HQ Trust: Seeking competitive advantages

Ridhima Sharma
HQ Trust: Seeking competitive advantages

Marcel Müller of HQ Trust outlines competitive advantages in the research process of managers which will lead to outperformance in the future in the expected market environment.

HQ Trust, one of the oldest and largest independent multifamily offices in Germany, manages over €7bn for its clients, using what it feels are the best managers globally across all traditional and alternatives asset classes. The company acts as an adviser to institutional investors and pension funds, and for more than 30 years has been working to preserve and increase inter-generational wealth. When it comes to manager selection, both quantitative and qualitative processes are used, but the qualitative part is far the most important one, says Marcel Müller, partner at HQ Trust.

“We believe the biggest mistake in our industry is the fact that people think they can buy past performance which is absolutely not true,” Müller says. “But you can see this behaviour in the asset growth for funds which performed well over past years. People tend to invest in strategies which performed well in the past, without understanding why they performed so well. For us it is more important to understand a track record instead of just buying a good track record. So, to summarise, we try to identify competitive advantages in the research process of managers which will lead to outperformance in the future in our expected market environment.”

According to Müller: “HQ Trust invests roughly 80% of client assets in actively managed funds and 20% in passive strategies. We use several databases as Morningstar, Bloomberg or eVestment for quantitative analysis, but the main source to find new funds are personal meetings with portfolio managers and our international network. We have more than 500 manager meetings each year. We have a recommendation list for each asset class we invest in. For ad hoc situations like short-term tactical allocations we use also passive instruments if available. In the alternative space clients have greatest appetite for private debt and private equity. We are also continuously looking for absolute return strategies with a competitive advantage.”

Strategy types
HQ Trust is continuously looking for good managers in all asset classes, Müller notes, adding that the regular monitoring and review process is an important part of daily work. “Our recent focus is especially on total return strategies in the emerging market debt universe. The high dispersion in country and FX-returns make this asset class an ideal candidate for an unconstrained approach. “When it comes to selection, we prefer specialised boutique managers with a clear focus on one specific asset class.

Additionally, we like the entrepreneurial spirit where managers have their own stake in the company and have significant private assets invested in the fund/strategy. Furthermore, competitive advantages and multiple alpha sources in their investment process and idea generation process is a necessary requirement for an investment.”

Red flags
There are several factors that Müller and HQ Trust consider when deciding whether to continue with a strategy previously selected. These include strong asset growth in an asset class with liquidity constraints. Also, high portfolio turnover is typically considered an automatic red flag. And they do not like drastic changes in the investment process or team. In terms of use of offshore vehicles, Müller notes that “we have quite a high allocation to both on- and offshore absolute return strategies – especially as an alternative for traditional government bonds investments.

“There are some illiquid strategies which can’t be 100% implemented in a regulated daily liquidity pooled fund, where we would prefer the unregulated version. Nevertheless, there is a strong overlap between regulated and unregulated strategies, where we would prefer the regulated strategies in case they offer the same value with lower fees.”

Müller argues that the best risk management is embedded within the research process itself, where the selection of potential securities is based on detailed fundamental research, which should avoid distressed situations or, worse still, a default case. Looking ahead, Müller believes that in five years’ time there will be more investments in illiquid strategies including private debt and a stronger focus on benchmark agnostic strategies in the fixed income universe. “Fixed income indices remain a challenge in that the largest constituents are often countries or companies with the highest debt burdens and lowest credit quality.”

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