Jean-François Hautemulle reshuffled the fund selection process at UniCredit Private Bank. Based on a truly pan-European approach, he tries to promote transparency and avoid bad surprises.
The marginal benefits of choosing a European small cap manager who might be able to outperform by an additional percentage point might cloud the bigger picture. “What we try to do on the network level is to show clients the benefits of diversification. Many are still exposed to bulk risks, such as high exposure to bunds or BTPs, especially if they are exposed to their local markets.”
The concentrated exposure by clients to particular funds gives Hautemulle a headache every now and then.
“That is a challenge for the whole industry. Every year there is the one fund. In the first half of this year it was Hasenstab –for very good reasons, as he had an outstanding performance. The year before, it was Bill Gross of Pimco. The year before that, it was Carmignac.
“You cannot avoid the fact that money is flowing into these funds. But you have to make sure the exposure to these funds is not too large for the network.”
At times, the fund selectors need to tell advisers to “ease off” on some products. “Managers experience bad years and good years. Even the best managers experience very bad periods.”
This reserved analysis does not mean that Hautemulle has lost faith in active fund management. “I still believe in it. Over a market cycle, active managers should outperform if you choose them right. This is our basic premise.”
Even though performance is an important guide in the selection process for Hautemulle, focusing solely on performance is ill-fated advice. “We look for three things in funds: performance, process and people. We try to identify the quality products.” People are an essential part of this trinity. Star managers rarely make the buying list.
But aren’t the likes of Hasenstab and Gross star managers? “They are the figureheads. They have teams of PhDs providing support to make them outperform. Bill Gross has half of Pimco working for him,” explains Hautemulle.
One different way to make diversification more accessible and understandable for clients is thematic products. To be sure, the funds selection team that Hautemulle heads has a “split view” on the product range. Yet he argues that these products can play their proper role in a portfolio.
“There is a role for these funds to play. The world is becoming flat and thus themes are getting more important. Trend funds are the big thing that people should pay attention to.”
Globalisation is the driving force behind this process. The floods in Thailand last year have had major consequences for technology companies. The floods destroyed factories that were crucial to the global supply chain.
The tightly knotted net of these supply chains (that”made the world flat”, as the New York Times’ Thomas Friedman wrote) underpins the growth in thematic investing. Hautemulle says: “There is a role for focused funds to play. That is why Pictet is one of our Preferred Partners. Every partner has been chosen for a specific reason.” The Swiss asset manager and private bank has a large range of thematic funds.
Slower growth, tougher job
The other major force shaping the industry might be the tougher environment for capital markets. With government bonds already yielding less than inflation and the growth outlook for developed markets darkening, costs for asset management services carry more weight than in the past.
Fund managers thus might fight much more fiercely over clients: “In an environment where you have double digit returns, a substantial fee goes unnoticed. In an environment such as today’s, it is getting tougher to justify your fees.” As a result, focusing on the process and people behind portfolios might yield a bigger premium going forward. “There are some exceptional teams out there in the market and asset managers are well advised to create an environment at their firms to promote outperformance.”
This might mean different strategies for different companies. “Some asset managers will get more active. Some are going long-short. Some are using focused funds. What matters more is that you will see, very clearly, those who have a solid, repeatable process.”