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Johannesburg - The global asset management sector will have to change the way it does business as a result of the financial crisis.
This is the view of Jon Maguire, the chief investment officer for Cru Investment Management. Cru operates an absolute return investment fund with operations in the UK and the pan-European markets, and has opened an office in South Africa.
Maguire said: "The banking sector seized up in September, and the asset management sector did the same in October."
According to Maguire, many asset management companies with exposure to the equity markets have not seen any new business since a large-scale sell-off on global equity markets, and many are experiencing large-scale withdrawals from both retail and institutional clients.
Look beyond the stock market
Maguire doesn't buy the advice touted by many investment managers that long-term investment in the stock market will outperform other investment classes. He points to the Japanese stock market as an example of one that has failed to deliver over an extended period. "Inflation ensures the very long-term direction is upward, but investors can experience significant short-, medium- and long-term losses."
He also said the stock market is little more than a "trading valuation" as opposed to a "value-based assessment" of a business. With businesses not able to meet their earnings forecasts, suddenly willing buyers for listed shares have dried up and the trade valuations have decreased sharply.
With large-scale withdrawals, asset managers are being forced to rethink their business models, says Maguire.
Maguire believes that one of the reasons Cru has been able to generate a positive return for investors in recent months and attract inflows into its funds is because of its exposure to the private finance and non-listed company market.
"When a business lists onto an exchange, this is where many of the fund managers begin to get involved and begin to place client money - but the real money is made in that period after the business has established itself but prior to listing," said Maguire.
It is easier for businesses to generate high earnings multiples in the pre-listing phase than it is for them to generate high earnings once they are listed. This, according to Maguire, is the competitive advantage Cru has brought to its clients.
Investors who have had access to private ownership (like venture capital and private financing deals) in the UK market have enjoyed returns of 20% a year in equity investments and 13% in fixed interest instruments, said Maguire. In comparison, over the same period investors who have gone the public ownership route have only seen returns of 3% in equity and 4% in fixed interest in the UK market.
Private financing involves the lending of money to firms for working capital for specific projects or deals. These deals typically come with high levels of collateral from borrowers. With traditional lending avenues such as banks and the corporate debt market failing to provide capital, good businesses are turning to the private finance market to provide funding.
The Cru Investment Portfolio Fund has 43% of its funds in private finance and 24% in its (non-listed) private equity portfolio.
- Fin24.com
