The (fund) size matters
Edmond de Rothschild’s head of Long-Only Multi-Management Pierre Bonart considers the launch of a single manager funds platform to resolve size issue in manager selection.
Geneva is the centre of Edmond de Rothschild’s long-only multi-management team with local fund management teams on the ground in Paris, Geneva and Luxembourg.
Alternative multi-management expertise has been placed under London’s responsibility, with a local team in Geneva.
Pierre Bonart heads the long-only multi-management unit, which has over €8bn of assets under management, two thirds of which are allocated to external clients – distribution partnerships and institutional clients – and one third to internal clients.
Examples of partnerships include Japanese and Luxembourg banks as well as digital platform Boursorama.
Before Bonart’s appointment in 2014, the buy-list tallied 400 funds recommended to the group and its private banking business. It progressively shrank to 250, then to 130 strategies reflecting the objective of expressing the high convictions of the multi-management team.
Funds of funds have also been cleaned up and now tally eight to 12 funds against 18 to 20 previously.
The selection mostly focuses on active managers with rare use of ETFs for niche asset classes and tactical bets that do not justify picking an active manager.
Touching on fund analysis, Bonart says the long-only multi-management unit has intensified its work in fund research and comparison through peer groups.
“We are not seeking the best recent performance but we look at a number of factors including the biases that have driven the fund performance. For instance, are these structural biases or the manager’s bets?” Bonart points out.
”In our opinion, alpha in active funds must be caught through a concentrated and high conviction management. It is not enough selecting funds nor looking at stars and rankings to catch alpha.
“Moreover, recent academic research has found out that best rated funds tend to have a negative period in the aftermath of inflections in the markets,” he says.
AVOID ’LINER’ FUNDS
Edmond de Rothschild’s long-only multi-management team remains very cautious regarding the size of the funds it picks in its funds of funds.
The more assets a strategy draws, the greater the risk of a dilutive effect on its active management, Bonart observes.
“When they reach a certain threshold in AUM, active managers tend to preserve assets instead of trying to catch alpha. This reduces the active mechanism of the fund,” he highlights.
“We try to avoid as much as possible ’liner’ funds as the manoeuvre of such strategies is almost impossible. On the other side, we cannot invest in small-scale funds. If EdR’s private bankers were to invest €50m in a strategy managing €60m, we would spot a huge imbalance regarding the control ratio of the fund,” he adds.
Bonart reckons the size issue has led the unit to only select funds of a certain capacity and therefore to put aside other performing strategies.
“That is why we are considering launching this year a platform of single manager funds in which a mandate would be managed by an external asset manager.
“It would allow us to pick rather small managers delivering a real added value and not necessarily based in Europe. We could tailor the mandate, ask the manager to avoid a segment or to be more concentrated,” Bonart explains.
A fund would exit Edmond de Rothschild’s buy-list if it became too large or if deviations were spotted in the strategy’s positioning and process. There is also an eye to whether a fundfs outperformance is in
excess of the selector unit’s expectations – if so, Bonart suspects the strategy might give back some of its performance.
Regarding clients, Bonart believes they have understood yield expectations cannot be the same as in the years before the global financial crisis that started in 2007/8.
However, he notes that clients keep searching for higher yield, and that could lead to overinvestments in a few strategies.
“That volatility we observe on the high yield market illustrates it well. We must pay attention to overcrowded strategies.”
In addition, he sees rising demand for socially responsible investment (SRI) products from both retail and institutional clients.
Pierre Bonart has been group head of Long-Only Multi-Management at Edmond de Rothschild since 2014.
He started his career in 1994 as a financial engineer for BNP Paribas before joining Invesco as a fund manager. He was appointed deputy CEO of HSBC Louvre Gestion, where he was in charge of multi-management in 2003.
Bonart became head of Investments of Unigestion Family Office in 2008. He holds the CFA and CAIA certifications.