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From Monaco: What Are Fund Managers Buying?

When the going gets tough, the tough...err... head to Monaco. As global investors tried to get their heads around the Greek debt crisis, the US slowdown or the prospects of a hard landing in China, the world's largest fund managers headed to Monaco Tuesday to discuss the issues closest to their hearts.

Mutual Funds
Jay Brousseau | Stone | Getty Images
Mutual Funds

Inflows, outflows, assets under management (AUM), index linked products, Ucits, distribution and the latest emerging market strategies are the talk of the town as the people managing your pension or fund got together to discuss how to make more money, deal with regulators and convince the world's wealthy to invest.

The good news for the industry, according to a closely watched report from McKinsey and Co, is that AUM for the asset management community has returned to the pre-crisis peak of nearly 35 trillion euros ($50 trillion). The bad news is this down to the rebound in markets since the 2009 and not down to new inflows of money. In fact McKinsey and Co's annual report finds that the asset management industry's share of all global financial assets now stands at 14 percent, versus 15.5 percent in 2007.

McKinsey believes one of the reasons for this is that banks, who are still repairing balance sheets after the financial crisis, are less willing to drive investors into mutual funds, and instead push them into deposits and savings products that boost their balance sheets in these times of Basel III and higher capital ratios.

So, as I walked into my first discussion group I was not surprised to hear the discussion turn to the high margins fund managers are forced to pay to those distributing their funds in order to win business. At this point I thought CNBC.com readers would be most interested in what the fund managers where actually buying and selling rather than focus on how the banks are eating into the margins of the fund managers.

First, we spoke to Slim Feriani, the CEO and CIO of Advance Emerging Capital, who told CNBC that despite all the gloom surrounding Greece and the debt crisis he believes the glass is half full.

"We are cautiously optimistic despite all the bearish sentiment. The clouds are still out there, the event risk is still real, the sovereign debt crisis has yet to be resolved" said Feriani.

"We do believe though a disorderly blow up in Greece is unlikely following the lessons learnt from the Lehman crisis, policy makers will think twice before doing anything drastic."

"Bailing out Greece is less costly given all the uncertainty that would be created by a disorderly end to the Greek crisis," he added.

With no cash in his portfolio, which is totally invested in emerging and frontier markets, Feriani believes even in the worst case scenario for Greece emerging markets would be a relative winner. He is though confident the worst case will not happen.

"There will be no hard or soft landing in China," he said.

"For seven years it has been on the agenda but we don't buy that view. There will not be soft or hard landing for 10 years - China cannot afford to grow at less than 8 percent for social reasons, it needs to create jobs."

One of the reasons for his confidence is China's informal economy, which he estimates makes up a third of GDP.

"Over time the informal economy will be integrated into the normal economy, boosting total growth," he said.

With the huge debts facing the developed world set to lead to below trend growth Feriani believes exposure to big, domestic focused markets is the best way to cautiously invest in emerging markets.

"Our strategy is focused on big markets with a domestic focus like Brazil, Russia and Turkey. We like these rather than export-focused Asia which is exposed to problems elsewhere" said Feriani.

Next up I caught with Rick Lacaille, the global CIO of State Street Global Advisors, which advises funds managing $2.2 trillion on investment strategy. Lacaille believes it could be healthy that there is a possible agreement on burden-sharing on Greece, but questions whether this will get us to a position where the Greek economy is on a sustainable footing.

"We own equity holdings across Europe, European banks may need more capital due to new regulations, there may be a need for some to raise more equity capital which would protect our other investments," said Lacaille.

"We need the banks to lend more money to help our other investments prosper."

State Street's central scenario is that there will be no hard landing in China.

"This is worrying some who see the risk of a hard landing but the slowdown is small and some are even asking if it is now behind us," he added.

This summer could still be filled with uncertainty, Lacaille believes.

"Second quarter earnings could disappoint, guidance from many US firms has been edging lower but analysts have not been following and cutting estimates," he said.

"Figures could disappoint, having seen cost driven profit growth over the last few years we have seen top line growth in the last couple of quarters. To get the next leg of growth for earnings we need economic growth and jobs growth."

With the data in the US deteriorating quickly, Lacaille said investors and consumers will feel better about the health of the world's biggest economy if they understand that some of the factors holding back growth are temporary.

"It is important to understand the difference between temporary and long term factors hitting growth," he added.

"There will be no double dip, people will save more and corporate balance sheets are in better shape. Still, we are not out of crisis until rates return to normal and we start creating jobs."

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