Fund selection should focus on quality, says Barclays’ Arguello

Until recently, the thinking behind a funds platform of third-party fund managers was that it should be comprehensive, that it should ‘cover the waterfront’. But the credit crisis has forced many banking groups to radically rethink their asset management strategies.

Three years ago, Barclays was offering 350 funds just in the long-only space. Today, that number has been whittled down to 110. Jaime Arguello, director of multi-management at Barclays, says: “Our strategy is about quality over quantity, where ‘less is more’.” In the alternatives space, the Barclays funds platform has 35 single manager hedge funds, 12 Ucits funds (“a new area for us”) and two funds of funds. Barclays manages £7bn of multi-manager funds and there are some £5bn invested in funds on their platform.

The steady reduction of the funds on offer comes at a time when the overall number of funds continues to grow, currently at about 60,000. The US alone accounts for at least 25,000 funds. As Arguello says: “There are more funds than stocks now, making the business of fund selection all the more important. The concept of open architecture is based on the premise that no fund manager will be good at everything. It is important for us to be able to offer our clients the best specialists in each sector.”

Barclays’ adoption of open architecture is, appropriately, selective. Arguello says: “Open architecture is good but we present our clients with a shortlist of managers, based on the clients’ needs.” However, he says, this presents Barclays with a problem: “Investors focus far too much on past performance. So we ask our clients if they believe in fund manager skill. Those that don’t are offered ETFs as one option, while those that do are offered actively managed funds.”

The managers’ performance is a key determinant for entry to the shortlist: “We expect our managers to generate alpha over a market cycle. Selecting managers is a bit like selecting stocks.” Looking at his stable of managers, Arguello says 75% of the hedge fund managers outperformed last year, while the fixed income teams did better at 90%. But the equities teams last year had to contend with exceptionally volatile market conditions, with only 60-70% of them outperforming.

Within this new approach, specialists and boutique fund managers have established increasingly important roles. Barclays does not necessarily favour “the big funds houses that are trying to be all things to all people”, Arguello says. Barclays does not buy whole ranges of funds, preferring instead a policy of picking only the best-in-class fund managers. 

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