As a replacement, Oberbeck took on “a more concentrated, and extremely transparent” fund: the Bellevue Global Macro fund, managed by a Swiss boutique. This fund makes macro calls on sub-categories of bonds and equities rather than hard-to-understand bets such as ‘short European banks, long Indian banks’, as the Morgan Stanley fund did according to Oberbeck.
But transparency is not only important on the portfolio level. “We want the fund manager and the analysts to be accessible and want to receive commentaries quickly when something happens in markets,” he says. That’s especially vital, of course, with global macro managers, who tend to employ a top-down led investment process.
“And risk management is also very important. We’ve for example seen managers who increase risk when prices fall. We don’t like such a thing,” Oberbeck adds.
Assets under management
Another important aspect the German always keeps a close eye on is the assets under management of a fund, especially if these are growing rapidly. That increases the odds for a soft-close, which is an automatic selling trigger as DZ PRIVATBANK wants to treat all their clients equally.
But rapidly swelling assets also risk compromising a fund’s investment strategy. And that’s what happened to the one of his funds over the past few years: the Julius Bär Absolute Return Europe Equity Fund.
“From 2013 to 2015, the assets of the fund swelled from €250m to more than €3bn. Because the fund primarily pursues pair trades, there is a certain size limit,” he explains. “When the fund grows too big, it runs the risk of watering down the good trades.”
The manager also understood this, so the fund was soft-closed at the start of 2016, prompting Oberbeck to sell it. As the fund then went on to deliver its worst annual performance on record (-4.2%), assets actually shrank to €1.3bn as of 30 April, possibly making the fund investable again.
Long/short equity – a bad year at the office
The Julius Bär Absolute Return Europe Equity Fund was not the only long/short equity fund to perform badly in 2016. In fact, it even did slightly better than its peer-group average (see graph above).
Oberbeck attributes this overall failure to deliver to “an extreme sector rotation” that hit long/short equity managers hard.
“So-called bad sectors and bad stocks, which were shorted by many managers on the basis of their fundamentals, outperformed in 2016. These companies may have been structural shorting candidates because of their poor fundamentals, but managers failed to correctly assess valuations,” he explains.
