“At Morabanc, we love star managers,” says Carles Figueras, head of fund selection at the Andorra-based private bank. Most of the €400m in external funds he oversees is invested in products managed by ‘personality fund managers’.
But it is not mainly the charisma and strong views of these managers which attract Figueras. His underlying star manager bias is of a rather technical nature. “We like transparency, to have the
possibility to clearly see who is responsible. With bigger management teams, it is sometimes not clear who takes responsibility for certain decisions and it’s difficult to know why things have worked or not.
“For us it is very important to understand who is taking the critical decisions and to comprehend the investment philosophy of the fund”, Figueras says. This makes it possible for him and his team to determine in which macroeconomic environment a particularly strategy will work. “This is our focus when we do our due diligence,” he explains.
However, investing in funds led by star managers comes with some serious threats. Not the least of those is a manager departure. “That is a risk,” Figueras admits. “But we have lots of alarms in place to make sure we are not the last ones to know a manager is leaving.” Star managers not only tend to have full control of their investment process, they often have outspoken views and act accordingly, as opposed to bigger investment teams which have to reconcile different views and often end up being closely tied to the benchmark. It is exactly this outspokenness that Figueras likes. “We want really active managers and are not scared of taking risk,” he says.
No gain without pain
As a matter of fact, star managers become stars because of their track record. But, as you can read on page 4 and 5 of this issue, it is not always a good idea to rely on the track record too much. Star managers’ high-conviction investment styles also have their risky features.
A manager who proves this point is David Iben, a global, unconstrained equity manager. His contrarian investment style paid off extremely well from 2006 to 2011 as his Nuveen Tradewinds Global All-Cap Fund consistently outperformed its peers. In December 2013 he launched his new Kopernik Global All-Cap Fund, employing a very similar investment style but yielding slightly different results. The fund’s portfolio is highly concentrated, with large overweights in the world’s most unloved asset classes such as Russian equities and mining companies. Since inception in November 2013, the fund has returned a disastrous -13.10% before costs.
Still, Figueras maintains Iben is one of the most talented equity managers in the world. “This year he is perhaps the worst manager in his peer group, but sometimes you have to take pain to reap the benefits later. We even increased our position recently. But I indeed wouldn’t recommend this fund to a client who wants only one global equity fund,” he admits.
“Another example is Francisco Parames [who recently left Bestinver]. We have been invested with him for several years, me personally over 10 years. So I know his team and investment approach very well. If he were to start a new company today, we would do our due diligence and if we were confident with the outcome, we would invest with him right away. “It’s our duty to invest where we have the conviction.”
To enable himself to be among the first investors in such a new fund, Figueras considers a fund investable as soon as it has gathered €50m of seed money. Another advantage of being quick investing in a new fund is that it often gives you access to ‘early bird share classes’, according to Figueras.
Fund of funds focus
Morabanc has around €400m invested in five funds of funds, which are each composed of several third-party funds. “We developed this range as we thought our added value would be higher than by just creating a fund buy list. We are well aware of the costs this approach entails but, because we are often among the first investors in a fund, we usually get a good price and we always use institutional
In its fund of funds range, the turnover of funds is approximately 20% a year, which is quite a bit higher than average. “Sticking to what you have is not the best way to manage things,” Figueras
says. “A good manager will only be good for a while. You need to have a portfolio of managers to anticipate any changing dynamics.”
Morabanc’s fund of funds range, which consists of three long-only equity funds, one bond fund and
one absolute return fund, is growing quickly. However, its private banking unit still harbours the largest chunk of the total of €1bn in external funds. “With our private banking clients, there is a growing demand for balanced funds, just like in Spain where most of our clients are based.”
Morabanc’s fund selection team does not include mixed-asset funds in its funds of funds but provides its private banking colleagues with a buy list. Perhaps unsurprisingly, Figueras’ favourite fund is not only led by – but even called after – a star manager: Deutsche Asset & Wealth Management’s
Concept Kaldemorgen Fonds. Klaus Kaldemorgen leads this unconstrained long/short fund, which has
returned an average 6.59% pa since inception in 2011, with a much lower volatility than equity markets.
“I know his investment approach very well and it has been working for several years now,” says Figueras. As Figueras’ fund selection philosophy is all about conviction and bottom-up star managers, he and his colleagues engage as little as possible with asset allocation. “In our global equity fund of funds we more or less replicate the index in terms of weight, but in general we focus on the managers only,” he explains.
Cautious on bonds
However, Morabanc has one fund of funds which necessitates asset allocation: its Bond Opportunities Fund. “In this fund, we do the allocation between high yield, convertible bonds and emerging market debt. We have a very cautious view right now, especially regarding high yield. We believe investors in this asset class are not being rewarded for the risk they take, so we are positioned very conservatively, in short duration funds or even out of high yield in funds which could help us avoid a period of stress.”