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The 3 Worst Scenarios for Fund Managers and Portfolio Managers

What is the worst situation a Fund Manger face? Poor performance, unfortunately it likely isn’t.

Experienced Fund Managers are usually not bothered by underperformance, especially year-on-year, period-on-period.  There will always be periods of underperformance and outperformance, favouring or disadvantaging different investment strategies.

Portfolio Managers or selected Fund Managers have the unenviable task of managing single country / sector investments.  This means throughout the period of economic uncertainty or cyclical downturn in that country or sector, they will have to stay invested.

For the larger asset managers, they carry the fiduciary duty to not only preserve capital but to support economic and financial stability in that country / sector.

If you are the Portfolio Manager or Fund Manager, what would you do?  If you are the Wealth Manager or Investment Advisor, should you get your clients to stay invested?

Sometimes,  Fund Managers or Portfolio Managers will make consistently poor decisions and inevitably, suffer from loss of reputation and credibility.

Independent Fund ranking and rating providers such as Thomson Reuters Lipper and Citywire Selector evaluate and rank performance for Unit Trust and Mutual Funds while Preqin provides ranking for Hedge Funds.

We look at the 3 worst scenarios for Fund Managers and Portfolio Managers:


Scenario #1 Massive Funds Withdrawal

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Massive outflow of funds is a major concern for Fund Managers and Portfolio Managers.

  • Is it due to poor performance?
  • Is it a new long-term economic cycle?
  • Is there a major change in investment trends?
  • Are they losing institutional support?
  • Have they suffered from loss of reputation?
  • Are they unable to maintain the trust of advisors?
  • Are they unable to maintain the trust of investors?

Aside from expertise and professionalism, good reputation, trust and credibility are the important elements for Fund Management firms, Fund Managers and Portfolio Managers.

The biggest Fund Managers are also the trustee of funds for society and economy, managing billions and trillions that are not only invested by individuals but also by institutional funds that are allocated from Pension Funds, Retirement Funds, Endowments, Insurance Funds and Investment Funds.

Types of Institutional Investors:
 Types Source Examples
Pension Funds Savings that are contributed from employees and employers Government Pension Investment Fund – Japan,
Retirement Funds Similar to Pension funds, where savings could be contributed by anyone, anytime for retirement 401(k), EPFO, MPF, EPF, CPF*
Endowments Contributions and donations are made into trust funds where capital gains and incomes are used to fund programs Harvard Management Company, Yale University Investment Fund, Ford Foundation, Mayo Clinic
Insurance Funds Premiums collected from insurance policy-holders  Allianz, L&G, AXA, Prudential
Investment Funds Investments made by individual, companies or institutions. Unit Trust, Mutual Funds, Exchange Traded Funds managed by Fund Managers such as Vanguard, Capital Group, Amundi, Henderson, Old Mutual
  • *401(k) ~ United States
  • *EPFO (Employees’ Provident Fund Organisation) ~ India
  • *MPF (Mandatory Provident Fund) ~ Hong Kong
  • *EPF (Employees Provident Fund) ~ Malaysia
  • *CPF (Central Provident Fund) ~ Singapore

 

The Largest Fund Managers in 2016:
Rank Sovereign Wealth Funds HQ Founded in AUM (USD)
1 Social Security Trust Fund United States 1935 $2.8 Trillion
2 Government Pension Investment Fund Japan 2001 $1.3 Trillion
3 Government Pension Fund- Global Norway 1990 $902 Billion

Source: Caproasia Institute

 

Rank Asset Management HQ Founded in AUM (USD)
1 BlackRock United States 1988 $5.1 Trillion
2 Vanguard United States 1975 $3.9 Trillion
3 State Street Global Advisers United States 1978 $2.4 Trillion

Source: Caproasia Institute

 

Scenario #2 Fund Merger

Imagine 2 Central Bankers deciding monetary policies for a country, 2 Professors teaching in the same class, 2 Lawyers from different firms advising a client, 2 Fighter Pilots in the cockpit and 2 Wealth Managers advising a single client.

Fund Merger is an unwanted situation for Fund Managers.  Two or a few very highly accomplished Fund Managers who had grown accustomed to deciding the strategic direction of funds that number in excess of billion dollars, with tremendously insightful views and conviction of global economic and investment trends, are now in a position of possible convergence of views and decisions.

More complications:

  • To decide on overall Fund Strategies
  • Restructuring of Funds, domicile, legal & tax matters
  • Re-align existing portfolios and investments
  • Instill confidence with anchor Institutional Investors and Individual Investors
  • Ensure continuous value-added investment philosophy after merger

 

Scenario #3 Funds Shutdown

Global Head of Investments

Fund Managers generally dislike Fund shutdown.  Strategically, it either means something went off the course or perhaps, the end of an investment trend.  Unfortunately, the reputation and stigma stays with the Fund Manager for a Fund shutdown.

But why would a Fund shutdown?  There are actually many reasons why a Fund would be shutdown.  Funds with poor performance continuously would be likely shutdown.  There could also be insufficient AUM to support the infrastructure and cost of running the fund.

More strategic reasons could be a change in investment trends or complications arising from regulations or compliance.  Sometimes, the Fund Manager quits.

  • Change in Investment Trends
  • Competition, Threats and Lack of Scale
  • Insufficient AUM
  • Regulatory or Compliance Complications
  • Management Decision
  • Fund Manager Leaves
  • Poor performance of Fund Manager

Are these the worst scenarios for Fund Managers and Portfolio Managers? Or is a prolonged economic downturn such as the Great Depression the worst situation?  Hyper-inflation? What do you think?

 



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