The Fund Selection Blog

Selection in the wake of the financial crisis

It is a well-known fact that 2008 was a horrible year for long-only equity managers. Its aftermath could also prove that 2009 will have been the year that highlighted those fund selectors who were really excellent, and those who were able to add value from those who were merely decent.

 

Suitability categorisation

At a press conference in London the president of the European Fund and Asset Management Association (Efama), Jean-Baptiste de Franssu, outlined the organisation’s strategy for the next two years. Among the things he highlighted was the issue of distribution of funds. In a press release the organisation stated: “Efama will lead the European industry in this area, placing greater emphasis on the needs of investors by reviewing the conditions under which Ucits funds are being sold by distributors.”

 

What about fund research boutiques?

Over the last couple of years, and even over the last couple of months, we have seen the launch of a lot of smaller independent equity research boutiques. When will we see something similar with managed investment research?

 

 

Selection or allocation?

Senior executives from the international fund industry gathered at the FundForum International in Monaco at the end of June to discuss and decide on the future shape and direction of the industry. Even if the financial crisis, of course, meant fewer participants, less exhibitors and fewer fancy giveaways, this is still a great place to pick up on industry trends and meet senior people in the European and global asset management industry. The topics discussed and the issues people agree on are pointing in the right direction. If the industry is able to walk the walk as well as talk the talk I am certain we have a lot to look forward to.

The Nordic Round Table

On April 23 some 40 fund selectors and product developers gathered in Stockholm for the second annual Nordic Fund Selection Forum, arranged by Tell Media Group - the company behind this fund selection blog-column. Delegates networked with industry peers and listened to some excellent speakers from sponsoring fund groups as well to invited experts such as Antony John from FundQuest and Oscar Vermeulen from Altis. It was however the round table that highlighted some of the topics that are found high on the agenda for fund selectors in the Nordic region. We were grateful to have Jonas Arsjö, head of investment consulting at Mercer in Sweden, Jauri Häkkä, head of fund and manager selection at Nordea and Mattias Hagen, a senior fund analyst at SEB, on the panel. These were some of the topics that were discussed;

Change of focus

Fund and manager selection has never been easy but it used to be fairly straightforward. It was about finding managers with skill and, depending on the reason for the selection exercise, combining managers to a well-rounded portfolio. It is straightforward no more, as additional and arguably more complex parameters have entered the fund selection equation.

The death of fund selection?

2008 provided investors, individuals and institutions alike with an exceptional environment in which to grow, or at least safeguard, their capital. With the benefit of hindsight many have concluded they must change their ways in order to do better. Some large institutional investors have also started to ask how they make the most of the money they spend on asset management, be it internal managers or external mandates.

Nobody ever got fired for buying IBM

Fund and manager selection is, at its core, all about fund research. Over the years we have seen that it is difficult to build a pure fund research business and most companies offer their research capabilities through products such as funds of funds, or as part of an overall consulting offering. Over the last year or so the industry seems to have taken the next step in this development, where it is no longer enough to be an excellent boutique and instead specialist players become integrated parts of larger financial conglomerates.

 

Why is that? We are only human and when forced to take decisions we are sometimes, if not always, motivated by fear, uncertainty and doubt. This concept of ‘FUD’ was, according to Wikipedia, first defined by Gene Amdahl after he left IBM to found his own company, Amdahl Corp. “FUD is the fear, uncertainty, and doubt that IBM sales people instil in the minds of potential customers who might be considering Amdahl products.” From this we got the axiom that “nobody ever got fired for buying IBM equipment”.

 

I guess nobody ever got fired for going with a large provider rather than a boutique in the asset management sector either. Or, put another way, if institutional investors continue to be unwilling to go with smaller, arguably more specialised, players they help create an industry dominated by a select few. We have over the past year or so seen a number of examples in the fund selection space where independent specialist players are teaming up with larger entities.

 

On 2 April last year we saw that Investment Manager Selection (IMS) was being acquired by BNP Paribas. The company is now operating under the FundQuest brand, the multi-manager specialist within BNP Paribas Investment Partners. Late last year we also learned that Altis, the Swiss multi-manager boutique, was joining forces with ING. ING said at the time: “This move contributes to ING IM’s ambition to be a leading solutions provider for its diversified client base and responds to increasing market demand for a fiduciary management approach.”

 

That might be so, but it also points to the fact that it is tough to be an independent player, regardless of how excellent your research and product delivery is, when you don’t have a large enough distribution and sales network. Teaming up with a larger entity, such as BNP Paribas and ING, gives independent fund selection boutiques instant credibility with larger institutional investors and they also provide sufficient resources – not least in sales and marketing.

 

The same argument can be used to explain a similar deal in the Nordic region, which was made official in November 2007, where SEB – the Nordic banking group – bought Key Asset Management, a London-based manager of funds of hedge funds.

One could argue that this trend creates fund selection entities that are less independent, but at the same time it creates entities that have sufficient resources to do a good job.

 

I have two questions for you:

 

1. Is the trend outlined above positive or negative?

2. Is it possible to successfully (operationally and financially) run an independent venture providing fund and manager research, or do you have to offer your research capabilities as part of implemented consulting or as part of a fund-of-fund operation?

 

Use the comments feature below and have your say!

 

/This comment was first published in Issue 72 Feb 2009 of the Funds Europe magazine

Say goodbye to Past Performance…

…and say hallo to the Fund Selection Blog-Column.

After running the Past Performance column in Funds Europe since October 2005 we have developed a new format that will focus on fund selection. Fund selectors are more important to investors now than ever before. Together with a blog related to this column (see below) we hope to draw fund selection practitioners and other knowledgeable individuals into a stimulating and ongoing discussion.

In this inaugural blog/column, apart from setting the scene for upcoming columns, I want to also share some insights gained from discussions and from a survey I have been working on. When I go back and flick through my notebook from the European Fund Manager Selection conference, which was held in London in early October, and when I listen to the tapes from interviews with fund selection teams at Thames River Capital and Jupiter two things stand out.

 

First, fund selectors must focus more on the operational risk of their providers, due mainly to recent events. This means they will have to spend at least as much time understanding fund companies’ operational aspects as they do on money management processes.

 

Second, market turbulence will most likely result in weak fund companies falling by the wayside and a lot of others will be affected by corporate activity. Together this will mean more fund manager turnover.

Both trends are good news for professional fund selectors and multi-managers - or, at least it should be for those with the resources to deal with new challenges.

A survey I have done of fund selectors in the Nordic region has also found some interesting things. Here is a sample:

 

Q: Fund research is about understanding and gaining correct expectations of a single fund/manager. How many of the funds you have selected have handled the crisis in a manner you expected and has performance been as expected?

A: Three out of five say 75% of managers behaved according to expectations and two out of five say only 50% of managers behaved as expected. One survey participant explains: ”Manager skill is easier to identify over a cycle and so-called turning points are always more critical for the research process.”

 

Q: It is in times of stress like at present when the analysis process is really tested. Have you learned anything that prompts you to make adjustments to how you analyse funds/managers?

A: Three out of five say yes and one develops his thoughts further by saying: “You must of course continuously develop your research process. Even if risk management always has been important we have all learned more about what can happen in times such as these.” Another says: ”We focus more on back-up plans because the risk that a manager may disappear has increased.”

 

Q: Some fund companies (and their owners) are under pressure - has the analysis of fund companies become more important in these turbulent times?

A: Four out of five say yes, and echo the sentiment made in the two points above.

Now, please keep us updated to make sure we indeed do cover what is most relevant in the fund- and manager selection space and make sure to visit www.fundselection.org/blog and participate in what we hope will be the most relevant discussions on this increasingly important area of asset management.

 

/This comment was first published in Issue 71 Dec 2008 - Jan 2009 of the Funds Europe magazine

Blog in Funds Europe magazine

Low turnover might be a good thing when we are talking about fund managers and multi-manager portfolios. However, a low turnover of posts on any blog is a bad thing. This is why we have been working hard behind the scene to make sure we are able to build this blog to a must read for anyone interested in fund- and manager selection.

One result from this work is a co-operation with Funds Europe magazine where we will publish a monthly column on fund and manager selection in the magazine. The same column will run both on paper and online and the overall aim is to publish a regular column in the magazine that is both relevant and timely and at the same time draw fund selection practitioners and other knowledgeable individuals to this blog for a stimulating and ongoing discussion.