processing is a godsend in the data heavy world of quantitative fund selection. However does it have a place in qualitative investing and can the cost justify a switch? Elisa Trovato reports

“After the Federal Reserve left Fed funds unchanged at 5.25 per cent in last’s FOMC meeting, the risk of inflation still haunted the market growth prospective. However, the odds of a recession are rising, it’s not yet a done deal. In October, we increased our positive view on equities relative to the bonds valuation and we made some changes in the portfolio position adding two new equity funds: MFS European Value and Protea Winter Green Fund.”

“Equities rallied further from their early summer blues, reaching five-year highs in several cases. There was brief concern that the US economy was losing momentum too quickly – retail sales, industrial production and various leading indicators were weaker than expected. However, company results and, more importantly, outlook statements continued to please and provide support. Bond markets were little changed over the month. We have made one switch in the portfolio, from Lazard UK Alpha into Schroder UK Alpha Plus.”

“Our portfolio is fairly balanced between bond and equity. In the euro bond area the investment in funds with a total return approach has been eliminated. The equity component of the portfolio remains quite conservative, although there are some more aggressive US funds in the portfolio. Our preferences are now more balanced between defensive funds or defensive themes as property and telecom, and aggressive themes, as technology for example, or aggressive funds.”

“No significant change in our portfolio since last month. The slowdown in the US economy is sufficient to reduce inflation pressures, but not enough to crush earnings. We believe the probability of a recession is marginal. Decent equity valuations are supportive in both absolute and relative terms. We favour a defensive stance on equities. Yields in the US may have more downside on the mid-term, however in the short run, risk return is less appealing and we feel comfortable with our current stance.”

“Third quarter earnings keep coming up pretty impressive, almost twice the return of the stock market, as far as the US are concerned. This means that stocks keep getting cheaper and cheaper. Investors must keep in mind that valuations are not of any use when it comes to spot inflection points on the markets. However, the balanced portfolio is still tilted toward equity funds in general. We have added a new manager: New Star’s Richard Pease, a manager we trust to to outperform European benchmarks.”

“We continue to recommend an allocation of 40 per cent to equities, 30 per cent to alternatives and 30 per cent to fixed income. The rise over the past month for equities has been 3.5 per cent for the MSCI World index. Over the past three months, this return has been 7.4 per cent. The FTSE Allshare has returned 6.6 per cent and the FTSE 250 12.9 per cent. Few would have predicted such strong results. We will now do more active work within the various asset classes and have taken some risk off by reducing exposure to Japanese small caps and reinvested this money into US large cap managers.”

“A good month for our stance, with equities continuing their recovery. Bonds also made some progress as expectations of an economic slowdown in 2007, led by the US, gathered pace, easing the pressure on further rises in interest rates around the world. A number of the selections performed particularly well. The star of the selections was, however, the Thames River Global Emerging Markets fund which rose over 5 per cent during the month. We remain happy with a mild equity overweight but are watching our regional exposures carefully in the final quarter.”

“We have significantly increased our fixed income exposure and have reduced equity holdings. This reflects our increasingly positive outlook for euro bonds and the slightly deteriorating value in stock markets. Except for minor weighting changes, we have left our fund allocation unchanged.”

“Over the month, our balanced portfolio has benefited from several bets such as European equities, corporate and emerging high yield. Our exposure towards global government bonds has been detrimental to the performance.

In a context of soft-landing confirmation we have decided to reduce our holdings in European equities and to a lesser extent in the Japanese market. After having activated a stop loss on gold last month, we have come back on it, considering good level of jewellery demand coming from India and restricted offer. We have also, this month, slightly reduced our stance towards equities by cutting a part of the Asian convertibles fund, which is very sensitive to the stock market.”