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The German-speaking fund universe

Posted by on 10 June 2016
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Right at the start of the afternoon session on Tuesday's Business Leaders Forum at FundForum 2016 in Berlin, we were given a fascinating insight into how the panel of German-speaking fund selectors came up with their fund universe.

Beginning with the fact that data feeds are a crucial component, Bernd Poegel from Dekabank explained that he also relied on agreements with 70 fund companies from which he receives data fact sheets.

Manuela Thies explained how Allianz Global Investors used quantitative screening to differentiate more than 80 different peer groups, and reclassified funds if they didn't fit into the peer groups where they had been put. The big challenge, she said, was regarding new strategies: "For example unconstrained strategies, where it is even more important to have qualitative due diligence and to understand what the funds are doing - and which peer groups they really fit into."

Philip Schifferegger of Erste Sparinvest said that quantitative screening was the first step: "We don't just look at the alpha metrics, or expected return outperformance, risk factors are also important. Maximum downturn of different periods are the focus of our analysis, but that's only the quant part, and that's just the beginning."

Thomas Romig outlined three situations that attracted the interest of Assenagon: "Long-only funds where there is an asymmetric pattern - funds that offer a little bit of downside protection but may not have the best performance on the upside; we also like to focus on alignment of interest; and new participants in the market where they really show us what are their strengths are, rather than coming to us with ‘yes we can do everything.'"

Active share

How as a fund selector do you interpret active share – something that is increasingly becoming a popular measure for active fund management – asked moderator Simon Weiler from E-Fundresearch.Com. Is it super-hype or actually useful?

"Its popularity is based on two aspects," explained Johanna Handte from Deutsche Bank Asset Management. "First of all it is simple and seems to be intuitive; second, many fund managers who say they have a high active ratio point to a potential outperformance versus a benchmark," she said, whilst noting that she hadn't seen any empirical research to support this.

"There are limitations. It's important to choose the right benchmark, and to know how the asset manager is computing the active share," Johanna continued. "It can only be one part of the process. I don't think it's the holy grail of the active asset management."

Nor did Thomas: "It's one indication," he concurred. "You can do other analysis like factor analysis. You have to look at the portfolio – how are the deviations: on a sector basis? On a country basis? For example, for an equity manager."

Threshold for fees

Fees was the next topic of discussion, with a question from the audience on whether any of the panel had any thresholds with regard to fees.

Philip didn't, recognising that fees depended very much on the asset class and the degree of activity on the portfolio.

"Of course we are all under cost pressure," he conceded. "The market is very competitive, especially in the institutional world, and clients are less willing to pay high fees with limited return potential, given the low interest rate environment - which is why ETFs are so popular."

For Bernd, swing pricing was very important: "When you invest in a bond class and there is a swing factor of 0.5 it's a very high cost in this asset class. We don't have a fixed range for the cost, but it's very important for the fund analyst when he looks to invest in one of the funds."

Thomas, meanwhile, told us about an incident where an asset manager was excluded because of extensive swing pricing: "For us it was more a factor of getting alpha into the fund paid by redemptions or subscriptions. You can misuse every detail of how you define your fund. You can't always say swing price is good or bad; it has to be a fair deal between the investors who are in the fund and investors who want to enter or leave the fund."

The perfect roadshow

Dispensing advice regarding roadshows, the panel gave their golden recipe for the perfect pitch presentation:

"First, know your client," stated Thomas. "And what they allocate and what they don't allocate. Keep it short, structured and focussed. Also know your competitors. And it would be nice to get performance attributions straight away and be able to discuss them in the meeting."

Bernd agreed, adding: "It's very important after the meeting that you have monthly information about the funds. It's great to meet a great manager but after this you have no information, and that's not a good deal."

"I might add another point," said Thomas. "It would be very innovative if you included a slide with how you are aligned with your strategy with us as an investor, and with our client; that would be a good practice."

"Content is key," said Manuela. "It's always good to have content like process, people, performance, and product overview. Confidence is good, it's key for us to understand why you think your funds are better than your competitors'. Straightforwardness and honestly are also important; we have the databases, we can double check."

And finally, the ubiquitous discussion on active versus passive

Philip reckoned that there is a world for both: "If you look at a client portfolio which has a short-term investment horizon and a low risk tolerance you are better off with a passive portfolio. If you have a long-term view and a higher risk tolerance you are better off with active.

For Johanna it was a question of market efficiency: "In markets where we have a lot of sale-side coverage it is difficult for us to see active management outperform on a consistent basis, but there are niche products where we definitely see alpha opportunities."

When it came to choosing funds, Manuela said it was very important to "open the black box. We would not invest if we didn't understand the fund strategy. This is where we as fund selectors can really do a good job; I don't think either the end investor or the client has the capacity or the access to select these products the way we do it."

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