The importance of time in fund selection

Mussie Kidane (pictured) is head of Fund Selection at Geneva-headquartered Pictet Wealth Management since October 2007. Last November, he has received the InvestmentEurope‘s Personality of the Year Award 2016/17 for Switzerland.

His team of six analysts – which has recently welcomed senior analyst Angela Perez-Palacin from Coutts and former Lombard Odier’s senior fund selector Olivier Gügi – is responsible for over CHF17bn in assets across major asset classes.

The Swiss group’s approved list of funds has recently expanded to more than 200 active and passive products selected for both discretionary and advisory clients. In over a decade working for Pictet, Kidane has observed considerable changes in the asset management landscape and their impact on manager selection.

Pictet’s fund selection chief highlights that the asset management industry ever more carries a social purpose, as ageing societies’ requirements accentuate the need for innovative and robust pension and social security solutions.

But the industry and especially active managers find themselves confronted with several challenges that have to do with sub-standard relative performance and the perceived excessive fees. He argues that the prominence of passive management is here to stay and the ensuing pressure on fees is liable to re-shape the industry conceivably for the better.

“Active and passive management can and should co-exist in a portfolio depending on the nature of investment decisions, the asset class considered and investment horizon envisaged. Both active and passive strategies could be more suitable in one’s portfolio at any given time.”

While he concedes that investors do care about the fees that they pay, he stresses that they care even more about what they get in return for the fees that they pay. The bottom-line is, Kidane says, investors have paid and are willing to continue to generously pay fund managers that create consistent alpha net of fees.

Pictet’s head of Fund Selection sees less middle ground in the US market he terms as very competitive in terms of fees whilst he notes in Europe fund pricing is rather inefficient. But he also validates the latter by the complexities in cross-border distribution regulations and associated costs.

“In terms of distribution, a fund’s intrinsic quality and results is a necessary but not a sufficient condition for commercial success. It also needs to meet a number of regulatory and compliance requirements” he adds.

Another observation Kidane makes about today’s asset management industry is that most investment firms tend to favour quantity rather than quality of their product shelf.

As such, it has become a common practice to launch more and more strategies in search of a blockbuster product although they don’t necessary have the required expertise and resources.

“We have recently seen a proliferation in unconstrained/flexible fixed income and multi-asset or multi-strategy funds. However, there’s an important entry barrier there: time-tested expertise. But we are old-timers in this business and we know that talent is rare” Kidane asserts.

When selecting a fund, Kidane expresses a preference for high-conviction managers that take calibrated risk and manage it properly. Another characteristic of his choices remains the commitment to fund managers he knows well and has been invested with for a long time.

He notices that a large part of the fund managers in Pictet’s buy list have been there for three years or more. “The oldest fund on our list has been added 15 years ago,” he notes.

Carefully analysing the rational for selecting a fund manager, formulating sensible expectations on subsequent results and defining an adequate investment horizon shape some of the challenges fund selectors have to cope with, Pictet’s head of Fund Selection concludes.

ABOUT THE AUTHOR
Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco.

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