“When composing our portfolio, we prefer to pick asymmetric fund managers who complement each other, just like a football manager does when making the starting line-up for a football game”, says Thomas Romig, head of multi-asset management at Union Investments in Frankfurt, Germany.
“And just like a football manager does, our selection starts with constructing a reliable defence, selecting managers with a defensive orientation who do well when markets are in a downward trend. These managers form the basis of – and have a slight overweight in – our portfolio, so have a relatively better chance of being selected by us,” says Romig, who has been an active player himself since he was six.
“Then we proceed selecting the mid-fielders, managers with a good track record and just a few ups and downs. We finish our selection process by picking some opportunity managers, akin to the attack in a football squad.”
Weathering the storm
Just like football coaches need to build a team able to anticipate unexpected situations on the pitch, such as a red card, high-impact decisions by the referee or a hostile crowd, fund selectors have as one of their main tasks to compose a portfolio that is able to weather market events.
“We find it very important how fund managers deal with isolated market events. When we perform a qualitative screening, we do not primarily look at the performance or volatility of the fund, but rather at how funds relate to their peers and the benchmark when dealing with them”, says Romig.
To continue the football metaphor, Romig feels it’s important not to micro-manage players.
“We feel we should not prescribe in detail how a fund manager should act. It is important for us to be able to analyse how the performance of a fund can be explained. We take this information into account when composing our portfolio.”
Just like a typical German football manager, Romig attaches a great deal of importance to the endurance and commitment of his players. “We find a long-term orientation of utmost importance. Fund managers should be rewarded for their performance on a three- to five-year basis rather than annually. It’s important that asset managers share our philosophy. “Union Investment wants to play in the Champions League, but we’d rather deliver a continuously good performance than being the best team one year and fall down the table the next.”
No cure, no pay
When it comes to fund manager remuneration incentives, Romig is completely fine with bonuses exceeding fund managers’ salaries, provided they are rewarded on a performance basis and over a longer period of time. “Fund managers are there to generate performance, not to generate volumes and drawing money into their funds. They should be able to pay their bills with a fixed salary in the city where they live, but their performance should always significantly reflect in their pay checks.”
The right focus of the fund manager is at least as important a selection criterion for the German fund selector as the remuneration policy of the asset manager he is working for. “We attach a lot of value to the unique selling point of a fund manager. The question whether he is employing six or seven strategies at a time or focusing on just one or two strategies is in fact the most important point for us.
“We are looking for managers with focus, and therefore avoid managers with a tracking error of 1% to 3%. They should ideally have a deviation from their benchmark of 4% to 6%.” Benchmark huggers are confronted with the problem that the extra costs are too high compared to the alpha that could be generated, Romig asserts. This doesn’t mean, though, that he believes in ETFs, even though he began his career in 1997 as an index fund manager for ADIG Investment. “We tend to avoid ETFs as they demand too big a use of capital. Instead, we invest in futures and derivatives within the passive products range.”
Catching the German soul
The careful selection tactics of Romig and his team have been rewarded – he has overseen a 200% percent increase in AUM to €7.7bn since he joined in 2009. “If you wait three more weeks, we will pass the €8bn mark”, Romig adds joyfully. The fast growth in AUM, currently about €80m a week, is partly attributable to the popularity of multi-asset funds in Germany, although competitors like Commerzbank and Deutsche Bank did not grow their assets as quickly over the past years.
“We recently expanded the range of multi-asset products we offer to our clients, introducing protected strategies, fully flexible strategies and volatility-driven products to the retail market,” Romig explains.
“The current low interest rate environment looks very good for multi-asset investments, so by putting our cards on multi-asset we touched the right nerve in the German retail investor, who is conservative by nature, but is looking for alternatives to low-return bond funds.”
So, provided a fund manager has the right focus and incentives, what asset classes should his fund focus on to get in Thomas Romig’s picture right now? “European small caps are our favourite asset class at the moment. There is an extensive range of funds available as European small-cap funds capture quite a large universe. Especially here we like very active managers, as the small-cap universe is not that efficient.”
The Franklin Templeton European Small Mid Cap Fund is one of the small cap funds Romig is invested in. Tending to invest in the European periphery, the fund has more than 13% of its holdings in Irish equities and more than 7% in Greek stocks. It is well-positioned to profit from an economic uptick as it is relatively high invested in industrial and financial stocks, and has outperformed its peers over the past year, but its tracking error has come down remarkably from an annualised 7.33 over a five-year period to 4.10 over the past year.
In the previous issue of EIE, Romig was quoted saying he would consider investing in emerging market credit early this year. And so he did. “We indeed built up a position in EM credit in the latter half of December but decided to take the profit and sell it again with regard to the developments in Ukraine, which also is an emerging market in the end.” He is still enticed by the 6% to 7% interest rates, but is patient. “Like many investors, we are waiting for entry opportunities. If we see those, we want to take positions again.”
He takes a similar attitude towards high yield. “We are getting a good interest rate of 4% and bankruptcy ratios are low, so we are still invested. But there is a risk of interest rates going up if the US economy accelerates. So our duration is just one to 1.5 years, so we could get out of the asset class quickly without having to take too many losses.” Romig’s view is that, provided we don’t see exorbitant economic growth, “high yield will continue to be in the sweet spot”.