Fund Selector Series: 'We see a shift in risk appetite'

Agnes Sng is head of investment funds advisory for Asia at BNP Paribas Wealth Management.

She is based in Singapore and leads a team across both Singapore and Hong Kong, overseeing the distribution of the wealth manager's mutual funds.

She covers the selection, monitoring and the promotion of the funds.

BNP Paribas Wealth Management’s fund platform covers long-only funds and liquid hedge funds.

Sng is considered one of the pioneers of mutual fund distribution in Singapore.

She spoke to AsianInvestor on a range of topics from how the wealth manager selects funds and how it monitors funds that are exhibiting red flags.

She also talked about evolving investor trends.

“Since December, we have seen a slight shift in terms of more risk-taking appetite from our clients,” Sng said. “They are now considering diversifying portfolios and not sticking to cash only.”

This interview has been edited for clarity and brevity.

Can you describe the broad fund selection approach of BNP Paribas Wealth Management?

We cover a large universe of around 1,000 funds and we have over 30 fund specialists, including myself – based in Europe and Asia.

The selection process is institutional grade.

First, we apply a quantitative filter on the fund universe based on various metrics. We also carry out in-depth financial due diligence on each fund, including a qualitative review of the team, process, performance, price, etc.

We also carry out operational risk due diligence on each asset manager. We consider the compliance aspect of their operations and we also also have a high standard of proprietary ESG analysis.

We partner with two top-tier fund research partners – Mercer and BNP Paribas Asset Management Research.

We have an ESG ‘Clover’ system that rates funds from 1 to 10. We give fund houses a questionnaire that looks at various considerations such as exclusion policy, transparency etc.

We consider adding funds to our recommendation list when their rating is 5 Clover and above.

We have one of the largest selections of ESG funds in the industry with a rating of 5 Clover and above.

Can you describe the criteria used for assessing whether a fund is worth adding to the platform?

The historical track record is the first important indicator – have these funds structurally underperformed the benchmark and their peer group? This is the quantitative aspect.

Then we look at the team, the breadth of expertise and research capabilities.

We also have a thorough look at the investment process – has the process been consistently implemented through portfolio positioning?

You can be a growth manager but suddenly change style. That can be a big trigger point for us.

Is there a ‘key man’ risk? Is there a risk that the success of a fund depends on one individual and what happens if that individual leaves the organisation? That would be another trigger point for us.

How do you deal with any risks that might emerge?

When we ascertain something is a risk, we could immediately put the fund as a ‘sell’ or we opt for a transition phase where we place the fund under review or on a watch list.

We then monitor the fund over a certain time period, over the transition period, to assess what changes are taking place within the fund. We regularly interact with fund houses and fund managers.

We also have a process in place that kicks in when we see red flags.

If a fund has consecutively underperformed its peer universe for about three consecutive quarters, we put the fund under review.

In the fourth quarter, if that underperformance continues, we will remove it from the platform.

Sometimes, a fund will underperform for three consecutive quarters and then reverse trend.

Another red flag could be a manager change. On average, we could be reviewing 15 to 20 funds annually, which might end in exclusion or removal.  It’s a constantly evolving process.

What market trends have you seen in 2023 and which of those are likely to continue in 2024?

A lot of private banks are challenged with the high deposit rate and clients are sitting on cash right now.

If you look at Morningstar data, the only funds that saw inflows in 2023 for actively managed funds were money market funds. They saw huge inflows but we are seeing the trend going down.

In Asia, we have also seen inflows into bond funds, investment grade bond funds and into alternative liquid hedge funds.

Since November last year, we have started seeing clients asking about technology and artificial intelligence as investment themes. We have also seen some interest in Japan equities through 2023.

Since December, we have seen a slight shift in terms of more risk-taking appetite from our clients.  

They are now considering diversifying portfolios and not sticking to cash only.

Of course, several clients are still looking for income and to get that, they are looking at investment grade bond funds, which can offer some nice returns of over 6% or so. Income is still the theme that resonates with our clients.

Liquidity has also become very important to clients, especially over the last few years.

How are investors using funds in their portfolios?

We see increasing penetration of actively managed funds in client portfolios. One approach we have adopted is taking a 'core and satellite' approach to funds.

We have the core sleeve, which is constructed with funds that have low volatility, low tracking error and tend to be more global in nature.

These are long-term holdings and investors should not be too concerned with day-to-day fluctuations.

In the satellite sleeve, investors can take advantage of trending themes that are expected to outperform the market. These funds can have higher volatility, higher turnover but also offer returns higher than the market.

All this depends on each client’s profile and their risk appetite. Liquid alternatives can play a good role here and the ones that have done well [in 2023] are hedge funds.