Distributor due diligence of mutual funds “overrated”

John Cappetta, a senior fund gatekeeper at Julius Baer, is refreshingly open about asset managers' sales strategies, client behaviour and discretionary portfolio management.
Distributor due diligence of mutual funds “overrated”

High-net-worth individuals are ideal clients, due diligence is overrated for mutual funds and pushing hot products is a bad approach, argued John Cappetta, Singapore head of managed solutions advisory at Julius Baer.

These were some of the surprisingly candid views he voiced when speaking about product strategy and selection at AsianInvestor’s Fund Selector Forum in Singapore last week.

In comments that were not welcomed by everyone in the audience, Cappetta said his preferred clients in Asia were those with $10 million to $30 million in investable assets, rather than ultra-high-net-worth investors (those with $30 million-plus). 

“My perfect clients are those who have aspirational mindset; they want to get to the next level,” he noted. “They are the ones who are going to be active [in investments].”

Ultra-wealthy clients provide “nice chunky AUM” for a bank, but are not so active in terms of investment transactions. “If they do [trades], they are going to squeeze you,” said Cappetta. “They’re great for the firm, but they are not going to produce numbers for you.”

Turning to product sales strategies, he advised managers against pushing funds because they are flavour of the month. He cited as an example European equities, which he said everyone was touting hard about a year ago and yet the asset class has since been performing poorly.

“No one was talking about emerging markets or natural resources [at that time],” Cappetta noted, asset classes that have better opportunities to perform well today. 

Julius Baer has been favouring the Schroder Asian Total Return Fund recently, he said. The product aims to provide capital growth and income from equity and equity-related securities of Asia-Pacific companies, and a degree of capital preservation by using derivatives. “Just by giving the portfolio manager the capability to use futures to protect the downside helps,” said Cappetta. 

“We are just tired of going through the up and down cycle,” he noted. “It is us bankers who make that cash call. Part of it should be [down to] the manager’s ability to raise some cash. It goes a long way [with clients].”

Fund managers continue to ask about the gaps in their investment platform but there are no more gaps, he said. “Everything is filled. If you have something unique, that’s when we talk.”

Karen Tan, head of global wealth solutions for Asia Pacific ex-Japan at Deutsche Bank Wealth Management, makes a similar point. “The fund platform is saturated; to add a product is challenging," she said at the FundForum Asia last week. Both she and Cappetta appear on AsianInvestor's recent list of the 25 most influential fund selectors in Hong Kong and Singapore. 

"Unless there is a gap in the bank’s product range, a fund manager has messed up big time or there is strong support from the sales side, there is no real desire to add products," added Tan.

Moreover, Cappetta does not attach too much importance to due diligence for mutual funds, suggesting it is overrated. In his opinion, he said, the big managers have already done due diligence on the fund and the team. "Of course they will put their best people forward.”

“Is fund selection and due diligence a marketing gimmick? Probably. Do you need due diligence in hedge funds [and other] alternative assets? Absolutely."

Meanwhile, on the subject of discretionary portfolio management, Cappetta said selling such services was “still an uphill battle” in Asia. Julius Baer’s business is still very much focused on advisory in the region. The DPM portion remains small, he said, but did not provide a breakdown between the two. 

However, while there were previously cases of double-charging in the industry – where fees are charged for management and retrocession is also paid to the distributor for selling the funds via the DPM portfolio – that is coming to an end. Private banks now tend to use institutional share classes, which don't pay retrocessions. 

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