Few investors, if any, would cite the German silent film industry of the 1920s as an influence on which fund manager to back – but Holger Bachmann is not your average investor.
The head of banking for German car manufacturer BMW’s financial services company is also a published author and film historian who has co-written a book analysing the cultural impact of one of cinema’s most iconic films, Fritz Lang’s 1927 masterpiece Metropolis.
Bachmann’s passion for early 20th century cinema has helped him develop a cultural overview which extends all the way into his day job where it has provided fresh insight into key investment concepts.
‘Cultural history teaches you something about mean reversion so it’s useful to compare the two,’ he says. ‘You tend to find certain patterns, that all exaggerations are corrected and these outcomes are relevant to asset management.
‘Also there’s a focus on how people react to certain extreme events and how these are represented. How people can be manipulated. These issues are explored brilliantly in the cinema and on the capital markets, of course, as evidenced by behavioural finance.’
Ever since he joined the BMW Bank in 2001 to help build its funds business, this emphasis on human behaviour and investing has driven Bachmann’s approach to fund selection, which he carries out with colleagues Markus Baumgartner and Georg Entfellner.
Quant models are pointless for active investors and alpha hunters, says Bachmann, and building an active multi-manager portfolio must be driven by simple concepts beyond technical data.
‘We have a very basic approach that rests on active and flexible asset allocation. ‘We don’t believe in benchmark replication, or in technical systems, or any quantitative models.
‘We believe there will always be a mean reversion. That may take some time so we tend to have an anti-cyclical approach.’
Films and funds
Bachmann began his career at Union Investment in 1997 where he gained experience in the marketing, sales and product development departments. In 2001, he joined BMW Bank, which was moving into the fund business for the first time.
After 12 years, he is now the group’s head of banking and is in charge of its fund selection capabilities.
Outside of work Bachmann’s passion is for early 20th century cinema. The published author and film historian has written a book focusing on the 1920’s iconic film Metropolis, which he co-wrote with his college professor Michael Pinden.
‘I find it fascinating from a technical point of view what these guys achieved with very limited means, there was no CGI back then or real special effects.
‘I think the cinema of that period really reflects on the cultural spirit and Germany in the 20s, which was a fascinating period when Berlin was full of cultural diversity and innovation.’
The idea of a car manufacturer having its own banking business may be an unfamiliar concept for some people but Bachmann says this is common practice among major car makers like Volkswagen and Renault.
However, German companies have gone a step further than many of their European rivals and branched out into other lines of business beyond basic financing services.
BMW Bank has a well-developed deposits business of €8.7 billion, which Bachmann heads as well as being responsible for the group’s fund business which has over €300 million in assets under management.
‘The big three German car manufacturers believe it’s very handy to have a diversified refinancing pool and you cannot rely on the capital market alone.’
BMW decided to launch a fund business in 2001 as the group felt it had a large enough spread of clients – now close to 350,000 – to offer a range of different products.
Before joining BMW Bank for this new venture at the car marker’s HQ in Munich Bachmann had worked at Union Investment for four years across its marketing, sales and fund launch team.
It was during his time there that he got to know two of his favourite fund managers, Christoph Bruns and Citywire A-rated Olgerd Eichler who have since left the group to join LOYS AG and MainFirst Asset Management, respectively.
‘Moving on to BMW Bank was a fascinating opportunity,’ says Bachmann. ‘It was a chance to turn things around with a very established company with a well-regarded brand that was looking to go into something new.’
After initially handing the manager selection process to Russell Investments and then to Sauren Group, Bachmann says this expertise was brought in-house in 2007 and he has been running it ever since.
The ultimate selection machine
When explaining his approach to manager selection Bachmann references a point many fund managers make. ‘An active manager will tell you they need to see the management of the companies they invest in. And in the same way we want to speak to them because for us, they are the company we are buying into.’
This personal approach is the cornerstone of his selection process, especially when it comes to picking alpha managers.
‘Product specialists and sales people have a very good knowledge but you need to see the person calling the shots.’ Bachmann’s search for outperforming managers has led him predominantly to boutiques where German groups are among his favoured picks.
Once he has identified a manager he likes, as with Bruns and Eichler at Union Investment, he will seize upon the first opportunity to invest with them. However, in this case regulatory constraints prevented him from investing in the pair’s Union Investment products.
‘I’d always said if Bruns strikes out on his own I would invest and that is what I did when he joined LOYS. Then Eichler did the same and moved to MainFirst and launched the Top European Ideas fund.
‘We weren’t looking for European equities but as soon as we found out Olgerd Eichler was available for investment I said we need to go and see this guy.’
Bachmann’s focus on the individual manager means he will often follow them to another group and sell out of their old fund to buy their new product. This is what happened with former Assenagon Asset Management and Citywire A-rated duo Jochen Felsenheimer and Wolfgang Klopfer.
The pair ran successful absolute return bond products which Bachmann held in his portfolio until they left to launch their own boutique XAIA Investment in 2012.
‘We have very close contact to these people and the success of this fund is directly linked to them.’
In another example he mentions Gerd Rendenbach who previously ran one of the biggest bond funds in Germany for Pioneer. Bachmann held the fund but Rendenbach disappeared from the scene in 2007.
A few years later he ran into him at a corporate event and discovered Rendenbach had joined Bayern Invest and has since invested in his new bond fund.
One of the driving factors within Bachmann’s fixed income asset allocation is to have a flexible and unconstrained approach to the bond market.
He has been steering clear of eurozone government bonds ever since the financial crisis. While he readily admits this may have cost him some performance he believes the negative effect outweighs any potential upside.
Instead he is always on the lookout for what he calls freestyle bond investors, managers that run unconstrained strategies that can use any opportunity in the market to generate returns, and has been increasing his exposure to them over the last year.
‘First, you have to find someone who can implement a really unconstrained bond fund and I don’t believe that any of the big houses allow that.
‘Then you have to identify a manager who does this successfully and we have two or three in our portfolios that over the last few years have consistently returned attractive yields by investing in special situations and high yield bonds, for example.’
One of the freestyle bond managers he holds is Martin Wilhem who runs the Acatic IFK Value Bond fund. ‘This guy is brilliant, we’ve had him for a couple of years now but you need to speak to him and understand his approach. He has been a bond trader for Deutsche Bank and he knows all the bond market traps.’
Freedom to manoeuvre is key and once again the importance of the manager’s style and independence remain paramount for Bachmann who gives any quant-focused investments a wide berth.
‘It’s a people business. Look at the very successful investors like Warren Buffett, they don’t use a technical approach.
‘In my view a quant approach is just a security, it won’t help you to generate an above average performance. It will maybe help you to avoid extreme disappointment but in the long run it won’t be successful for the private investor.’
Bachmann prides himself on having a holistic approach in which he has no clear preference for any specific investment products.
‘We do have a tendency towards active alpha managers and boutiques, but there will always be certificates, ETFs and index funds in our portfolios. We have no ideological preferences.'
However, there is one investment theme he will avoid at all costs: gold.
‘A lot of the investment boutiques have for a long time favoured gold but we stay away from stuff like that because we believe that gold and precious metals do not have an investment case, it is a speculative play on inflation fears.
‘There is no real value generated there and we have always said that the gold price was an exaggeration. There is no real need for it.
‘If the investment regulations we have on the funds had allowed it we would have shorted gold a year ago as we didn’t believe for a second the stories we heard. ‘If I have five people in a week trying to sell me a gold fund, that indicates an exaggeration.’
Over the last six months Bachmann says he has barely touched his asset allocation as opportunities to generate good returns are pretty scarce.
‘We don’t see any major undervaluations at the moment. You have this big bubble in euro government bonds and high yield and corporates that have had a very good run.
‘There’s also been a massive downturn in emerging market corporates and we are cautious about that.’
While he does have a tendency to favour German boutique names, when it comes to his emerging market exposure Bachmann has looked to some of the industry’s best known managers.
Asia and emerging market specialist
First State also features in his portfolio as he invests in both the First State Asia Pacific Sustainable and First State Global EM Sustainable, both of which are managed by Citywire AA-rated David Gait.
Renowned French investor Vincent Strauss of Comgest is also part of his EM allocation through his Magellan fund. Turning to the broader investor market, Bachmann is scathing in his criticism of investors who have yet to understand the true value of active managers and avoiding marketing ploys.
‘There is still the tendency to follow fashions and trends and to try to market stories. Sometimes I really wonder how it is that the same stories are told over and over again.
‘Christophe Bruns always said that asset management knows no innovation. All these innovative products that come out are not new, they just have marketing wrapping.
‘And the other thing is people still believe there is such a thing as a free lunch.
‘There is still this desperate belief in technical models because everyone says there needs to be a formula to generate safe returns but it does not exist.’
This article originally appeared in the October issue of Citywire Global magazine