EFG goes on the hunt for unusual opportunities

Charles-Henry Monchau, head of discretionary asset management at Switzerland’s EFG Asset Management discusses what he looks for in a fund before investing, and what strategies and asset classes the company favours.

Which strategies suffer from a lack of talented managers for the amount of money going into them?

Many studies have shown that the probability of success for active management depends on the degree of efficiency of market.

In more efficient markets, such as the US large-cap value or fixed income, the probability for a fund to outperform is quite low.

On the other hand, less efficient markets, such as emerging markets or small caps, offer high probability of success to active managers.

Surprisingly, some of the most efficient classes are dominated by active management.

So, for US equities large-cap value, more than 90% of the assets are actively managed, while only 10% are in ETFs. In addition, many of the least efficient asset classes have a bias towards passive management. For example, more than 50% of investors invest into emerging markets through ETFs.

This is counter-intuitive and leads to the conclusion that many investment portfolios are not optimally constructed.

The other inefficient and attractive segments where it is difficult to find talented managers are real estate, commodities and frontier markets.


Are clients telling you they are becoming more or less risk averse?

Our clients face the same dilemma as most investors: they earn no, or very low, interest on their cash holdings but are afraid to jump into the stock market or hang onto their bonds. There is, therefore, a hunt for steady income and assets that can protect them against unexpected inflation.

Thanks to our flexible and cross-asset approach, we are able to package discretionary or advisory solutions that meet their needs in terms of return and risk.

We also noticed that investors are sceptical about absolute returns funds given the funds’ inability to protect capital in 2008.

They are, however, more receptive to the idea of targeted returns. Here, the main goal is to generate cash returns, plus a certain percentage over an investment cycle.

Risk control is only a secandary aim, with risk being defined a cumulated drawdown rather than volatility.

Are there strategies you expect to de-emphasise in your multi-manager products during this year?

We view government debt of many developed markets as unattractive.

Right now in the world, there is a situation where there are three-quarters of the countries with a lot of debt and a relatively small number of countries that are wealthy.

If you are going to invest your safe bond money, you should invest in those countries that are going to pay you back, and not in those that may not be able to do so. You can do this by targeting the debt of wealthy nations: in other words, those countries that rank best according to their net foreign assets position.

At EFG AM in 2009, we launched a fund that follows this approach. Within hedge funds, macro and CTAs are giving way to strategies such as equity long/short, distressed and event-driven.

Regarding alternative Ucits III, we want to make sure that the funds in which we invest follow strategies that can be implemented without creating an important liquidity mismatch.

That means that we will only invest into Ucits funds in the strategies CTA, global macro or long/short equity. Last but not least, the Ucits label is, for us, not a shortcut in due diligence.

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