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UOB Private Bank's fund deselection process

UOB Private Bank's fund deselection process

Citywire Asia spoke to Wong Meng Keet, head of managed product solutions at UOB Private Bank about red flags in funds and product gaps in the market.

Q. Tell us about your role.

A. I formulate the strategy for UOB Private Bank’s fund offerings and oversee its execution through our advisory and due diligence teams.

My role includes reviewing all traditional and alternative funds to check that they are suitable for our client base. On any given day I conduct due diligence on a variety of mutual funds, hedge funds and private equity funds to ensure that whatever we recommend to our clients serves their best interests and helps to diversify their portfolio.

Q. Walk us through your fund deselection process.

A. Our investment and deselection process is both qualitative and quantitative. On the quantitative side, we benchmark against peer, broad market indices and other relevant risk and performance metrics. On the qualitative side, we rate the funds for their manager competency, transparency and conviction. In addition, we also consider the following important qualitative issues:

I. Organisational issues such as changes in key personnel and structure: For example, when Bill Gross and Mohamed El-Erian left Pimco, we did not head for the exit as we felt confident that Pimco did not operate with a key person risk, which was what  the market reacted to initially.

II. Changes in strategy and/or approach: If a manager is changing a fund’s strategy and/or approach, I will assess if it is a tactical move or simply a performance chase. In order to better understand the underlying reasons, it is essential to follow the manager closely to understand their investment approach and portfolio over time.

III. Fund capacity: I’m wary of funds that grow too large relative to their strategy because the manager may have to be less selective about where they can invest.

IV. Incentive structure: I prefer a fulcrum fee structure over other incentive structures as the fulcrum fee structure provides a longer-term incentive. With a fulcrum fee structure, the fund house backloads a manager’s variable compensation component over seven years so that the largest payout is issued at the end of the seventh year. In this way, it incentivises a manager to make investment decisions with a mid- to long-term view and also for the investor to stay invested.

Q. How do you decide on the funds in the conviction list?

A. We have a set of criteria that we use to rate managers after meeting them. Currently we have about 30 funds on our high conviction list.

Q. What are some product gaps you’re seeing in the market right now?

A. Most of the innovation and development in fund products has been around investment strategies to achieve superior performance. However, achieving superior performance consistently is difficult and that is why this is a hard way to differentiate a fund.

What I would really like to see is innovation on investment terms, such as introducing liquidity in the hedge funds space. For example, liquid alternatives can provide low or uncorrelated returns with good downside protection, especially now as markets appear stretched.

But you have to be selective when choosing funds. You should not be looking at the performance only. You should also factor in the fee structure of the fund. I would also like to see more funds use a fulcrum fee structure. It is unrealistic to expect clients paying, say 175 basis points in total expense ratio to stay with a manager for the long term when the return on investment in the short term may fluctuate more or become a negative return. This is one of the reasons why clients stay when performance is  good and sell when it isn’t. This is not a sustainable approach for the clients, who should view their portfolios from a long-term perspective.

Q. What about smart beta?

A. Discretionary strategies are subject to judgement calls by managers. Smart beta is very compelling because it is a rules-based system where you can take emotions out of the equation. We have taken on board several smart beta funds that are rooted in an analytical model, Fama-French factor investing.

Q. What do you expect from an asset manager and what ticks you off ?

A. For me, transparency is very important and I want to meet or to speak with the portfolio manager directly. I want to talk to the ultimate decision maker who understands the trades and not only the client portfolio manager. We will not take on board a fund unless we have a thorough understanding of the fund and the people managing it. A major pet peeve of mine is when managers cherry-pick peer comparisons and benchmarks. For example, they compare their institutional share class against a competitor’s retail share class. That is not comparing apple to apple and therefore, it is misleading.

This article appeared in the 2017 Asia Selector supplement to the Citywire Private Wealth magazine.

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