Welcome to the new age of fund selection. Following years of disgruntled investors bemoaning high fees, which in their view equate to little added value, it’s time to wipe the slate clean and rebuild.
This, at least, is what Jean-Marie Mercadal of OFI Asset Management is attempting to do with the overhaul of his firm’s multi-management division.
The French group’s deputy CEO and head of mult-imanagement believes many investors are disillusioned by the fund selection industry so he has hatched a plan to win them back.
Time to win back trust
‘The challenge is to give investors, institutions and others, renewed confidence in multi-management which was wrongly considered by some to be simply about stacking up fees,’ he says. ‘We have to re-demonstrate that we can offer added value to investors at an competitive price.’
Strong words, but Mercadal is following through with action. Since last year he has taken significant steps towards his goal by introducing a new business model for his group’s multi-management process.
From his Paris offices the towering Frenchman, who runs €3 billion in funds of funds, says the plan rests on three main points: performance, costs and transparency. Simple, when you think about it, and Mercadal admits that his only regret is not having come up with the idea sooner.
With more than 25 years’ investment experience, Mercadal was part of the new wave of money managers that hit the French market in the late 80s at the time of the so-called financial Big Bang.
After almost 10 years with OFI Asset Management he is now revamping his group’s fund selection offering.
About 80% of the firm’s €3 billion in multi-management assets are focused on equities through the dedicated funds of funds they provide for institutional clients. The remaining 20% is allocated towards absolute return products.
So how does the new plan fit into this framework?
With the help of deputy CIO of multi-management Eric Bouffort, Mercadal has set up a structure that aims to combine the safety of a long-term solution with a flexible approach designed to react swiftly to any volatile market environment.
‘We thought about how we could improve our offering to institutional clients and concluded there were different areas we had to make progress in,’ says Mercadal.
‘The first was on performance, the second was on managing and reducing costs. The third goal was transparency, because with the new Solvency II regulations it was clear that multi-management was changing.
‘We also wanted to carry out measures which would allow us to make better use of some of the new tools on the market, like trackers that can access different sectors and themes.’
The two fund of fund processes
In a nutshell, Mercadal and Bouffort have split their fund of funds process into two distinctive groups: long-term mandates and tactical allocation strategies.
Each of their Luxembourg-domiciled funds of funds will have two thirds of their portfolio run by long-term managers through mandates while the remaining third will focus on more thematic-driven funds and ETFs.
His core manager selection approach has not changed, insists Mercadal, but the nature of each process requires different levels of research. ‘Either we use them on our tactical allocation or we feel we can give them a mandate. The latter route involves more thorough analysis.’
Within his equity allocation, €1.7 billion is dedicated to international strategies and about €1 billion to European ones, where the new approach has already been rolled out.
Initially he is focusing on his funds of funds’ core allocation and the group has two European equity fund of funds products on offer.
Mercadal and his team are currently working on their other core allocation to US equity and have signed up groups such as Edgewood Management and Byron Capital to run mandates. By the end of the process Mercadal aims to have six to seven mandated managers dedicated to Europe and four to five for the US.
But isn’t he worried about the inherent risk of handing over such a large part of his assets to a select few?
‘Just because we have core portfolios where we have six or seven managers it doesn’t mean our allocation will be static. On the contrary, we know there are managers who are good over long periods but still have distinctive styles.
‘There are times where their styles will favour the current market and other times when they won’t.'
‘So within our core portfolios there will be managers we lighten and others we add to.’
For example, if a value manager has gained 10% over three months you should aim to reduce them and reinforce your portfolio with one that has lost 10%, he says.
‘You have to have some flexibility and be able to react even with managers who are fairly stable. That is our job as fund selectors.’
Speed and flexibility
The tactical allocation portion of the portfolios allows Mercadal and his team to react swiftly to market headwinds. Using tools such as ETFs, says Mercadal, also enables them to gain exposure to themes they believe can offer attractive short-term returns.
This approach also allows him to keep costs down in an environment where there is tough competition to keep fees low to attract new investors.
Aside from the large ETF distributors such as BlackRock’s iShares and Lyxor, he also uses Market Vector, part of the Van Eck Global group, Source and PowerShare.
One essential role this portion has to play is to help balance out his funds of funds’ overall exposure.
‘We employ them in the first instance to compensate for a bias that our core portfolio has taken,’ says Mercadal.
‘Having everything on the one platform allows us to fine-tune the aggregated portfolio in real time.'
‘So if, for example, we decide that today is a good time to buy oil stocks but none of the core managers we have selected are invested there, we can compensate by taking a position in a sector tracker.’
So this flexibility is key to his process.
Another important element is transparency. Since the financial crisis investors are hungry for details about how he’s positioned in any given market. His aggregated portfolio boosts the level of transparency and provides a real-time view on how it is positioned to deal with market shocks or opportunities.
‘We have to buy on signals and if we believe there is a good rebound potential in an area like oil then we will act. ‘We have already done so on gold mines and Russian country trackers this year.
‘We’ve also moved quickly on banking trackers when the sector was really oversold. It was a tactical play as we don’t have a long-term view on the sector but we thought it was worth it.
‘We may have sold them too early but it still worked.’
Cracking under pressure
Currently, OFI multi-management is invested in around 120 funds and Mercadal has been following most of the funds’ managers for many years.
Mercadal continues to hold them for their disciplined approach and long-term style-driven strategy, he says.
‘They have a certain way of thinking that is always the same. They stick to their style and aren’t swayed by trends.’
For Mercadal, this is how you define a good manager, not by the short to mid-term returns but if they can last the distance.
‘These are managers that over the long term have generated returns through cycles that were more or less favourable to their individual style and at other times were singled out and pointed at but still stuck with their original process.’
On the other hand, the bad manager is one that cracks under pressure. One recent example springs to mind, says Mercadal. This particular manager was of note as there was no indication things were going to turn sour.
To this day, Mercadal says he still does not truly understand why the manager changed his proven approach.
‘He had been excellent since 2007, had anticipated 2008 and had a fairly prudent bias. He was part of a big investment house and they made him into a big player and started promoting it and subscriptions went up.
‘But this year he cracked as the market reached its highest point and he went long in March. Between March and May the market lost around 15% so he ate up all of his risk budget.
‘And when the market was at its lowest in May and the rebound came he completely missed it, so he did everything the wrong way round.’
As the fund industry has grown, the argument that fund selectors can add value by giving investors access to foreign funds that would otherwise be beyond their reach has become obsolete.
‘The added value of a selector today is not to offer access to an average fund manager based in Korea who has a sales rep that comes to France from time to time and meets everyone,’ says Mercadal.
‘It’s about having access to a portfolio in real time, so it’s like a portfolio of live underlying shares. In terms of fund manager knowledge we step it up a notch.’
Changes are coming fast within the industry, whether through Solvency II or the increasing pressure to keep fees low. Nevertheless, Mercadal believes the qualities that make a good fund manager transcend market cycles.
‘The art of managing funds is eternal in a way. If you were to take one of the big US managers from around 50 years ago and give them a fund to manage today I think they would still run it well.
‘Today’s proliferation of tools means you can do a lot more but the essence of the job remains the same: try to anticipate, use your common sense and diversify.’
Jean-Marie Mercandal's biography
The Paris-based manager began his career back in the 80s and is part of the generation of money managers that witnessed what is commonly referred to as the financial Big Bang.
Back in 1987 the UK led the overhaul of financial markets as Margaret Thatcher’s government liberalised the country’s stock market. Other countries soon followed, including France, as it aimed to maintain competitiveness and in turn liberalised its own stock exchanges.
While having no previous ambition to enter finance, Mercadal says his attention had been drawn to the industry following the Big Bang effect. A new wave of French money managers saw the light as jobs were created and opportunities arose. Following a placement at the Banque de Financement et Trésorerie, Mercadal officially joined the group in 1987.
After two years he moved to Banque du Louvre and was appointed CEO of its asset management division Louvre Gestion when it was launched in 1991. In 2003 he joined OFI Asset Management and now runs its multi-management business.
Earlier this year he was appointed the group’s deputy CEO. His interest in investment extends to his personal reading and Mercadal recommends:
- Lords of Finance: The Bankers Who Broke The World, by Liaquat Ahamed
- Debt, Deficits and the Demise of the American Economy, by Peter Tanous and Jeff Cox.
OFI Asset Management factfile
The French firm is owned by two large domestic insurers, Groupe Macif which owns 66% and Matmut with 34%. The overall group runs over €50 billion in assets and was founded under the name Ofivalmo in 1971. It offers both traditional fund solutions as well as multi-management strategies which account for €3 billion of its assets.