James Fava, Asia Pacific head of product development and management funds at UBS Wealth Management, discusses products that were popular in 2018, and why there's low demand for alternative risk premia strategies.
Q: How are products developed at UBS?
A: The product development process is very collaborative across the research, product development and sales functions. All new ideas are vetted across these functions at regular, established forums and where appropriate are also linked to guidance from our CIO division.
In addition, the team has oversight over the local funds that we develop with our asset management division for local distribution. We are also responsible for ensuring all business processes are in place whenever we have a new type of fund offering for clients.
Q: How do you use performance data in your selection process?
A: Performance attribution data is essential in gaining a deeper understanding of a fund’s alpha drivers, risk/return characteristics and portfolio positioning. It can highlight potential issues such as too much risk in specific securities, or inconsistent positioning with investment approach.
Q: What types of products are gaining traction now?
A: Products that gained traction include global asset allocation strategies as investors remained concerned about market volatility, and floating rate fixed income strategies on the back of rising rates.
Global technology funds also saw inflows as investors remained positive on the sector’s strong earnings growth and its longer-term potential.
Q: Given this year’s volatility, which of your investment calls have paid off?
A: Despite recent volatility, the relative overweight to global equities with a higher quality tilt such as durable business models and sustainable competitive advantages paid off as they remained supported by healthy corporate earnings growth.
Within fixed income, US leveraged loans performed well against a backdrop of rising rates. Our long-term structural view on automation and robotics also benefited from higher investment into process automation as companies seek to improve efficiency, driven by higher labour costs and ageing demographics.
Q: Where do you see opportunities in fixed income?
A: Private credit has been viewed as an attractive investment opportunity ever since banks started restricting their lending activities. The broad yield compression in the public markets over the past 24 months added impetus to this, with clients being more open to tapping private markets for credit exposure.
We have done two products recently in this space that were oversubscribed.
Q: Are alternatives in demand?
A: We have seen strong demand for alternative funds that deliver high-quality investment content, are well constructed and attractively priced, primarily in the hedge fund and private equity space.
Real estate seems to be a relative evergreen, and remains popular with clients. Demand for liquid alternatives has also been strong in private equity and real estate, as clients have looked to diversify their portfolios without having to invest in multi-year funds.
Conversely, clients in Hong Kong and Singapore have been willing to take on some illiquidity in hedge funds to access high-quality content. Finding the right blend of quality at the right price can be a challenge, which we have often addressed by working with the managers to structure tailored, dedicated solutions.
This is only possible if you have access to the best managers and can bring sufficient scale to the project.
Q: How has investor appetite for alternative risk premia strategies been in Asia?
A: We see very little demand for such strategies among our client case. These products are simply not as easy to explain or understand as traditional investment strategies.
Q: Are clients using customised vehicles to access hedge funds?
A: There are very few clients of sufficient size and sophistication whose specific needs are best met with a customised vehicle. We have a dedicated solution for these clients that gives them direct access to specialist hedge fund capabilities, but the vast majority are well served by our commingled funds offering.
Q: What type of strategies are investors hoping to see more of?
A: Interest in sustainable investing is growing, so we believe there is greater demand for products in this area. In line with our longer-term investments based on secular trends such as population growth, ageing and increased urbanisation, these trends are also more likely to remain robust across different economic cycles and better weather short-term market volatility.
We are constantly on the lookout for products that can benefit from such trends. These can range from solutions that focus on specific investment themes such as robotics or water scarcity, which can be used as individual building blocks in clients’ portfolios, to broader solutions such as a global equity fund that incorporates various themes associated with these trends and/or material ESG factors to help clients meet their needs.
One of the key challenges is ‘theme purity’, as some companies have multiple lines of businesses and revenue streams not related to a specific theme. There is also a lack of consensus for ESG definitions and considerations among managers.
Q: If you could ask a fund manager just one question, what would it be?
A: Hard to restrict myself to one, so I’ll make it a two-part question! ‘What is the biggest risk in your portfolio, and what are you doing to address it?’
This interview was first published in Citywire's 2018 Asia Fund Selector supplement.