Global Asset Management

Investment capabilities and performance

In past quarters, we have outlined the performance challenges we have faced in some capabilities, notably our core equity capabilities. As mentioned above, we have taken a number of steps to address this and are now beginning to see improvements. We expect that it will take some time for the market – current and prospective clients – to fully recognize our efforts. There is also a time lag between underperformance and its impact on net new money, so we cannot exclude the possibility of further outflows in coming months. However, our business has reduced its dependency on any one investment capability or market.

Our actively managed Global Equity composite, as an example, outperformed its benchmark in the quarter but remained below benchmark for most longer-term periods. In the quarter, the outperformance was largely due to strong stock selection in the consumer discretionary and healthcare sectors as well as positions in retailing, automobiles, automobile components, pharmaceuticals and biotechnology.

Regional equity performance for the quarter was varied. The US equity and US equity 130-30 long-short strategies outperformed, largely due to favorable stock selection, particularly overweight positions in automobiles and automobile components and railroads coupled with underweight positions in real estate investment trusts. Canadian, Australian and Asian equity performances were also strong, while European and Japanese strategies underperformed. Most small cap capabilities performed well.

All growth equity capabilities, with the exception of US Mid Cap Growth, underperformed their respective benchmarks in second quarter. The US Large Cap Growth performance lagged due to stock selection in the consumer discretionary, industrials and utilities sectors. The US Mid Cap Growth capability was ahead of its benchmark, driven largely by both sector allocation and stock selection in the consumer discretionary, energy and financial sectors. The US Small Cap Growth capability was negatively impacted by stock selection in the consumer discretionary, industrial and information technology sectors.

Yields rose across all major developed bond markets in second quarter and our bond portfolios were positioned to benefit from this movement. Lower rated residential mortgage-backed securities performed poorly as homeowner defaults exceeded market expectations in terms of level and rapidity. Credit spreads in other portions of the market widened in sympathy as market liquidity diminished. The relative returns of our active bond strategies were mixed, depending upon credit and currency orientation. In the case of the Absolute Return Bond strategy, credit and currency impacts outweighed the positive impact from interest rate positioning.

Balanced (multi-asset) portfolios turned in a mixed performance versus their benchmarks over the quarter. Asset allocation was flat to slightly negative in terms of performance contribution. The overweight stance towards US and emerging market equities and the underweight position to bonds, including emerging market debt, contributed positively to performance. The underweighting of Canadian and Continental European equities detracted from performance.

Currency strategies were a drag on performance in balanced strategies for the quarter. The overweight Swedish krona position was a positive contributor but the positions on the Japanese yen (overweight) and the Canadian dollar, euro and sterling (all underweight) detracted from currency performance.

Our main absolute return portfolios, the Dynamic Alpha Strategies, were broadly flat on the quarter. The positive stance toward equities and short position toward bonds contributed positively to returns. However, this was broadly offset by currency and security selection.

Alternative and quantitative investments strategies posted steady gains in second quarter in spite of mixed global equity markets performance in June. Returns across the majority of O'Connor single manager hedge fund strategies were positive. On the multi-manager side, returns have also been positive with the core fund-of-hedge fund strategies performing strongly during the quarter.

The global real estate business saw continuing growth in assets across all regions, mostly from direct investments in real estate. Our private real estate funds again provided solid returns. The relative performance of our global real estate security funds remained solid despite negative market movements, with most of the funds either performing flat against or outperforming their respective benchmarks.