Taking the long-term view

Market uncertainty makes choosing a fund more challenging for selectors and advisers with investors and clients often excessively focused on short term safety and returns. Managers from Millennium Private Banking wealth management unit, part of Portugal’s Millennium BCP banking group, explain their approach.

“You tend to see too much short-termism. People really worried about performance from one quarter to the next. You see it with fund managers and with companies trying to beat their last quarter’s earnings numbers or to beat the consensus numbers. If you can somehow lean against that wind it’s beneficial,” says Mark Dwyer, director of Millennium Private Banking’s wealth management unit.
The unit is primarily responsible for developing the strategy and recommending the products that are best suited for thousands of the bank’s clients. For its recommendations, it draws on a universe of €800m worth of assets in third party funds, mostly international bond and equity funds with a very small fraction of Iberian products.

To find investment opportunities, a team of specialists carries out initial research on targeted funds, looking at their performance over a period of time. Dwyer says the team looks for funds that have outperformed their objective over a whole market cycle, usually between five and seven years.

A more detailed investigation follows to check that the way the fund has developed is consistent with the information provided by the fund manager. “When we’re buying funds we want funds to be doing what they say on the tin,” Dwyer says. “We’re not interested in buying a US equity fund that’s investing outside the US, or a US equity fund that is making all its money from investing in small cap stocks. We’re very strict on the asset classes that we go into and making sure that they do exactly what they say,” he says.

Once funds with positive long term risk profiles have been identified, the next step is to interview their managers. Personal contact is important and it usually means meeting five to ten short-listed managers. These meetings are used to better understand the processes and philosophy underpinning a fund and that these are sound. “To see that the process is grounded in economic theory and based on something we can understand,” says Dwyer.

Looking for consistency

This also involves checking that the fund manager’s past performance was achieved by implementing that process and philosophy and was not due to some other factors. “We’re very strict in terms of seeing the manager tenure, how long the manager’s been there, how long he’s been working together with the team that generated those results in the past,” he says.

He says it is important to understand how a fund’s performance was generated and that this was achieved in line with the information initially provided by the fund. “For us that’s the most important thing. It’s not just about trying to find the manager or the team who have done well in the past, but that [their success] can be replicated going forward.”

This means taking a long term view. “We’re not interested in seeing managers that have not got a performance track record of more than five years.”

The bank keeps a close watch on developments in case it needs to adjust to changing conditions. “When things change we’re very quick to react to that,” Dwyer says. 

The fund’s performance is monitored daily and more formally on a monthly basis with a report on each fund. There are also annual review meetings with the fund manager. The main objective of that meeting is not simply to judge whether the fund has done well or poorly, he says, but to identify what has changed in the process over the last 12 months.

Key questions are: has the fund become too big, is it losing a lot of money, has there been turnover in the analyst team or a change of control in the management company that would influence future developments. If the company is affiliated to a bank was it able to pay bonuses, were there any problems in the parent group that might influence whether the manager stays for another year or not. Those things are very important for us, says Dwyer.

Looking at the broader picture, the bank is not interested in themes or star managers. “They tend to be bid away to other groups,” he says. “We’re always wary when we see a lot of publicity about a particular manager because things tend to be mean reverting over time. It’s not just asset markets and cycles, it’s also fund managers’ performances.” Most managers under-perform in the long term, he says. “It’s difficult to find managers that can outperform the market in the long term.”

One of the ways to avoid chasing your tail is by taking a longer term view than the market tends to do and persuading investors of the value of that approach, says Rita Cabaço, economist, in the unit.

“You have clients who are short-termist and take the past year’s performance of a fund or a sector or an asset class as their guide for future investments. Our role is to advise them. It’s a learning process. If our portfolios perform well over a business cycle then clients learn to trust it,” she says.

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