Donner & Reuschel: Leaving comfort zones

Like many other European countries, Germans often joke about the difference between northerners and southerners. The merger of two long standing private banks , Hamburg-based Donner, and Munich-based Reuschel into Donner & Reuschel five years ago aimed to turn these differences into an advantage. Munich based Tilo Marotz (pictured), fund analyst and portfolio manager and Patrick Schultz, fund analyst at Donner & Reuschel discuss how the merger affects their fund selection process.

“The division of responsibilities is fairly straightforward,” explains Patrick Schultz, fund analyst in Munich. Both sides cover asset management in general, we in Munich are responsible for the fund of fund business and fund selection. This also includes pre-selection of funds for the private banking team,” he adds.

This is also reflected in the group’s asset allocation strategies, Tilo Marotz fund analyst and portfolio manager in Munich explains. “In general, we try not to be too dogmatic about active versus passive but our Hamburg based colleagues are much more centred on ETF strategies, because their investment approach is quite model-driven and can therefore be easier implemented using passive strategies.”

“In Munich, we tend to be much more on the active side. Within our own fund of funds, around 90% are actively managed, it makes sense for us to focus on active management because the opportunities are simply bigger. After all, we still believe in active management,” he adds.

“It’s time to exit our comfort zone of thinking in boxes, between value and growth and instead think more systematically which approach is most suitable
for which market environment, quantitative methods continue to play a strong role in that” Marotz argues.

But the quantitative approach alone has it’s limits, he stresses: “Everyone can screen a database for fund performance, but we all know that there is a significant level of heterogeneity within these peer groups, that is why gathering ideas through networking events and fund manager meetings is so important. In the end, it is still a person that decides whether to press the red or green button” he adds.

“We are cautious of passive fixed income funds because indices are heavily biased towards bond issuers with the highest levels which represents a fundamentally skewed incentive. An exception could be if we are able to use a duration model, in cooperation with the quantitative inhouse team,” explains Marotz.

When it comes to picking active managers, the Munich based fund selector team aims to deviate from traditional views. “We don’t think it is necessary to invest in as many different asset classes as possible, and we are generally sceptical of unconstrained products. Instead, where we do havea clear opinion, we aim to realise it with the best possible investment vehicle.

“Nevertheless, the ultimate investment strategy that outperforms during up and down turns is very rare, which is why we can’t commit our clients to investing in the same fund for 20 years,” says Schultz. Consequently, the team aims to move away from pre-selected approved lists and towards a fund selection approach based on the respective market phases.

Besides adopting different approaches to selecting managers, investors will also have to be more open minded towards new asset classes, says Schultz. “Over the last couple of months, we’ve had growing demand for investments in ’alternative funds‘.

However, our clients continue to have somewhat of a home bias. For European equity markets, we have been optimistic until summer, since then we significantly reduced the equity ratio in our portfolios.”

“In future, our selection strategies will become much more allocation driven and the qualitative element will become more important. The one thing that remains constant is the level of responsibility, that has always been high,” he concludes.

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