Combining qualitative analysis with statistical examination helps Société Générale Private Banking cut risk, not returns.
Combining qualitative analysis with statistical examination helps Société Générale Private Banking cut risk, not returns.
The expanse of the entire fund universe can seem daunting, so it helps to pinpoint just a few ‘stars'.
That is one reason Société Générale Private Banking employs a combination of qualitative analysis and quantitative tools to pick the manager who is generating returns on the least amount of risk, from a strategy group that may exhibit similar returns.
Since the financial crisis, it is increasingly common for allocators to account for the risk managers take as when considering returns expressed in variables such as Sharpe and Sortino ratios.
Stephane de Vaulx (pictured), deputy head of fund solutions at Société Générale Private Banking, says his teams' process included quantitative tools to do this well before the crunch.
Stephane Rotceig, head of sales and marketing fund solutions, adds:
"In the mutual fund universe there are many funds that have similar performance, so we analyse them from a risk-adjusted perspective. We cover all the funds in a given sector to choose the best products for our clients also from a risk-adjusted perspective. You can have two products whose performance can be almost identical, but one can be taking much more risk to get there."
He explains quantitative analysis also helps to identify when managers stray beyond their central remit and expertise, or style drift. This was a significant issue in the global financial crisis.
Investors sometimes discovered their portfolios were significantly less liquid than expected, and managers less experienced in extricating client money from unfamiliar markets.
"You have to keep focusing on your analysis to make sure nothing goes wrong with selection. We are very pleased to have quant tools allowing us to do very detailed monitoring of managers. You can detect style drift and identify inconsistency," says de Vaulx.
Quantitative analysis also makes for more informative, useful discussions between managers and allocators, and may even identify changes managers themselves did not see.
Rotceig explains: "Some time ago we were analysing a US growth fund, and expecting to invest in it, but when we ran style analysis we found what was meant to be a US growth fund was in fact a value fund. When we dug further, we found the manager used to run a value fund."
The private bank recommends clients stay invested in a fund for at least two years, but it analyses risk-adjusted returns over shorter and longer periods, too.
The private bank has also strengthened links with the risk department of the broader banking group.
The private bankers are also acutely aware of liquidity risk in funds. This means, when faced with the same onshore and offshore hedge funds, they opt for onshore Ucits products, or would use managed platforms, which could be on- or offshore.
Tight Due Diligence
De Vaulx notes strict quantitative and qualitative due diligence are necessary for onshore hedge funds, even those falling under the Ucits regulation. "Tight due diligence is what helps your clients be safe in a fund."
The private bankers will analyse a fund company for strength and processes, for example before putting its funds and management teams under the microscope.
Such scrutiny also helps the private bank gain transparency one key requirement for fund investors since the crisis.
Rotceig notes wealthy French clients, in general, followed a slightly different path from the bank's other clients during and since the crisis.
Société Générale Private Banking is seeing most appetite from French clients for exposure to US and European equities in the traditional arena, while EMs equities' exposure is still present but declining.
Among alternative investments event-driven managers such as merger arbitrageurs are being sought.
EM exposure is coming "mainly through funds investing in companies that have a heavy business exposure to growth markets and a consumption theme. We consider this approach is preferable to direct investments in EM countries because of inflation issues those countries have to face," says Rotceig.
Inflation-linked and short-duration bond funds are also of interest to the bank's French clients, to protect against inflation and rate increases.
French investors are generally conservative, typically lagging the investment trends found overseas.
Rotceig says French clients have been regaining their risk appetite, spurring a move towards investment grade and high yield bond funds, preferring high yield products since they offer better risk-adjusted returns.
While the EM debt investment theme played out abroad through government, corporate bond and local EM currency funds, French clients accessed it via euro and US-high yield funds, primarily in the deeper US markets.
Last year, their search for yield led them to mixed-asset funds, whose managers can easily switch between fixed income and shares, and to corporate bond funds.
www.privatebanking.societegenerale.com
