The PrivatFonds structure gives Union Investment the room to invest directly in markets, not just via funds, its multi-asset team leader explains.
The quantitative criteria include, for example, data via Morningstar, Citi for equity style factors, and four in-house factor regression models for equity funds. Qualitative analysis includes examining questionnaires, portfolio holdings, visiting and interviewing managers. In qualitative analysis Romig’s team will ask, for example, what kind of people are running the fund? What kind of experience and expertise do they have? How are they incentivised? How much money do they have to run now, compared to when they have invested successfully in the past? Were the same people responsible for past performance?”
He wants managers pure in style – “for example, a small cap fund should be driven by small caps, or stock pickers should not be highly correlated to the factor of ‘asset allocation’.”
A presentation earlier this year detailing investment trends Romig’s team was examining showed a willingness to think broadly in an eclectic range of strategies, and a diverse group of manager names attached to the trends. Some mentioned included First State Global Listed Infrastructure, Craton Precious Metals, Pictet Water, Lacuna Asia Pacific Health Care, SAM Smart Energy, Rayonier and Plum Creek. ETPs for gold and timber/forestry and short T-bill futures were other ideas.
Romig gave one rationale for considering smaller managers: “If you compare a boutique manager with only one product, alongside other asset managers who might have ten managed by five different fund managers,in some cases we may be more willing to invest in the boutique’s product, where they have more pressure to perform in that area than the other set-up, which have more diversification of products.
“We prefer smaller sizes, but we also ask a manager how much they can manage, and are they willing to close a fund if they reach the maximum sensible level of assets? In asking that, we have some knowledge of what will be manageable for different products.
“Then you must monitor them and have intensive communication about that. It is our job, if a manager says they can run €5bn, to assess that and ask the right questions. Also, we will ask how much do they invest daily, and how much can they divest in surroundings that are not kind?”
This is crucial as some equity managers, for example, suggest market liquidity is at most half its level of before 2008. Romig’s team also limits its own liquidity risk in target funds, by generally not contributing more than 15% of a portfolio’s total assets.
And what does Romig’s team expect from managers? Preferably access to institutional share classes, detailed descriptions of fund fee structures and NAV calculation processes. He also expects to be informed quickly of changes in organisational structure and corporate actions, changes to portfolio management teams, benchmarks and investment process, and details of new funds or soft closes. Changes to direct access to portfolio management, within two daysof notice, are also to be notified.
Romig expects external databases he uses . primarily Morningstar and Bloomberg . to receive accurate, updated fund information, but does not want emails about rankings, ratings, awards. If he wants factsheets, he will request them.
Before investing either directly in markets or funds, Romig demands a full understanding of all financial instruments involved. This may sound obvious. But it was anything but obvious in late 2008, when parts of the financial industry manifestly failed to understand fully mortgage-related instruments.
Romig says: “By fully understanding instruments you use in your work and in fund selection, you do not get caught by too many surprises. We have to understand every strategy before we invest. For that reason . because we did not understand it fully. We avoided investing in structured credit [before the crisis].”
Romig since understood such areas, and so says investing in some CDOs and ABS “may be worth it now. it is certainly not overcrowded, and a lot of people want to get rid of their exposure.”