Banco Best’s deputy head of investment and asset allocation chief Rui Castro outlines his team’s selection process underlying its focus on research amid a challenging environment for investors.
Lisbon- headquartered Banco Best is a Portuguese financial institution that was launched in 2001. As a retail bank, it operates in the areas of banking, asset management, and trading and it offers a list of around 3,000 funds from more than 60 different managers worldwide.
Rui Castro, Banco Best deputy head of Investment and head of Asset Allocation, is responsible for all products and services offered by the bank to its clients, with a particular focus on the development of launches. “We are constantly searching for new ideas. Last year for instance, we were the first bank in Portugal to distribute a fund exclusively managed by artificial intelligence, the Acatis AI Global Equities.
“Our clients can invest in funds and ETFs that cover almost all investment themes, including lithium and autonomous driving, robotics, cyber security, nutrition, water or smart cities, among other.”
The bank’s selection of passive instruments will be mainly based in the tracking and low-cost capacities of these solutions while the selection of active strategies needs a more exhaustive analysis, since it involves the search of managers who can add alpha and value, in order to at least, cover the extra costs of this kind of investments.
Banco Best usually runs an approved list of funds formed by the top performer funds labelled as the “Fund selector list”, which aims at meeting most of clients’ investment needs. Nevertheless, the bank may seek out more specific funds if the clients ask for them.
Banco Best’s selection process starts with a quantitative screening. However, this stage is not purely quantitative, since it also includes some qualitative elements. “The model is built in a way that incorporates judgement that can really penalise some funds that despite having good risk/return metrics, are – for instance – too big or too small for us,” says Castro.
He continues: “If we are looking for ETFs, the work is almost done at this stage. Bearing in mind that we work with Ucits and ETFs, we can add to the screening model all the criteria that we need to look at.
“If we are looking for funds, we will need then to make a deep qualitative analyses in order to confirm we like the way managers are getting performance and whether we believe their process is consistent.”
According to Castro, clarity of thought and transparency are two key values that managers should have. He favours those managers who know clearly how to look for companies that may outperform and he also likes those whose rules are clear, since that makes him feel confident about their future decisions.
Addressing risk control skills, Castro put the emphasis on the age factor. Although he does not even consider this should be named a skill per se, he generally feels that experienced managers are more reliable, because “there is nothing like real test, which you can have just once you have experienced many different market environments.”
During the past years, investors have particularly struggled when looking for conservative investment solutions given the lack of returns offered by fixed income. “Investors who used to have fixed income products in their portfolios, are the ones struggling more now. As they are not used to have capital at risk, we need to continue looking for solutions that can protect capital from heavy drawdowns while providing some income.”
Another challenge arising from the current market environment is the search of strategies that can control volatility risks.
Castro says it is a big concern when selecting funds since the current low-return environment makes difficult to find the balance between those managers able to assume certain risks looking for returns but at the same time trying to keep volatility low.
Referring to incidents such as that experienced by GAM recently, he says: “Although we try to study deeply the funds included in our short list, the key point relies on preventing some issues in those funds using more alternative techniques to gain exposure and reduce risks.”
But absolute return funds are in the background for Banco Best clients, who seem to prefer multi-asset strategies – mostly funds with greatest exposure to fixed income and some to equities – than more complex strategies.