Nikko Asset Management’s Devitt sees consolidation in outlook for Fofs and Fohfs
Aoifinn Devitt, head of the World Series Fund platform at Nikko Asset Management, sees consolidation as one key outcome for funds of funds and funds of hedge funds in future.
The fund of fund industry has been subjected to a multi-pronged attack in recent years, as fees and assets come under pressure, and performance, transparency and “value added” are probed. Escalating competition from consultants and a spike in the number of institutions wiling to pursue their own direct programs, have forced groups to adapt, even preemptively, as, to paraphrase an Intel executive, “only the paranoid survive”. It took some time, but groups are no longer holding sacred the “one size fits all” commingled fund model, nor are they spurning advisory and hybrid mandates in favour of a purely discretionary approach.
We are seeing an expansion in both the type of service provided and the breadth of fund types that will be used to manufacture a solution. As funds migrate from the pure commingled fund offerings, they will offer advisory mandates, bespoke portfolio construction (with focus perhaps on sector carve outs or more liquid or concentrated portfolios) or access to a due diligence and research database. Investors are increasingly focused on outcome based investing, which has necessitated a broadening of the products considered for inclusion in a portfolio. For example, absolute return mandates may today include diversified growth and absolute return funds manufactured from traditional asset classes such as fixed income, while an active credit fund may include many private equity/hedge fund hybrids. Combining long/short and long only mandates has gone out of vogue in recent years, but may be poised to return as the value added of long/short strategies continues to come into question.
Fees remain of heightened importance and often advisory and hybrid mandates will be set according to whatever fee the client may wish to bear, rather than anchored by any fixed fee precedent. Underlying fund fees are also scrutinized, and increasingly fund of fund groups will tout their ability to gain sizeable fee discounts through the creation of separate accounts with managers, sometimes with managed account structures. But this negotiation ability remains the vestige of very large funds, as it depends on scale, clout and experience. Similarly, only very large groups have the depth and infrastructure to meaningfully support advisory and research processes, with web-based interfaces that provide clients with real-time access to the reports and information that they desire.
This leads to the inevitable conclusion that smaller, boutique funds of funds will continue to struggle as investors flock to broader, deeper groups. We expect an ongoing cycle of consolidation, and that the recent skepticism regarding assets and their stickiness is likely to continue, leading to depressed valuations.
An interesting new trend in the cycle of consolidation is that large traditional fund groups seem to have a renewed appetite for acquiring multi-manager operations. As most funds of funds are predominantly institutional today, such acquisitions will expand the institutional reach of the acquirer, however, these acquisitions will also facilitate the migration for the fund of fund group into mutual fund style multi-manager offerings. The surge in Ucits issuance (despite mixed performance) has been a test-run for this, and firms are increasingly skilled at adapting strategies according to regulatory requirements as well as the enhanced liquidity such structures provide. Pending changes in private fund advertising in the US will also enhance the appeal of such products.