The one best fund doesn’t exist
Bernd Poegel, head of fund research at Deka in Germany explains his use of charts to understand fund performance.
Data points and qualitative reasoning compete fiercely in the field of fund selection. But given the vast choice between funds – roughly 32.000 are being sold in Europe, according to Lipper data – Bernd Poegel, head of fund research at German asset manager Deka, prefers to use quantitative analysis only as a “pre-selection” tool. The firm has about €180bn of assets under management, €22bn of which is managed in fund of funds and multi asset strategies that invest in other funds.
The chief fund selector at Deka remains wary about relying too much on quantitative analysis when it comes to fund selection: “You cannot look into a database and find the best managers just based on quantitative data. Alas, that is not possible.” Thus the team adds a significant layer of qualitative analysis when choosing funds, looking into the fund manager’s process. “Only 30% of the selection is based on quantitative analysis; 70% is based on qualitative”, says Poegel.
Only after having finalised the qualitative analysis can he truly understand a fund manager’s strategy. “It is important, that a fund-manager can explain the performance in every part of the investment cycle and attribute it to their decisions.” Just looking at performance numbers alone is not enough. “Fund managers need to give compelling evidence for any period of underperformance.”
But then again, data remains important. Yet Poegel prefers to be independent from standardized data deliveries to look at a fund’s performance and risk. Hence he looks at charts like the one shown below.
Each coloured dot represents the outperformance of a fund manager over a given timeframe, in this case at the Deka Europa Aktien Spezial, an equity fund with a diversified approach to stock selection. “This analysis is important because it gives a unique and quick overview about a manager. It tells you whether he or she outperforms consistently or has a bias to do so more in bull or in bear markets.” Hence, it is a powerful tool to decipher where outperformance comes from and how reliable a fund manager’s skillset has been over a business cycle or during market distress.
Living up to expectations
At the same time a fund must fit nicely to the views that the asset managers at Deka hold. “As an asset manager you always have your own views about the market. Thus it is important to know which fund might suit the market environment that you expect,” says Poegel. This makes fund selection into a relative rather than absolute choice. “The one best fund does not exist. If you expect a bull market you select differently than if you expect sideways markets.”
But policy moves sometimes trump market expectations. Indeed, low yields on safe government bonds have led to significant changes in the bond market landscape with a flood of money leaving low yielding government bond assets and instead flowing into other areas in the bond markets, with more risks and yields attached to them.
Even though central banks have lowered the yields on outstanding sovereign debt, Poegel thinks that one does not have to give up hope: “The right fund managers for products in the bond market together with active duration control can still guarantee sufficient returns.”
Deka started to invest in “frontier segments of the bond market” such as High Yield and EMD early on. But recent massive flows into the asset class have made the Deka selector a bit more cautious.
“When a lot of fund management groups launch new products, you have to raise the question whether the market is broad and deep enough or whether the funds move prices. Massive fund flows act as an early signal to watch this market sector more carefully.”
Such flows occurred in emerging market corporate debt as of late. In some areas, flows are met with significant primary market issuance. According to data from Dealogic for the end of May, global High Yield bond issuance has reached a new record high year-to-date. With $254bn worth of bonds being issued in the course of five months, low-rated companies have tapped markets for 53% more in funding than in 2012. Also EM debt issuance stands at a record high year-to-date.