Edgar Mestre, financial analyst at the asset allocation team of Summa Patrimonia outlines the fund selection strategy his team carries out, generally favouring actively managed funds.
Barcelona-based Edgar Mestre is one of the 14-strong team working at the Spanish financial advisory (Eafi) Summa Patrimonia, where he works as an investment portfolio analyst focusing on equity.
Summa Patrimonia, founded in 2005 to create and develop an independent consulting business for its clients, has around 150 clients (whose portfolios worth at least €1m) and has €400m of assets under administration. The company focuses on advising clients on financial assets such as mutual funds, stocks, fixed income and also alternative investments including capital risk, participations in unlisted companies, real estate, etc.
“Since our core business are individuals and families, we also advise small and medium companies in the search for financing, business valuation and financial optimization. Both services have a large cross-section, achieving great synergies,” added Mestre.
Although most of Summa Patrimonia´s clients come from Spain, the company also counts with some foreign clients.“We also keep good relationships with international banks based abroad,” Mestre adds.
The selection team primarily advises on actively managed funds, but sometimes it makes use of ETFs for both Spanish and foreign clients, as ETF management fees are lower than active funds ones, according to Mestre.
“For our Spain-based clients we don’t normally use ETFs because they are not transferrable, thus they don’t enjoy fiscal harmony. However, as the arrival of Mifid II may lead some entities to start charging trading costs and custody fees, we may start considering that alternative.”
Mestre highlights how his team uses a wide range of sources when searching out funds for potential investments. He also underlines growing contacts with boutiques – which traditionally were less accessible than bigger AM companies. “We are increasingly focusing on boutiques as they offer a more direct approach to their fund managers.”
When asked about his team’s selection process, Mestre refers with equal interest to the quantitative than to the qualitative analysis.
The quantitative element monitors funds globally, ranking them by consistency, before qualitative analysis looks to the investment process, encompassing both the fund’s performances and the managers in reference to outcomes. Following this analysis Mestre and colleagues start holding meetings with managers to finalise decisions on adding funds to their list.
With regards to absolute return strategies, Mestre comments: “Although absolute return funds offered lower yields in 2015 than had been expected – making investors doubt about this asset class – they added value and decorrelation to portfolios in 2017, leading us to continue investing in them but with certain caution.”
Of particular interest are absolute return funds with low volatility, but also emerging markets fixed income strategies, provided they have flexibility in reference to local currency exposure and credit exposure.
Mestre underlines the team´s preferences for those managers offering the following attributes: active risk/benchmark unconstrained, deep and differentiated fundamental research and criterion, transparency, and a transparent investment methodology.
“We favour those managers not basing all their decisions just in a fund manager because that person – who may have performed great in certain period of time – runs the risk of blind himself and miss other opportunities.”
Regarding risk control management, Mestre believes fund managers’ key attribute is the ability to control the volatility and the drawdown.
Mestre underlines how most of his clients have an increasing appetite for risk, despite their conservative profile. He adds:“When there is euphoria in financial markets, many investors want to increase the risk in their portfolios looking for higher yield. Our job is to advise them not to increase the risk above their profile, even in periods of euphoria – protecting them from exposure to potential corrections.”
EAFIS AND MIFID II
On a different basis and looking ahead, the portfolio analyst alludes inevitably to the newly implemented regulation Mifid II.
“From this point on, compliance will rely exclusively on financial advisers leading us to greater internal supervisions with subsequent rising costs. Hence some Eafis on low incomes may be forced to merge with others in order to be able to afford those higher costs.”