From Descartes to Becquerel, French physicists have been a powerful force in advancing the course of science. So with a PhD in particle physics, Mai-Khanh Vo is part of a noble scientific tradition. Particle physics is described as ‘the study of the fundamental constituents of matter and the forces of nature.’ At first glance, there may not be an obvious link to the world of fund manager selection.
But while that scientific tradition stretches back into the 19th century and beyond, in the late 20th century Paris also developed a reputation as a centre for sophisticated financial engineering.
So it is not as radical a step as it may seem for Mai-Khanh Vo to apply her training and analytical skills to researching investment managers. She trained first as an engineer and while one of her post-graduate degrees was in gas and plasma physics, another was in statistics and random models in finance.
All in all, she brings a formidable array of skills and qualifications to her role as head of multi-management for Amundi Asset Management. And while she took on this role in 2010, she has been involved in the business since its inception in 2001.
So how have the pressures on the multi-manager changed over that time? First of all, the end clients are more impatient today. ‘End clients don’t want to lose money,’ she says. ‘The interest rate is very low. It is very difficult for them to rely on a risk-free asset. They want to earn the same return they used to earn with the risky asset, but without risk.
‘Clients are saying: “I don’t want to put my money into equity markets.” If you take the risk, you get the return, that’s what we used to learn at school. But they didn’t get the return they expected. They are saying: “I don’t want to put my money into equities, so how can you provide me with a return without that risk?”’
To try and address this challenge, the Amundi team start by trying to explain to the client the reality of the current environment. ‘Things are changing. Probably we are going into a period of a low rate of return, and history is no longer a guide to the future. Also we try to provide a solution. The solution is not only equity, the
solution is a combination. So the advisory role becomes much more important.'
‘The future is multi-asset and multi-strategy. We are changing our centre of focus. Specific asset classes and areas that are getting the most attention: absolute performance, flexible funds – and when I say flexible, I mean highly flexible, go-anywhere funds.’
Typical balanced funds, however, are not attractive to investors, she says. ‘I recently had a very interesting question from one of our clients. They said: “You propose a 0-100% equity allocation fund. Why don’t you propose something that gives me positive return even if the market is going down?”
‘Clients are more and more sophisticated. This is the type of question we never had 10 years ago, now we see
a lot of clients asking these types of questions. They want to play the bear market as well as the bull market. They are not happy that the portfolio is 100% in non-risky assets when the market is going down.’
One consequence of this change in sentiment is demand for high-income strategies in the broad sense – any type of asset classes that may provide clients with yield. ‘In some countries, we see demand for funds that provide you with a monthly coupon. What people are looking for is stable dividend streams,’ explains Mai-Khanh.
Funds she likes in this space include M&G Global Dividend, which she regards as being like a typical equity
fund, but also M&G Optimal Income – a very flexible fund, mainly investing in fixed income, but allowing the
manager to invest in a basket of high dividend equities.
At the same time, attention is also being focused on absolute return funds. ‘This is a very exciting area, it’s a sort of twilight zone between traditional and nontraditional investment. We are both excited and wary when we select absolute return managers.
‘We only look at Ucits III format absolute return funds. Our general thinking is that we believe that all the alternative investment strategies are not replicable under the Alt Ucits format, because this requires certain
restructuring: liquidity is the most important.’
She shares the widely-held view that equity long/short is the easiest to replicate and points out that in the Alt
Ucits universe the newcomers are in some cases the traditional long-only managers. ‘The rationale is easy to understand. When they analyse the companies, if they don’t like them, they cannot use the research. So long/ short means they can use them in a more complete manner.
‘But long and short investing is very different. When we analyse long/short equity managers, it is important to see how performance has been generated: is it through the long book, or is it through the short book? Also linked to this is the ability to manage risk. We see more and more new funds based around risk – risk parity, minimum
‘There’s a lot of quality among the people who are running those funds. It’s a different way of management: you move away from market-cap weighting.’
Germany’s Aquila fund stable is a favourite for risk parity strategies while for minimum variance funds Mai-Khanh highlights Unigestion, where fund manager Fiona Frick has one of the longest track records in this area.
A growing check list
In purely practical terms, since she joined the team in 2001 the biggest change she’s seen in the multimanager’s role is the rising emphasis on operational due diligence.
‘In 2001 our emphasis was on manager interviews and quant analysis,’ she recalls. ‘Operational aspects were not really our focus. Why would we need to see the accountant of the fund, or the custodian? What we’ve learned from the crisis of 2008 is that the quality of the fund manager is one thing. The environment in which he or she operates is another thing, and it’s probably just as important.'
‘Our hedge fund colleagues used to do this, but for the traditional long-only it was not our key focus. We had a very short check list of essential criteria. After 2008, we felt that was not sufficient and we needed to be more stringent. So we built up our operational due diligence expertise within the team.’
In this way they cover not just front-office risks but internal processes such as risk management and auditing. ‘So even if it’s absolutely the best fund manager, if we have any doubt about the internal controls, we would never invest in that manager.’
Investment and operational research is done in parallel but the team also want to know how a portfolio is
‘Alignment of interest is not just how the fund manager is paid, but also does he have his own money invested in the fund? In terms of transparency, we always get the answers. Sometimes not very precise, but we can always get a clear view on how he or she is getting paid.’
But while managers putting their own money into their fund is a positive signal, any clear correlation with performance has so far proved difficult to establish. ‘It’s tough to evaluate because it’s hard to find out how much they have,’ explains Mai-Khanh.
'It is important to preserve all the information they get It is important to preserve all the information they get
from external managers but that means strict confidentiality agreements and a very thick Chinese wall around the multi-manager team.'
‘Fund managers need to be confident about this because we ask for a lot of sensitive information. For example for a young company, we want to know about the break-evenpoint of the firm.
Do the managers who have done well through the crisis share any common characteristics?
‘It’s the Holy Grail of our professional life. It’s a question I ask my team. First and most important is flexibility, meaning the ability to adapt the process to the environment. An example might be: in the past, high dividend stocks used to be defensive stocks, and today that’s not really the case. So companies like utilities are no longer seen as defensive.'
'To be defensive today is different. Flexibility is that – and it is also to constantly question the process to see if it is improvable. It also means a fund where the manager has the leeway to move from high yield to investment grade when he feels it is necessary.'
‘The focus is also on managers who are playing quality. This is an untypical period where flight to quality really pays.’ So she’s also looking at managers who are long duration, even if it’s expensive to do so.'
Flexibility and quality, with a focus on income and absolute return, all backed by rigorous operational due diligence. It may not be particle physics, but it’s a formula that investors will be able to understand.
This article originally appeared in the October 2012 edition of Citywire Global magazine.