Pseudo index trackers are out, says Söderberg & Partners

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Walter Nuñez Ovtcharenko, head of fund and insurance analysis at Swedish independent adviser Söderberg & Partners, rejects active funds that are pseudo index trackers.

Söderberg & Partners (S&P) is a Swedish independent adviser set up in 2004 with a focus on pensions and pension consulting.

Over time its activities have grown to encompass funds of funds business as well as advising on assets held by individuals and institutions. Currently the company has some SEK35bn (€4bn) in its fund of funds offering comprising four strategies under the ‘Trygghets’ brand; about SEK70bn overall in assets under management, and close to SEK300bn in assets under advice.

The adviser has developed a proprietary method for showing recommendations in the form of a ‘traffic light’ system, which it uses to indicate to clients which funds it favours (green) and which it does not (red). The traffic light recommendations are updated on a quarterly basis.

Having started as an adviser to pension funds, it is not surprising to find the filtering processes used by the firm are based on academic studies, and are more quantitative than qualitative in nature.

Walter Nuñez Ovtcharenko, who heads the fund and insurance analysis at S&P, estimates the process is “80% quantitative and 20% qualitative”. This in turn means the bulk of research resources tend to go towards studying, analysing, and applying modeling.

S&P’s approach generally is based on understanding and monitoring correlation between asset classes and taking a conservative approach, in order to minimise downside risk. This means analysis and recommendations will often turn on factors such as downside risk ratios. Due diligence on fund providers is not something that is stressed for all, but it is for hedge funds.

Customer trends

Because of S&P’s varied customer base, Ovtcharenko says he notices some differences in terms of the demand for funds.

While S&P’s own products are deliberately designed to be conservative, there is a noticeable trend among wealth management customers to demand the ‘latest’ in asset management. Retail investors tend to be more passive, with “about 10%-20% are interested in ‘trends’”, says Ovtcharenko.

From the provider perspective he is noticing the shift to ‘solutions’ in areas such as bond products. “They are trying to create all-weather products,” he says.

Also on the table more often are ‘exotic’ products for the mass market. Therefore S&P is more focused on due diligence in this area, to understand how these new products actually work.  He expects more multi-asset products to come to market.

Interestingly, Ovtcharenko and S&P do not fall into the camp of selectors who will only look for active managers. “I like products that do what they say they will do,” he says. This means that, while index products are acceptable, managers that claim to be active but who effectively track the index are not. Buying a Sweden equity fund that claims to be active, but which has 300 holdings is out, Ovtcharenko says.

Index funds are also seen as a good fit with S&P’s overall attitude towards costs for end clients. S&P offers commission free solutions for those who prefer this, and generally sees a need for lower fixed fees in asset management. Its own funds of funds recycle any rebates back into the funds.

It is alright to pay for an active manager “but they need to deliver”. Ovtcharenko says he likes unconstrained active managers.

Red flags

S&P’s quants-heavy selection process emphasises funds with a minimum three year track record and a minimum SEK200m under management, especially for hedge funds, because of the size of flows that its recommendations can affect.

Regarding ongoing monitoring, funds will be rejected if the modeling tells Ovtcharenko and colleagues that there is something not quite right. Manager changes and strategy changes are other key red flags on funds, he says.

Risk analysis is ongoing, looking at consistency and structure, to identify any emergent downside risk.


Söderberg & Partners: key figures

Söderberg & Partners Group reported net sales of over SEK1bn (€120m) in 2011

The group currently has over 900 employees and approximately 50
offices located across Sweden.

In addition to the offices in Sweden, there are analysis operations in London and offices in China




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