Rigorous product vetting has replaced minimal screening in many cases, leading to tighter and more heavily-guarded buy-lists. As a result, managers are paying closer attention than before to a relatively small number of influential ‘gatekeepers’ who have the final say on which funds make the grade, and which do not.
Shiv Taneja, managing director at Cerulli Associates, highlighted the trend in an article for the Financial Times. Using the Netherlands as a case study, he noted that the country’s upcoming commission ban on asset management products, due to start in 2014, was increasing the impetus for financial institutions to establish a clear separation between the advice they offer and the products they invest in – further amplifying the importance of Dutch gatekeepers.
“It is increasingly apparent that fund buyers – those individuals and groups within the likes of Rabobank who are charged with selecting investment funds that are included on fund distribution platforms’ buy lists – are fund management’s new rock stars,” Taneja wrote in July.
2008-present: Senior equity funds analyst in the investment competence department, Rabobank Nederland Private Banking
2006-08: Portfolio manager, ABN Amro Private Banking
2002-06: Funds and alternatives analyst in the investment office, ABN Amro Private Banking & Asset Management
1999-2002: Equities analyst in the investment office, ABN Amro Private Banking & Asset Management
Moennasing is responsible for the selection and monitoring of external managers for all equity, real estate and microfinance strategies at Rabobank. She also serves as a member of the investment strategy commission, which decides strategic and tactical asset allocation as well as selecting investment themes.
In her spare time, Moennasing is an active investor and coach on BiD Network, an organisation providing assistance to entrepreneurs in the emerging markets, and practices power yoga. “Yogis see the world from different angles and that’s also the case when I look at investments,” she adds.
“Gone are the days when fund selectors were the forgotten people, hidden away in windowless offices under a pile of spreadsheets, pityingly ignored by their far more visible and vocal sales and marketing cousins.”
Rishma Moennasing, responsible for equity fund selection at Rabobank – one of the Netherlands’ largest banks, with a 39% share of the domestic savings market – is probably one of the ‘rock stars’ Taneja had in mind when he penned the article. Moennasing laughs off the analogy and also takes issue with Taneja’s suggestion that Rabobank only obtained “complete freedom to pursue relationships with unaffiliated managers” when it sold a 90% stake in Robeco, its asset management unit, to Japan’s Orix earlier this year.
“Robeco was treated like all other parties,” she says.
However, she agrees with Taneja’s view that asset managers are hungrier than before for ‘face time’ with fund selectors. Along with its peers, Rabobank has taken an increasingly selective approach to when and how it uses actively-run strategies, and Moennasing says its total buy-list – equity and fixed income products combined – has shrunk from about 200 to 120 funds since she joined the firm from ABN Amro, in 2008 (see box). Rabobank uses the selection across its business – for Schretlen, its wealth management division, as well as its execution-only platform and discretionary portfolios.
So, how can fund groups get onto these influential yet diminishing lists? At Rabobank, managers who don’t know their SRI (socially-responsible investing) from their ESG (environment, social and governance) need not apply.
“We start with the asset manager and we have three criteria on the SRI part,” Moennasing explains. “They must have signed the UNPRI [United Nations Principles for Responsible Investment] initiative, they must integrate the UN Global Compact into their process, and they must exclude controversial weapons [cluster munitions, chemical and biological devices, among others].
“And that’s at the asset management level. If they fulfil all those three criteria, then the next step is that I will look at the funds of those asset managers.”
Moennasing says some groups, particularly those belonging to the large US banks, were at first reluctant to meet Rabobank’s SRI requirements, but that every one of the 33 providers currently on the list is UNPRI-compliant.
“That’s very good for a bank in the Dutch market,” she adds. “And actually, the managers are also using that in other countries – to show clients that they are ESG-proof and aware of the social impact of their investments.”
After demonstrating their commitment to SRI, asset managers must run the gauntlet of Rabobank’s qualitative selection process. The firm’s ‘core/satellite’ philosophy – where low-cost passive funds form the equity core, and actively-managed satellites provide alpha – leads Moennasing to hunt for managers offering a distinct alternative to index investing. This could be a high-conviction, concentrated investment style, or a specialist strategy which is difficult to replicate passively.
Up to scratch?
Managers who fail this test risk exclusion from the list – a danger highlighted by Moennasing’s decision this year to cull 21 sector-based strategies which did not differentiate themselves sufficiently from their indices.
Sometimes I meet good managers with very interesting views on the markets. They are always busy reading, or discussing investments. [Passion] is something you also see in their body language
Rabobank Nederland Private Banking
“We deleted them because they were expensive and stayed close to the benchmark,” she says. “So it was not in the interests of clients to have those funds. If you look at the number of funds we have now, compared with a year ago, it has decreased. And I think [the number] will decrease further, because we still have funds that could be more active, or cheaper.”
As well as displaying a desire to deviate from their benchmarks, managers must demonstrate something that is harder to quantify – passion.
“Sometimes I meet managers and think: ‘I can manage [client money] better if I do it myself’,” Moennasing says. “But sometimes I meet good managers with very interesting views on the markets. They are always busy reading, or discussing investments. [Passion] is something you also see in their body language, which is why we have face-to-face meetings with them before we start investing.”
No room for complacency
Even after passing these examinations, managers still have work to do before they can hope to join Rabobank’s buy-list. The due diligence process includes separate meetings with the analysts who contribute to the fund, as well as the company’s legal and risk teams. Moennasing is reassured by the presence of risk officers with the confidence to rein-in their colleagues.
“Fund managers are often very leading,” she adds. “And you don’t want someone just investing because they think they are a star manager. You want someone who is aware of how much risk he or she is taking, and who works together with the risk management department to take action where necessary.”
Indeed, quality and depth of process are at the heart of what Moennasing seeks in a manager. Such priorities echo a recent survey of 150 European fund selectors by Cerulli, which found that investment philosophy, transparency and risk controls were considered the three most important criteria when choosing products – above performance, fees and marketing support.
In addition, respondents ranked ‘poor performance’ as only the fourth-biggest reason for de-selecting a fund – below portfolio manager departures, insufficient access to managers and inadequate risk controls.
Moennasing says she is often willing to tolerate underperformance, if a manager has stayed true to his or her process.
“We want to know the investment philosophy of the fund, and that it’s a philosophy [the manager] will not change because the market is changing. I speak with the managers [of funds on the buy-list] face-to-face at least once a year and have conference calls several times a year. We see what they are doing, and if they are sticking to their policy. Or if they are doing things they should not be doing.
“We discuss performance and whether it is explainable why, for example, they are underperforming. But [underperformance] is not necessarily a reason to directly remove a fund from the universe. Of course, if [a manager] underperforms for a long time because he did something really wrong, then we will have a closer look at the fund and decide if we want to keep it.”
You don’t want someone just investing because they think they are a star manager. You want someone who is aware of how much risk he or she is taking, and who works together with the risk management department to take action where necessary
Managers with the consistency and high-conviction philosophy Moennasing seeks include Alken’s Nicolas Walewski, Fidelity’s Dale Nicholls, WP Stewart’s Mark Phelps, and the team behind Kempen’s high dividend funds.
Moennasing is also positive on low-volatility strategies, and uses a conservative portfolio run by Pim van Vliet, a senior manager in Robeco’s quantitative equities team. She views the fund as superior to the equivalent low-cost passive products offered by ‘smart beta’ providers.
“[Van Vliet] plays low-vol with a large number of stocks,” Moennasing adds. “He goes much further than just selecting stocks on low beta or low volatility – his model also looks at valuation.”
Hug at your own peril
Looking ahead to the likely impact of the Dutch commission ban on the country’s financial services sector, Moennasing forecasts a bleak future for “benchmark-huggers”. She predicts such managers will face pressure to lower their fees – a tactic that has so far failed to gain significant traction with UK investors, despite the introduction of similar kick-back reforms – or to revamp their approaches and become “more active”.
And while Moennasing also expects the ban to push cost-conscious investors towards execution-only platforms in greater numbers, she is upbeat on longer-term demand for discretionary mandates and the expertise of professional fund selectors.
“It’s right to take a critical approach to asset managers, because they provide a lot of funds – if they see a new trend, all of them want to provide a fund which will play that trend,” she says.
“So it is good that there are people like us who can look at the funds and see what the process is, who the manager is, and if they are providing quality and doing their job – or if it’s a provider with a poor process. We can filter out the good ones. That is the value we are adding.”