Listen to this interview about asset management and check the meanings of the words and expressions in bold.
baffling
central thesis
served the needs of
tend to
even though
over time
double digits
drive down
fat returns
as the saying goes
vivid
hand you
hopeless
damning
luck over skill
genuinely
look back over the past 10 years
to spot
15 straight years
abysmal
accurately
skillful
credit crunch
betting
undermine
it's been around
undergoing
witnessed
to claim credit for
it's all down to
narrow that down
so-called
exchange traded funds
low fees
driver of change
so on and so forth
mimics
over the long run
the likelihood is
turning to
the skill set
terribly skillful
narrowed
plausibly
riding on the back of
as we go ahead
sovereign wealth funds
wary of
flack
buying stakes in
broader spread of
retreating from
putting aside
come up with
attractive proposition
Would you care to...?
accordingly
lock in the return
a punt
coming back to
overall
sustainable investing
mistreating
sued
turn out to be
bogged down in
a trade-off
to beat the market
aim for higher returns
a backwater
sensible
to rely on
to pick
Sunday
CARTOON
Look up the words in this cartoon from The Economist, which charts the US President's decline.
VOCABULARY : ASSET MANAGEMENT
Read the following Economist article and check the meanings of the words and expressions in bold.
If fund management is such an attractive business, why would large banks such as Citigroup and Merrill Lynch want to give it up? After all, with both groups facing write-offs related to the credit crunch, the steady revenue from asset management would have been a comfortable cushion.
But there is one big problem with being a fund manager: you have to beat the market. If you don't, intermediaries such as brokers and private banks will not select your funds. And regulators, at least in America and Britain, will get upset if they think you are stuffing your poorly performing funds down your clients' throats.
This has prompted a move in the Anglo-Saxon markets to separate the jobs of “manufacturing” (managing portfolios) and “distribution” (selling them to clients). In continental Europe and Asia fund management is still dominated by the big banks and insurance companies. In Italy, for example, 92% of assets are gathered directly by salesmen tied to, or employed by, the fund-management group; in Britain the proportion is just 14%.
Manufacturing may sound like the more attractive part of the business. Provided the company gets its performance right, its profits will go up exponentially: it costs little more to manage $2 billion than $1 billion. But firms that act as distributors still earn fees from fund management, by charging investors for the oversight of their portfolios or by taking commission on the funds they sell. At the same time they cut out much of the cost.
There are three main kinds of distribution. The first is simply to sell products managed by your own firm. The second is “open architecture”. This allows the client access to almost any fund manager on the market, or at least to all the managers who are willing to allow their funds to be offered on such a platform. For various reasons, some are not. For example, they may want to control the type of clients that own their funds, or limit the size of funds under management to avoid their performance being diluted. Or they may object to handing over part of the annual management fee to the distributor. “Some of the really interesting boutiques don't want to be on platforms and give away half their fees,” says Alan Bartlett of WestLB Mellon AM, a firm that specialises in identifying skilled fund managers.
Another problem of open architecture is the so-called paradox of choice. Retail investors can feel overwhelmed by the thousands of funds on offer, so they are inclined to choose names they recognise. This favours funds that spend a lot on marketing and advertising. As a result, clients may not choose the best (and almost certainly not the cheapest) funds. But there is nobody to steer them in the right direction, because giving clients individual advice is too difficult and too expensive.
The third sort of distribution is “guided architecture”. In this model, a distributor offers the funds of a restricted number of firms that it has pre-selected as being suitable for clients. This narrows down the choice for investors and offers a degree of stability to the fund managers involved.
The effect of the manufacturing-distribution split is that the retail market is becoming almost as institutionalised as the pension-fund market. Just as a pension-fund manager's ability to get business usually depends on winning over a handful of consultants, attracting money from the “high net worth” market (ie, the rich) depends on a manager's ability to convince an elite group of private banks. That gives the managers plenty of scope to bandy about terms like alpha and beta in their presentations. “At least this means we can talk at the level we're accustomed to,” says one manager.
This opens up opportunities for boutique-style firms. “Groups like Citigroup and Merrill Lynch have got out of asset management and moved to open architecture; we, as an independent asset manager, are just what they are looking for,” says Jim Kennedy of T. Rowe Price. Outsourcing distribution allows fund managers to specialise in their area of expertise.
But there is a price to pay. Depending on outside distributors means the fund manager loses direct contact with the client. One industry veteran recalls how his firm used to maintain a department to deal with the letters from investors; now the correspondence has slowed to a trickle. The result may be less hassle but also a reduction in customer loyalty. There is a lot more “churn” (turnover of customer accounts) than there used to be. “These people [the distributors] have to do something to justify their fees,” laments one fund manager, and that something usually means switching to a new fund as soon as one appears to falter.
The recent decline in the fortunes of New Star, a British fund-management group, illustrates the danger. New Star was founded by John Duffield, formerly of Jupiter Asset Management, with the explicit aim of recruiting well-known individual fund managers. Its funds were popular with both retail investors and distributors such as financial advisers and private banks. But in 2007 performance faltered as the company became overexposed to the British property market. In the second half of the year fickle investors left in droves, withdrawing almost £2 billion from the group's funds. The company cut its dividend in the expectation of further withdrawals this year. In response, its shares fell by nearly a third. If you live by short-term performance, you can die by it too.
COMEDY : ANNUAL ASSESSMENTS
How do you feel about annual assessments ? Watch the following video extract from the BBC's The Office, which shows what happens when assessments are badly managed. Try to transcribe the questions that the boss reads to Keith.
THE NEXT BANKING CRISIS
Read the following article and look up the words in bold if necessary.
THERE is always a bright side. To date, the banks that have imploded as a result of the credit crunch have been largely domestic. It has been clear from the start which national authority is responsible for clearing up the mess. The remarkable rescue of Bear Stearns by the Fed over a single weekend is testament to what a determined regulator can achieve. If a large international bank went belly-up, things would be far murkier. “So far we've been lucky,” says the chairman of one national regulator. “There is no formal framework for solving a cross-border crisis.”
It may not be entirely down to luck: banks operating in just one country are more likely to get into serious trouble than ones with an international spread of business. But the crisis may encourage more banks to diversify across borders, so the question of how the authorities would work together if a big bank were to fail will become more pressing.
When things are going well, dialogue is relatively easy. Bilateral relationships between home regulators (who have primary responsibility for supervision) and host regulators are generally healthy. In Europe, the Committee of European Banking Supervisors has been running a project for a handful of cross-border banks in which their principal regulators have formed supervisory colleges to share information and conduct joint inspections. There is much more of this sort of thing to come. In April European Union finance ministers signed an agreement to tighten up monitoring of the continent's big cross-border banks. American and British officials are keen to install a transatlantic watchdog.
Working out whose job it would be to save a border-crossing bank in trouble is far more contentious. Would taxpayers in a bank's home country stump up for the cost of rescuing its operations abroad?
“If a bank is systemically important at home, the authorities would have an incentive to intervene to ensure an orderly resolution, thereby also directly or indirectly supporting its operations abroad,” reckons Mr Borio of the Bank for International Settlements. Yet crisis simulations involving the supervisors of Nordea, a bank that has a substantial market share in four Scandinavian countries, suggest that co-ordination problems are thorny. “The exercises are great fun but have terrible outcomes,” says one observer.
In cross-border banking, institutions that are “too big to fail” are not the only problem. There are also those that are “too big to save”: big banks in small countries whose coffers could not cope with the cost of a bail-out. UBS and Credit Suisse, two Swiss banks with a sprawling international presence, are firmly in this camp. Swiss officials shrug nervously when asked what would happen if either of these two giants were felled.
And then there are those that might be described as “too small to fail”: banks that are not systemically important in their home market but wield lots of clout in foreign markets. Take a bank like Standard Chartered, which has its headquarters in London but makes its money in emerging markets. Would British taxpayers and regulators step in if the bank's operations in, say, Asia went wrong? Many countries in Eastern Europe have banking systems dominated by foreigners (see chart 11). The authorities in New Zealand, where much of the banking system is in Australian hands, require foreign branches above a certain size to incorporate locally and to appoint local boards.
Agreeing burden-sharing arrangements for cross-border institutions in advance is tough. Most regulators believe that decisions on funding and the like will have to be thrashed out when the time comes. But the cack-handed rescues of Britain's Northern Rock and Germany's IKB hardly inspire trust. In an industry where crises unfold at high speed and confidence is all, hoping for the best is not much of a strategy.
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