Running the numbers is good as far as it goes, says Manulife’s Ajay Saratchandran, but when it comes to making a call on which strategies to back there’s no substitute for meeting fund managers in person.
He’s got 18 years of investment experience selecting winning funds, and a truly global CV that includes time spent in Australia and Singapore before his latest move to Hong Kong.
A Melbourne native, Saratchandran began his career in his home town as an analyst at Merrill Lynch Investment Managers shortly after it acquired legendary London group Mercury Asset Management – a hotbed of investment talent that was considered the crown jewels of the UK’s investment management landscape before it was sold to the American giant in 1997.
Having spent five years learning the ropes from some of the industry’s brightest minds, Saratchandran headed east to Sydney, putting his analytical skills to use at National Bank Australia. Then a subsequent role at Australia and New Zealand Bank saw him move to Singapore.
Saratchandran’s latest move has taken him to Manulife, where he’s head of Asia for the group’s investment management services (IMS) team. The new position also saw him swap the calm of Singapore for the bright lights and bustle of Hong Kong, and he’s quickly found his feet in the hectic metropolis.
Saratchandran’s hands-on approach to getting the best out of Hong Kong reflects his experience-led approach to uncovering fund manager talent.
In order to gain detailed information on fund managers’ investment styles, Saratchandran’s team makes use of question and answer sessions to drill down into the details.
‘We firstly review the questionnaire response from the fund house, arrange a meeting with the portfolio manager and conduct a Q&A session to understand the strategy in more detail,’ he says.
‘We will consider several factors such as team experience, idea generation, portfolio construction, implementation, business management and past performance.’
Combined with a rigorous assessment of how a fund should be performing given its stated approach, this qualitative assessment forms the backbone of Saratchandran’s selection process.
‘We do consider quantitative factors, which help validate our qualitative assessment.’ This two-step process guides the work of his four-member investment management services team, which he oversees as Manulife’s Asia head.
Understanding how fund managers perform at different points of the economic cycle is critical. ‘It is essential to understand whether the manager is consistently applying their stated process and investment philosophy.
‘We seek to comprehend how performance relates to the current market environment, and across an economic cycle. If it’s consistent with Manulife’s expectations then we know which market environment would suit the particular style of the manager, and we will make our recommendations accordingly.’
The challenge for Asian selectors
The lack of regulatory support for more sophisticated strategies in some jurisdictions presents a big problem for selectors.
‘At the fund level, more sophisticated strategies have been introduced to make them distinguishable from their peers. Some may use alpha-generating strategies which have evolved and have become more commonplace in institutional and offshore markets.
‘However the flip side is that some regulators are becoming more conservative, which may limit the ability for clients to access these products,’ Saratchandran says.
Tapping into reliable sources of alpha without getting crowded out is also an ongoing challenge. ‘I support active asset management and doing this job well is about believing it. Getting sustainable performance from a single manager is another challenge that fund selectors are facing.
‘I think it’s difficult to invest solely in an individual manager because excess return volatilities and dispersion are quite high across a market cycle.
‘There is an increasing trend of following the herd among distributors in Asia. When we find good managers who consistently perform above the indexes, there will be a point where competitors will identify the manager. Eventually this may lead to capacity limitations, which necessitate a subsequent effort and cost of seeking and distributing a new “good” manager.’’
The ESG outlook for Asia
Saratchandran does not see much demand for environmental, social and corporate governance (ESG) investments from his clients, though a number of managers do include these criteria in their company assessment.
‘We are focused on what our client demands are. If clients want more ESG overlays, we need to be more conscious of that and will adjust our assessment framework to include ESG factors.
‘Managers in the developed markets generally have a better awareness of ESG,’ Saratchandran says. ‘Some of them will have specific teams to assess ESG considerations within companies they invest in. So it comes down to the managers as well.’
Saratchandran notes that some asset management houses, such as Aberdeen and First State, have embedded ESG factors into their asset classes selection processes.
‘Some won’t go out and tell you explicitly that they have ESG factors as part of their process, and they don’t market it as a key consideration in this region.
‘It’s not something that we explicitly focus on in our fund selection process presently, but it would raise a concern during our evaluation if there were holdings which obviously breached these principles.’
Global investment reach
Saratchandran’s Asia-based IMS team supports Manulife’s various business channels in the region, forming an extension of the group’s global research capabilities in Toronto and Boston.
‘We provide due diligence for the Luxembourg-domiciled Manulife Global fund, where we select managers who administer those sub-funds which we distribute both internally and to external distributors,’ he says. ‘We also support the insurance platform investment-linked products (ILPs), and what we call investment-linked assurance (ILA) schemes here in Hong Kong. The way we select funds varies according to the differing needs of clients and Manulife platforms.
‘When we search for discretionary mandates, our approach will focus more on the individual investment process; whereas when we look at the ILP platform, we will examine both investment process as well as product features, including fees, distribution and policies.’
When it comes to sizing up an asset manager, Saratchandran says his team’s due diligence provides a comprehensive assessment of prospective fund houses. ‘This includes senior management, global footprint, back office, compliance and risk management infrastructure.’
Team efforts and star turns
Saratchandran is indifferent on the question of whether funds are better off taking the lead from a star manager or being steered by a team. ‘What we have is performance expectation bias,’ he says.
‘I’ve met managers who are outstanding in all respects and have delivered consistently on our expectations. On the other hand, I’ve also met those who are well resourced and have the potential to be a good manager, yet they don’t perform.
‘What we need to do is to exercise judgement on how these managers are interpreting the information from their research to form a well-constructed portfolio.
‘If we are looking at discretionary mandates, we might have more flexibility on investment approaches depending on target mandate, whereas with ILP or ILAS funds, we might want something a bit more conservative.
‘So again, it comes down to our assessment. We also need to realise that with a single manager, there will be a key person risk, which needs to be factored into our analysis and recommendation.
Getting to know the company culture and its effect on staff can also be telling. ‘We need to understand the business environment and what the company’s staff retention culture is,’ he says.
‘If it’s a boutique culture, where the mana ger is part of the ownership of the business, then the chances of the manager departing are quite low.
‘If the individual or team is in a firm which has had challenges retaining good managers, then we would be concerned there may be a higher probability that they could leave.’
Saratchandran isn’t one to be impressed by a big name, and his selection process follows the same rigorous pattern regardless of who’s in the frame.
‘We assess everyone on their merits. We are agnostic to industry reputation, and are just looking for people who are good investors with a demonstrable track record.
‘I’m a big believer that a good manager must be able to demonstrate their investment philosophy through their portfolio. He or she should be able to explain their ideas and investment process clearly. They must show discipline and a thorough understanding of the asset classes they are investing in.’
If a fund manager does not understand the risks within the portfolio, that is a serious red flag. ‘We want an appropriate assessment and analysis of risks at m ultiple levels.
‘Additionally, if the manager just relies on public information, that will pose risks as well. Good managers are supposed to come up with investment ideas that are unique or not fully understood by the market. They will bring these ideas into their portfolios, understand risks associated with these positions, create portfolios, and fulfil return and risk expectations.’
High staff turnover is another warning sign for Saratchandran. One group that scores well here is Aberdeen, whose staff-retention strategy has impressed the selector.
Manulife uses a number of asset managers on the ILP platform in Singapore, including Aberdeen, Schroders and Legg Mason, alongside Manulife’s own funds. ‘Manager selection is driven by a combination of business requirements as well as due diligence outcomes,’ Saratchandran says.
‘In Singapore, our business is primarily based on retirement, so we look for managers who are participants in the pension scheme.’ This would include the likes of Franklin Templeton, BlackRock and Fidelity.
Income products are a mainstay, but Saratchandran has experienced some difficulty aligning the objectives of the funds on offer in Asia with those of his investors base. ’Some products are biased towards specific higher income-generating asset classes and sectors, which may not generate the best overall risk return outcome for investors.’
Hong Kong’s ILAS platform includes a number of funds such as Manulife Dragon Growth, managed by KK Chay; JPMorgan Multi Income fund, co-managed by Jonathan Lowe and Michael Schoenhaut; Fidelity International fund, run by Nick Peters and Templeton Global Total Return fund, co-managed by Citywire AA rated Sonal Desai and Citywire A-rated Michael Hasenstab.
‘Looking at the Templeton Global Total Return fund, the strategy employed is relatively aggressive. The fund has higher volatility than some of the more traditional bond funds in the universe. We understand the risks taken within this particular portfolio, and we also understand how it compares to an average fund,’ Saratchandran says.
‘Templeton has generated the necessary return profile to justify the volatility the strategy exhibits.’
Turning to the wealth management unit’s overall asset allocation, Saratchandran says it again depends on which platform you’re looking at.
‘In Manulife’s global funds range, the majority of client assets are invested in equities. While the pension business in Hong Kong is mainly multi-asset funds, they also display a home country bias towards Hong Kong and China equity funds.
‘In the ILP platforms, the majority of client assets are invested in equities and balanced funds.’
Saratchandran says 2015 is set to be another testing year for investors. ‘We had a good run-up in US equities in 2014. Whether that’s sustainable, or whether investors should look for other investments is uncertain.
‘It is likely to be a volatile year across and within asset classes.’
This article originally appeared in the February issue of Citywire Asia magazine