The turnover of global investment managers has been substantial since the financial crisis and throughout the Eurozone’s uncertainty. Sebastien Cabanel, Head of Sales, Asia Pacific for BNP’s FundQuest says: “It has become a considerable source of concern for institutional investors who sought to stabilise investment styles and returns. You don’t like to see that in an established investment programme or group of portfolios.”
FundQuest acts as a gatekeeper for the bank’s clients screening and monitoring approved products and funds. Post global financial crisis, the number of institutions demanding these kinds of services has grown alongside high net-worth individuals and family offices.
Clients choose from a list of funds that suits their objectives and recommendations of funds are based on thorough due diligence. Part of the process includes performance comparison tests against a proprietary database of about 220 funds covering a wide variety of asset classes. “Our due diligence is labour intensive, representing one-on-one work with each investment manager.”
FundQuest also takes a conservative approach, where it is reluctant to recommend new funds and might do so only if they can track and measure the performance of the entire management team. Cabanel and his colleagues devote considerable time and resources talking to traders and analysts, back and middle office managers of each fund they approve. “We need to arrive at a complete judgement on the team and its people.
FundQuest mitigates the risk of different portfolio returns for a group of clients with the same objectives. “A basic objective is to harmonise returns so clients sharing the same goals achieve similar returns.”
By focussing on a manager’s complete operational risks, FundQuest is adding value in an area that was not previously treated with rigour. Presently, they approve of long only, strategy funds. They’re not recommending hedge funds, but are accepting fund of (hedge) funds. “I don’t recommend funds using ‘black box’ trading algorithms because they are difficult to conduct due diligence on and to understand the trades.”
FundQuest, which is run of out of London, Paris and Singapore with 28 people, also makes recommendations based on allocation and rebalancing based on a barbell approach and investing in multiple managers, which helps to mitigate risk by selecting different styles. The cost of gatekeeping varies depending on size, investment style and expectations. FundQuest’s studies are strictly confidential.
Tighter regulatory pressures around the world are making fund gatekeeping a sensible service. “Independent financial advisors and gatekeepers are being asked to extensively demonstrate they have performed due diligence on the funds they recommend. In a time of low return, high volatility markets, clients are demanding on their asset managers to assess all risks.
“Asset managers are being tested on their overall asset allocations as clients are trying to anticipate when markets shift away from fixed income. In a volatile, range trading market it has been difficult to make returns.”
This kind of market can tempt managers into ‘style’ drift so they use an array of quantitative tools to run the portfolio performance against benchmarks. This helps determine relative performance. FundQuest’s system also judges asset managers by their ability to explain their strategies and returns.
Cababel sees that Asian clients continue to demand more EM debt, Asian fixed income (corporate and sovereign) and local currency bonds and commodities. Some Asian clients are becoming interested in European equities. “Value managers have been under pressure over the last five years as the market cycle turned against them.”
“Secular and cyclical financial industry trends are driving a consolidation among asset managers in terms of size and specialty.” – Peter Guy