[Editor’s Note: This is a new monthly feature that will showcase influential fund selectors and discuss the latest selection trends at private banks and other wealth management entities.]
Gareth Nicholson is the chief investment officer and head of discretionary portfolio management of international wealth management at Nomura.
As Singapore-based head of the fund selection team in Asia, Nicholson oversees Nomura’s fund platform, which contains about 250 funds, covering both private market and public market funds.
The main asset classes on the platform are equities, fixed income and alternatives, which are the biggest categories, followed by money markets, multi-asset and thematic/mega trends.
Nicholson, who frequently contributes insights on international media and specialised panels, spoke to AsianInvestor about how the firm selects funds, what criteria it uses to assess quality, and what clients are looking from their funds right now.
“We try to bring the top-down view, which is the CIO view, with the bottom-up view of the fund specialists. From there, we get a view of where we think the best investments are, and what the best solutions are, from the bottom-up, which can hopefully offer a very good service to our clients who are ultra-high net worth and high net worth clients, family offices, independent asset managers, etc,” he told AsianInvestor.
The interview has been edited for clarity and brevity.
Q: Could you tell us about some recent fund selection trends and how you work with fund managers?
A: The past year has largely been about alternatives. We’ve added quite a few private credit and private equity names.
We will be adding some regional names around India and Japan – those are high conviction themes for us and maybe we will take off some of the long equity developed market funds.
It’s really refining the ones that are doing a good job. At the moment, everything has been going up or down over the past few months, so we’re looking for asset managers that can outperform the benchmark.
We tend to add about 10 names per year and maybe take off five or so funds.
I have a bottom-up approach. I work with fund managers and try to really understand what the manager does. We use the strongest funds to build up a base, which is a good thing because you are getting the best on the platform.
The problem potentially is that you could be affected by your own bias or the fund manager’s bias. To reduce that bias we discuss with the investment committee, which looks at what clients want and is cross platform, whether its global markets or private banking or research.
Overall, where do we see the most conviction – that is what we look at. Then we refine it from a bottom-up perspective and hone in on fund houses with the solutions that we believe will align with what our house views are.
Q: How do you assess the quality of different funds, for instance, private market funds and mutual funds?
A: First, we look at the fund from a quant background – we will run all the numbers: one year, three years, five years. The metrics we consider will include risk and return, drawdown etc.
This can give us a good feel of which funds, from a historical perspective, have done what they said they will do. It’s an initial filter to remove the ones that haven’t been very competitive in the past few years for whatever reasons.
For instance, Japan has had a pretty tough decade, so you wouldn’t compare Japan performance with say, US tech. You would compare it to relative peers and then see if this is the time for Japan.
If yes, for whatever reason like a new tailwind or a new theme, we want fund managers that have been able to do well in all kinds of environments.
We take our top 80 preferred partners and that gives us our first level of filtering via a quantamental lens.
Then, within that space, we ask our fund specialists to do a fundamental analysis. This would also include things like talking to the fund manager, understanding the investment framework, look at expenses and distribution fees, etc.
In terms of assessing different kinds of funds, I would say money market funds are quite vanilla and most of the other specialists can look at this.
But with equity, fixed income and alternatives, which includes private markets, hedge funds, and real estate offerings, they need a specialist to really understand the theme.
So each category has designated managed investment specialists to look at the funds, and to talk to the fund manages to get a sense of what the offering is about.
In hedge funds, for instance, you want to understand what the strategy is and who the governing people are and how it’s working.
On the equity side, it’s more about understanding a style that a manager may have been running for several years. And you are looking for slightly different factors in each instance. You need to assess track record, the assets under management size, the team’s stability etc.
Q: How important is fund manager longevity (a fund manager managing a fund for a long time) in your selection process?
A: My background is portfolio management and I was previously with Abrdn, where I worked for one fund for 15 years.
Fund manager longevity is an important component but I think it’s also important to have a framework around a process that you can see is working.
With funds becoming more complex today, and holdings becoming larger, it’s becoming harder for one fund manager to do the entire job – you really do need a framework and structure.
We believe it is important that the fund manager shares his wealth of knowledge and builds a framework around themselves and their team rather than doing everything themselves.
Because if one person is doing everything, obviously that person is getting very stretched in a market, where so many things are going on.
So fund manager longevity is important for sure, but it’s probably more important to see that the team has passed on that longevity to the framework, which means things can be managed by a few or other portfolio managers.
Q: What are clients looking from funds right now?
A: I think the main interest we are seeing from clients at the moment is income. From an investment perspective, they still want a stable income so there is demand for income funds.
Our definition of income is quite broad – these could hedge funds offering an income and diversification or some private credit or private equity fund offering an income enhancer. And then you have the typical income funds, of course.
We are also seeing a growing interest in artificial intelligence in Asia – it’s a space that hasn’t really had the same sort of love as it has seen in the US.
Asia is obviously much more digitally savvy than the US, the region’s use of QR code and other technologies has been world-leading but the market rally hasn’t been strong in this part of the world.
But we are starting to see that now. Clients are also starting to become interested in Japan. There is interest in themes such as healthcare in Asia, cybersecurity, automobiles and electric vehicles in Asia. So, interest around the broad robotics/AI theme is growing.
And here we are also looking at industries that can benefit from AI, not just companies involved in AI. Which are the sectors that can use AI? Healthcare is a huge one, cybersecurity is another.
Several sectors down the line will use AI and those are the ones we are highlighting as part of the same theme/future.
It’s also important to offer clients offerings that are diversified. Sometimes there is a tendency that with the largest four or five private banks, every bank is offering the same large fund to clients. But that can lead to concentration risk.
So while the fund may be good, it can be bad for the client. So we try to add funds where we believe they complement a client’s portfolio.
Sometimes that means taking on a fund that is not very famous but is very solid, rather than always opting for the blue-chip fund that is available on every single fund platform.