Track record is just one criteria wealth managers weigh up in terms of third-party fund selection. They also prioritise fund size, institutional stability, manager experience and product demand.
Pictet Wealth Management has a list of about 49 funds globally from 42 different fund management houses, indicating it has been cherry-picking products.
Mussie Kidane, vice-president and head of fund selection at Pictet WM, heads a team of six in Geneva who pinpoint external products to construct portfolios in line with the asset allocation decisions of its investment committee.
He says the process starts with quantitative methodology to organise information, homogenise peer groups and compare them. “We see which managers have done well over the last three or five years. That gives us a focus list of managers we want to spend more time on.”
With its shortlist in hand, the firm sends out a questionnaire to find out who’s who, how long the team has remained intact and to learn how ideas are generated and how research is conducted.
“We ask for details of the portfolio. When you talk to a manager he can tell you anything, but what is the portfolio telling us? Does it make sense, is it consistent with what the manager tells us he does.”
Pictet WM tends to go in-house where alpha generation is limited (liquidity funds or pure government debt funds), while for external funds it prefers managers who have been through boom and bust.
“We also tend to go with managers who invest in their own funds,” Kidane adds. “And we have a bias towards high-conviction managers who take bold decisions and act on them.”
He says institutional stability is critical. “Staff turnover is often quite high in big institutional houses. We like boutiques where managers have a stake in the business.”
Credit Suisse similarly adopts quantitative and qualitative screening to source third-party funds and instruments to implement its investment strategy.
“To get on the CS product shelf a fund has to be a certain size, the track record needs to be there and it needs to fill a gap and a demand on our side,” says Volker Köster, head of global product and client interface within the firm’s multi-asset class solutions business based in Zurich.
He notes an advantage with in-house products is that the firm can have direct influence on sector allocation to ensure a fund is following strategy. But he says there are no types of manager the bank likes to work with. “The big ones, obviously, but also specialist niche managers.”
Julius Baer says it has a team of 40 analysts and experts covering fund solutions out of Zurich. It builds a shortlist via quantitative database screening, while due diligence centres on bottom-up portfolio analysis. It looks for a three-year track record and fund volume over $100 million.
“We never want to own more than 20% of a fund as a diversification rule,” says Andreas Feller, head of investment advisory in Zurich.
Union Bancaire Privée (UBP) has two open architecture teams, one for visiting and selecting hedge fund managers and another of five people in Geneva who select and visit fund managers.
“We monitor the people particularly,” says Michel Longhini, executive managing director of private banking for UBP in Geneva. “What is important is to focus on risk control, which is provided by the institution. But if somebody moves with a strong personal track record to another institution with a good platform and risk control, we will certainly follow them.”
Lombard Odier says it has over 100,000 funds on its radar that it quantitatively screens on a quarterly basis. On its platform, it has about 100 funds.
Stephane Monier, head of fixed income at Lombard Odier Investment Managers in Geneva, insists the market share of internal funds in Lombard’s private bank is in the low single digits.
“To get my funds on the platform I have to respond to the need, I have to have good performance and I have to have a compelling story,” he says. “It is surprising the number of banks that are really stuffing client accounts with home funds.”
This is an accusation often levelled at UBS, which has close to 400 people within its investment products and services (IPS) group in Asia alone. It has half a dozen who do external fund analysis and selection, supported by a global team in Switzerland.
“If you look at our client fund holdings, probably 50% is UBS Asset Management holdings and 50% is third-party,” estimates Rene Buhlmann, UBS WM’s head of portfolio distribution for the IPS group in Hong Kong. “The truth is our primary objective is to enhance client performance.”
He says UBS has close to 700 funds on its shelf in Hong Kong, or almost 1,400 funds including the various share and currency classes. Of these, he says about 35 are currently top picks based on the firm’s internal research outlook.
“If I want a new fund for a specific fund or asset class, I work with my asset management colleagues to see if they have this in-house and whether our performance in competitive. If they have, I can distribute it. If they don’t, it takes them too long to structure or they don’t have the capabilities, I reach out to find the best funds in the market.”