The manager comes first for Sauren, not the fund
Some investors might feel ‘trust’ is a concept foreign to the world of finance. But for Sauren’s Ansgar Guseck, “that is ultimately what it comes down to” when his firm deals with, and invests in, fund managers.
The financial crisis demonstrated that, in one very important sense, the senior partner at the Cologne-based allocator is quite right.
In 2008/2009 investors could have the most detailed contracts with managers, they could conduct the strictest due diligence and thorough monitoring – but still not stop managers restricting withdrawals, investing in unfamiliar markets, or panicking to bad decisions.
That depended on the person, not the ‘fine print’. Guseck says €2.3bn investor Sauren understands minimising investment risk partly involves rigorous analysis and monitoring of managers’ investment philosophy, impact of asset size and motivation.
“But it is also about answering the simple question, “Do I trust the person I am investing in?”
Since Eckhard Sauren established his firm in 1991, its guiding principal has been: “Wir investieren nicht in Fonds – Wir investieren in Fondsmanager” (We do not invest in funds – we invest in fund managers).
He says: “A fund does not recognise opportunities. From our experience we know investment instruments such as funds do not have a life of their own, decisions are made by people. Therefore, the human factor also plays the leading role in our activities.
“Sauren looks for appropriately resourced managers, but one decision maker to take ultimate responsibility. Lead-managers departing is an immediate sell signal – “there is no reason then to further hold the fund” – and style drift rings warning bells.
Sauren’s analysis assigns each manager a quota of ‘defensiveness’ or ‘offensiveness’, using metrics such as net exposure. “Having these ratings means we can monitor our own total net equity exposure, and total risk exposure.”
Sauren typically wants no position exceeding 10% of fund assets, “which is already is quite a lot of risk, a diversified portfolio for us would have 20 managers or more. The portfolio construction is done within the risk profile of the individual fund of funds. Giving each manager a risk quota helps to construct sound portfolios.”
The firm also looks at the structure of its co-investors, “and whether it will be harmful if they exit at some point”.
Guseck says it is important Sauren does not pick managers or asset classes because they are ‘hot’, but eventually not understandable. “If you cannot withstand [the pressure to invest], you should not be running other people’s money.”
He highlights ABS funds, pre-crisis. “We did not understand that market and if you do not understand an investment, you have to walk away. Investing to us has a lot to do with common sense. Before the crisis, investors were buying a lot of assets they simply did not understand.
“We do not see it as our place to judge if a particular asset a manager is buying is good value, but we must understand what the manager is doing, and question if his investment case is plausible. We want to know how the manager identifies new ideas and how they are analysed, to understand his competitive advantage.
“By understanding how the manager thinks and works, we can evaluate how the fund fits into our portfolio construction.