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Citywire Montreux Fund Selector conference – May 2012

‘Fund Hunting’ by Jon ‘JB’ Beckett, CISI Senior Reviewer

During 9th – 11th May I had the pleasure of being invited again by Citywire to its fund selector

conference at the Fairmont Palace in Montreux, Switzerland. During the next 3 days, overlooking

Lake Geneva, I would interview 12 fund managers. I can now share my notes from the event.

As a fund analyst for over 12 years; and a CISI senior reviewer for the last few, I was proud to attend

the event as a CISI delegate. This had various benefits 1) I could speak more candidly than would be

possible for my current employer (one of the UK’s largest banks) 2) I could promote awareness of

the CISI to a largely alien audience and 3) I could collate my notes and share them with fellow CISI

members, many of whom also net fund buyers and asset allocators here in the UK and overseas.

The event itself brought together around 120 such fund selectors, gate-keepers and analysts from

across Europe. Between them nearly half a trillion Euros in assets under management, a broad

collegiate from private banks, wealth firms, fund of funds, retail banks, family offices and so on. The

event was broken up over 3 days with main sessions discussing the woes and wherefores of the

global market (‘the big picture’). Unsurprisingly the atmosphere was somewhat dominated by

opening proceedings around the Europe courtesy of Dr Andrew Lilico of the Telegraph but also a

positive note around Russia; courtesy of Liam Halligan of FT and Telegraph fame, and the ‘TIDES’ of

change by Dr Graeme Codrington. All of these sessions proved very well presented and insightful

but, for a fund analyst at least, merely intervals to the main job at hand: interviewing fund

managers. I pick up my delegate pack and pass (quickly scribbling ‘JB’ above Jon Beckett).

What this rambling isn’t; is your atypical fund manger assessment following some sort of tried and

tested ‘4 P’ analysis (People, Process, Portfolio and Performance). If it were then this paper would

easily run on for far more pages and I challenge any fund analyst to honestly go through the

conventional format with such a short window with each manager. If you did then you would

probably pay lip-service; at best, and miss the key points at worst. This means you won’t read too

much of turnover ratios, yields, portfolio concentration or active bets unless absolutely relevant.

Crucially some of the manager interviews didn’t necessarily focus on one strategy and, besides,

writing with less structure feels a little less like my day job.

The Citywire format is quite simple but brilliantly executed. Take around 100 fund selectors, some 30

or so fund managers, give each fund manager a room, one next to the other, over 2 floors of a very

grand hotel and then mash them all together in a series of workshops of around 40-45 mins in

duration. Each workshop session typically has a fund manager, 2-3 supporting colleagues and up to 6

fund analysts. When time was up there would be the familiar ‘knock knock’ at the door and you

would be quickly kettled to the next workshop. 3 workshops then lunch, 3 workshops then dinner.

Fast, intense and highly structured with very little time for chit chat or to reflect. It is for that very

fact that you have to wait until after the event before you can truly assess the managers and as I

write this paper I am also going back through my notes for the first time since Montreux. Being a

Scotsman in Europe did give me a language advantage (some may beg to differ) to get my questions

‘in’ but it was also a great opportunity to bounce off other fund analysts. Lastly my interview

approach is to study the charts packs after the interview and focus on the fund manager as he

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recites his planned pitch. I’m looking for obvious ‘tells’ where he is relying on a script, saying

something he doesn’t fully believe or for signs of real conviction.

At the end of each summary I will, somewhat frivolously, indicate a manager score. To not offend

the establishment I will not default to the traditional A-AAA moniker but instead award the ‘Beckett

B’s’ B?= inconclusive, B=just okay, BB=good and BBB=I’m investing tomorrow. These are of course

cannot be bona fidei fund assessments since there was no proper RFI nor due diligence conducted;

simply a first impression from the interview and information provided by the fund manager.

Day 1 starts around mid-day; after a 5.00am start from Edinburgh, but somehow flying from

Scotland to Switzerland means I always get there late on day 1, no lunch, no coffee, and I tend to

miss most of the opening address. I barely have time to grab a coffee and I’m ushered into the first

workshop of 3 workshops scheduled for day 1. Stumbling up the flight of stairs, level 2, level 3,

where’s Amundi? (I’m trying to scan the provided map, while holding a coffee and my bag) ahh here

it is. It may have helped but it was only on day 2 that someone pointed out that the fund managers

were all situated in alphabetical order. Ahh yes... bugger.

[We break from the main session and head for the first workshop, up the stairs to the third floor,

down half a cup of white coffee in the foyer, no snacks, no lunch, very hungry..]

Day 1, Manager 1: Hiromitsu Kamata, Amundi, Japanese Equities: The Pitch ‘How to Unlock Value

from the Japanese Equity Market’. Most fund manager presentations take the same format, a

product specialist or head of sales will run through the company, usual introductions and

backgrounds yada yada and give a basic outline to the fund strategy. In this case this followed what

is normal for most Japanese funds, a Europe product specialist plus a Japanese fund manager. With

respect to Kamata-san then his English was actually very good with only the occasional lost in

translation moment. It was then to slight annoyance that the product specialist couldn’t curb his

own enthusiasm in jumping in. I appreciate that I was probably the only person at the table where

English was my first (indeed only) language and that English spoken with a Japanese accent does not

necessarily gel well with those used to listening in English in an English, American or otherwise

French accent. I digress, so what of the fund and Kamata-san? Well, as I have come accustomed to,

Kamata-san comes across as your fairly typical indigenous Japanese manager: conservative in the

level of risk he wants to take, polite, softly spoken, and modest in both outlook and performance to

date (quite a contrast to US-based managers). The main message he wanted to convey was that

many Japanese stocks are cash-rich; trading at large discounts to real value, and that the culture

among Japanese boards is changing and starting to release more profits back to shareholders as

dividends. Kamata-san stated he was the most conservative fund manager in Japan, particularly

value-biased relative to the TOPIX (his price to book of 2.5x versus 1.66x of the index). The fund itself

was promising a 2.2% dividend yield with prospects for more in the future. That yield is hardly going

to sway a UK Equity Income manager but diversifying income is a growing discussion and Japan isn’t

as far off the US as some would presume. An average holding period of around 3 years (or net

position turnover of only 30% p.a.) certainly seemed consistent with a value approach; the 60%

turnover ratio quoted caused some confusion but as it transpired that figure was reflecting trading

activity in and out not the outright long position. Named stocks were few but refreshing that the

manager shared both positive and negative stories. Time for another question.. knock knock.. That’ll

be a no then. We ended with polite handshakes and half bows (why do I always feel the need to bow

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and say domo arigato gozaimashita to Japanese managers?!). Thankfully my bow was awkwardly

small and my pigeon Japanese confined to internal monologue only.

In terms of ‘reading’ the manager, Kamata-san is much like other Japanese managers I’ve met,

difficult to read. Japanese managers tend to either have no expression or habitually smiling with

little in the way of hand gestures or obvious ‘tells’ (that smile rarely is a sign of happiness but an

almost doctrinal etiquette). However eye-contact was generally good, he appeared open in his

answers, enthused to go into detail. As Japanese managers go he was friendly and open. Overall the

idea of a value-come-dividend play in Japan appealed, the manager seemed to have a sound

approach and my only concern is that an over-conservative approach could make returns less

appealing to the retail investor. Overall=BB.

[Up the stairs to the fourth floor, glass of cola, small pastry, slightly less hungry..]

Day 1, Manager 2: Jesper Madsen, Matthews Asia, Asia Dividend Fund: The Pitch ‘Seeking

Dividends from Asia’s Growth’. An Asian specialist fund via a San Francisco team may seem a little

unlikely in Europe but it’s typical fare back in the U.S of A and California is as close to Asia as London.

The presentation opened in a typical US fashion, glossy but friendly… Matthew’s base in Asia is

roughly $18bn so well established, investing both growth and growth-income strategies. The fund

itself goes back to 2006 so offers plenty of track record; although I would generally focus on post-

2008 numbers. Importantly the fund does invest in China but only via Hang Seng-H and some USD-B

shares and so best to look at Matthews for diversified Asia Pac rather than as a China specialist per

se. The team typify the strategy as ‘long-term, bottom, non-benchmark’ (thankfully ‘absolute term’

was not explicit if perhaps implicitly suggested). Jesper Madsen targets growth in dividend versus

growth in earnings and echoes of ‘cash-surplus’ from the earlier Amundi meeting popped into mind.

As is typical of most US teams, Madsen could be yet another product of the CFA-factory but his

European background tempers this and pleasingly his academic background gives him more of an

economic rather than an accounting persona. He initially kicks off the presentation by being a little

over-reliant on the pitch pack; while stating some fairly obvious top-down facts about Asia. As ever I

still seem to unsettle the fund manager when they see I am studying him more than the charts. He

then starts to move onto dividends and things get a little more interesting. The over-arching idea is

that Asia has lagged outright but likely to catch and overtake going forward. An awkward point was

Madsen’s push of ‘higher growth and higher dividends’ in % terms and this I picked him up on. When

pushed he agreed that the consensus is that Asian industries will mature and will see slowing growth

replaced by stronger income. Good, now the conversation starts to add-up and get away from what

was initially a slightly glib ‘cake-and-eat-it’ view. One thing Madsen said that I did like was that ‘beta

does not pay’ and he also noted that a higher % of larger Asian companies pay dividends compared

to the US. Certainly a target dividend yield of 4% seemed attractive when the S&P500 is struggling to

pay more than 3%. He’s talking here about ignoring the index and searching out dividend

opportunities by not weighting along with the market. In terms of approach Madsen selects yield

‘available today’ with one eye on the ‘3-year growth outlook’ through what seemed to be a fairly

typical CFA-esque dividend discount model but I may be doing him a disservice without more detail.

The conversation around Japan was very consistent with Amundi with the view being one of growth

dividend ahead of earnings dividend growth. This is relatively small boutique and we’re not talking

JPM in terms of people or research base so if that’s what you want then best to look to your JPM

and Templeton. There’s no engrained risk-management process or quant overlay; for a core equity

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fund that might be a problem, but I’m agnostic on the former; sanguine on the latter for this type of

fund. You also get a sense of mobility and nimbleness from Madsen’s approach that can be lacking

with the larger players, supported by that absence of benchmark weighting. Madsen does talk about

taking some caution and playing the probabilities but it’s clear he hunts the dividend almost single-

mindedly and therefore not cap-biased, which generally bears out in his portfolio splits. The obvious

danger is that he is then caught out by a top-down shift. However his economic training seems to

engender him with enough savvy to see the big trends; even if he refuses to be overly distracted by

them. Knock knock...

In terms of ‘reading’ the manager, Madsen had a little of that US ‘gloss’ and appeared well practised

in the art of presenting his fund. At times there were small ‘tells’ where he seemed a little irritated

at being cornered on his dividend growth assumptions but generally confident when talking about

the portfolio. I generally find that US-managers hate being interrupted and prefer a closing Q&A;

whereas European managers are less structured and more laid-back. Madsen engaged with strong

eye contact and hand gestures but some of this will have been instilled. Overall I was wary of a US-

managed Asia fund but the dividend discipline and Madsen’s conviction won me over. Overall=B.

[Back down the stairs to the third floor, coffee, running late, small unidentifiable sweet, ushered into

the next room.]

Day 1, Manager 3: SooHai Lim, Baring ASEAN Frontiers fund: The Pitch ‘Investing in Undiscovered

Asia’. By the third meeting my mind was firmly up to speed and full of Asia ideas from the previous 2

workshops that morning. This really helps a fund analyst to make comparisons but also to pick up

themes and re-use them as challenges. By the end of the morning I will have digested Japan and Asia

with or without it. SooHai Lim was another CFA and worse to boot an Accountancy graduate, oh

dear. Although Lim came across as very personable; his CFA training was abundantly clear. I am not

saying CFA is bad but for Asian equities where you quite different accounting and corporate culture

then CFA dogma is of less use. I’ve decided that I much prefer economists running Asia money over

accountants. How much this is to do with own personal bad CFA experience I can’t say. However to

my surprise Lim did show a good touch for the top-down, highlighting the political dynamics and

opportunities in Singapore, Malaysia, Indonesia, Thailand and Philippines.. Underweight South

Korea.. Very much a ‘tiger’ allocation capitalising on the expected explosion of the middle classes.

My only area for concern was his ambiguity when it came to the role quant screening had in his

selection. There was a clear overlay there but Lim seemed far from clear as to how and when it

applied. Just as we start to get into some detail around process... Knock knock...

In terms of ‘reading’ the manager, Lim didn’t have too many ‘tells’ although he was clearly

unaccustomed to that very ‘European’ persistent style of questioning. At times he was a little over-

scripted in terms of using the presentation pack but he did show an immersed knowledge of his

market and so unruffled when conversations developed out of sync with his rehearsed presentation.

Eye contact and gestures were generally good albeit less polished than Madsen; (given the proximity

of meetings and strategies it was hard not to make a comparison). Lim was very much an Asian

manager with a US-tilt to his English; very Chinese-like, but spoke with enough sincerity to sound like

a local talking about his local market. That’s something Madsen, as a Euro-American, would always

struggle to pull off. Overall Lim seemed competent at treading a well trodden approach. The only

blip was during the quant discussion when Lim was less than comfortable talking about how quants

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related to this process. The process of stock-picking appeared less focussed than Matthews clear

dividend screen. It would be churlish to also express caution simply because it’s Barings, and it’s

Asia. More importantly what stood out was Barings’ broad locally based and largely indigenous

research base. Probably a big commitment cost-wise but impressive nonetheless. Overall=B.

Day 2 is always tiring and began at 7.00am for breakfast with views over Lake Geneva, then a

9.30am session by Liam Halligan on the merits of Russia. It was a fairly charismatic presentation

although Halligan looked as if he had been partying harder than some of the delegates but I put this

simply down to his laid-back semi-celeb demeanour. Handily it kept emerging markets in the

discussion. By about 10.30am we were into our next round of workshops.

[Back up the stairs, fourth floor, out of breath and running behind so no stop for snacks or drinks

before the first workshop of the day]

Day 2, Manager 4: Polar Capital America fund: The Pitch ‘Is now the right time to being vesting in

North American Equities’. This was an impressively quick, manic session to kick Day 2 off. The fund

managers in this case being Andrew Holliman (ex-Threadneedle and Baillie Gifford) and Richard

Wilson (also ex-Threadneedle). Holliman is a well known retail name in the UK with lots of

experience; (Wilson less so and more institutional) lots of past ratings and accolades, coupled to a

very bullish view on North America. After 6 minutes all introductions and background chat have

been completed and we’re well into the fund process.

The fund is described as all-cap, value and bottom-up; (albeit some top-down) approach. The usual

yada yada is covered about aligning fund manager with customer and background blah blah. More

pertinently Holliman and Wilson use up 5 minutes explaining why they left Threadneedle to join

Polar. In short it seems to avoid non fund management roles and general bureaucracy that comes

with a larger firm. Fair enough. Both managers have extensive sector research experience and take

ownership of all stocks going into the fund. This fund is pretty aggressive in that it runs a

concentrated portfolio of around 40-60 positions; with very few low conviction positions. The team

are prepared to zero weight positions with no conviction. This is all very boutique-sounding, by

avoiding small positions that do little for diversification but can increase fundamental risk. It also

makes the portfolio more nimble but ultimately more volatile to benchmark/peers on a short-term

basis. The fund aims to achieve a 5% gross performance target based on 4% historical gross returns.

Bullish stuff and the theme very much around achieving absolute returns. The team highlight the

short-term myopia of the US manager; this fund takes a traditional value 3-5 year horizon. The team

look for companies quoted below intrinsic (discount) with strong free cash flow, to buy at discount

and wait for the re-rating from the wider market. What is interesting that 75% of the initial stock

ideas come from the team’s quantitative screen; with 25% from fundamental research. This is

probably reasonable given the set-up of this fund; its smaller resources overall and arms-length

research approach. With 40-60 positions then a) the quant screen producing 30-45 positions better

be good at avoiding value traps and b) the 10-15 positions from qualitative analysis would be a key

area to focus on in terms of assessing the team’s alpha generation. A 20% drop triggers an automatic

review; the strong focus on valuation means that the team may be more inclined to follow and buy

into a falling stock (E.g. Merrill Lynch). Typical of UK managers, the team were less inclined to want

to discuss too many ‘bad stories’.

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In terms of ‘reading’ the manager(s), these guys were well polished, fast and confident. Where they

showed a little hesitation is in questioning but only in as much that it seemed to annoy them by

interrupting their pace. The other was a momentary hesitation about the interaction of the

quantitative and qualitative screening process and the contribution to performance of stocks from

the quant screen versus the qualitative screen. The fact the fund hasn’t been running long (6

months) gives the team time to tweak their story albeit it means buying in the meantime is

something of a leap of faith. Both managers were clear to reaffirm that both screening methods are

brought together before final stock picks are made. Once back in the portfolio then both managers

again appeared confident and knowledgeable although the lack of company anecdotes shows these

managers are not necessarily spending lots of time (or money) visiting companies.

Overall I have a soft spot for Polar; mainly on the back of an insurance and reinsurance market fund

it used to run as a UK domiciled OEIC. My indecision around picking a US fund manager has been

whether to choose a US based house, which are often to driven by style-cap and forget about net

returns back to non-Dollar investors; or a UK based boutique that lack analysts on the street means

the manager may need to rely more on arms-length research. However in Holliman and Wilson I see

plenty of conviction; motivation, with a strong research approach that is now less curtailed than at

Threadneedle. The team want to keep this fund small and nimble and will therefore soft-close the

fund sooner than your regular retail juggernaut. The approach is no-frills; and potentially low cost,

with plenty of buy and sell discipline and a top-down overlay that assesses each stock in context to

the business cycle. It’s very straightforward, 3-5 year buy and hold with low turnover, thus easy to

follow, easy to decompose. Overall=BB.

[Back down the stairs to the third floor, quick coffee, running even further behind, small cake,

ushered into the next room.]

Day 2, Manager 5: Bluebay Emerging Markets Corporate Debt fund: The Pitch ‘An Asset Class that

has Emerged’. The general tack taken was to push the asset class rather than any KSPs around the

approach of the fund manager. The manager on this occasion was the Russian Polina Kuryavko.

Given her surname then I will refer to her as Polina hereon in a bid to reduce typographical errors.

The fund in question is long-only; reserving her long-short approach for her standalone hedge fund.

The fund is running about 5.5% from its long positions (which most income investors would welcome

in the current market). The fund manager does not expect to see double-digit returns going forward.

Polina looked to highlight 23 ratings upgrades at the sovereign level (or 5:1 upgrades versus

downgrades) and generally lower leverage and default rates in Emerging Markets compared to US

High Yield. The approach is quoted as ‘bottom-up’ with sector outlooks to tilt the portfolio. Her

biggest overweight region currently is Latin America where they expect to see rating upgrades; with

a high concentration in Energy and Utility issuers, and M&A candidates in the Tech space.

A good point raised was that the Emerging Corporate space is still young and therefore the asset

class is too small to be separated into high yield and investment grade. Polina expects within 5 years

there will be more distinction and general expansion of the sector. Another area highlighted was the

risks in local currency debt versus hard currency (US Dollar) debt. Although it makes sense that the

quality of local accounting is variable; invariably reduces the manager’s available opportunity set.

What was interesting was a growth in EM debt Eurobond issues but the size remains small. It is

therefore unsurprising that the fund is well diversified both in terms of region and on a sector basis.

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One area for some confusion was a strong reliance on US rating agencies when rating EM countries.

There was a vague inference to an internal score but this seemed light on structure. When pushed

on this point Polina seemed slightly less assured (or perhaps irritated) in her responses.

In terms of ‘reading’ the manager, Polina came across as very charming. That can sometimes be an

obstacle to reading for any tells. Generally her eye contact was not great and she liked to read from

the chart pack. However during Q&A she appeared relaxed, with good hand gestures. What was

particularly good was that Polina invited in questions at the start of the session. Overall she came

across as very knowledgeable and experienced at both stock and macro level. She knew her subject

even if nothing shone about her general approach and process. Overall=B.

[Knock knock, back up the stairs to the fourth floor, small glass or orange, quick hello with Pietro @

Citywire, no snack, ushered into the next room.]

Day 2, Manager 6: Skandia Global Futures Fund: The Pitch ‘The Portfolio Benefits of Managed

Futures’. This struck me as an unusual pitch with a sub-advisory between Skandia and Aspect

Capital; with Anna Hull presenting as ‘proxy’ manager. This is a managed financial futures fund,

UCITS 3 compliant. Aspect is a futures specialist and has a 13 year track record in this space, London

based. General introductions and company backgrounds follow, blah blah… It becomes quickly

apparent that Skandia’s add-value is precisely zero bar providing the distribution platform for Aspect

but clear Aspect would equally love to tie-up with other firms.

Aspect are your usual medium-term trend followers, cum technical traders in the futures space. This

is common approach with Aspect looking for trends, starting to pick up trends as short as 2 week

trends and then build out positions if/as the trend grows for more than 2 months in length, buy and

hold, taking long positions. They seek to hold high numbers of different positions from around 120

different markets (individually and not pairing say price anomalies from one market against

another). They look for the trend in the futures market rather than the spot market. There is no

arbitrage taken here. In terms of technical analysis they a fairly atypical moving average

convergence-divergence system.

What’s new is that they have taken on the extra burden of running the strategy as UCITS compliant.

This will present the team with some limitations as well as trading cost (E.g. the Swap cost 50bps for

the UCITS fund). The strategy is mostly traded on exchanges with the exception of currency

forwards. From a risk point of view it was slightly disconcerting the team used a single counterparty

(New Edge) on an Index swap. There has been some fear around OTC counterparties following MF

Global and the team believe they have a maximum of a single day’s profit and loss. UCITSIV/IOSCO

may ultimately drive firms like Aspect into entering cleared and exchange quoted Swaps.

In terms of ‘reading’ the manager, there wasn’t much point as Anna Hull was there only as ‘proxy’

but she showed belief and knowledge in her field. Ultimately Anna was very articulate, warm and

open to questions but this was much more of a sales presentation than a fund manager review. This

was very apparent by the lack of specific trade knowledge or discussion around current market

dynamics, prices etc. As such it was impossible to get a proper feel for this fund. Overall=B?

[Knock knock, time for lunch, usual chit-chat, subject matter rarely diverges off shop as the host fund

manager takes the opportunity to push their pitch down your throat faster than the food on offer.

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The trick I find is to fill-up whenever possible as you are never too sure if you’ll get the opportunity

later.]

Day 2, Manager 7: Investec Emerging Market Debt: The Pitch ‘Risk Asset or Safe Haven?’ The fund

was presented by Thanos Papasavvas, Investec’s strategist for the fixed income and currency team.

This was a great opportunity to join some dots between this fund and the BlueBay fund from earlier

in the day. Again the usual trivialities and background was provided but commendably shorter than

most other managers. Thanos was then quick to get into the meat of the macro outlook on EM debt.

Country-wise the key drivers given were China, India and Indonesia. The central story, unsurprisingly,

was the usual diversification and correlation angle via EM currencies and EM Debt. Here then the

key difference to BlueBay was Investec’s willingness to buy local debt in local currency rather than

US Dollar as preferred by BlueBay. Thanos was quick to note that local currency EM debt is the

riskiest in the portfolio. In terms of assets, Investec is managing somewhere in the region of €500bn.

Investec aims to achieve a broad opportunity set: local currency, hard currency and long-short

strategies. The fund is then split 50:40:10 between these strategies with a degree of latitude around

these weightings. The team’s beta local currency strategy quotes a running yield of just over 5%; and

duration of less than 1 year sounds tempting. No detail was given to what duration was being cited

but that perhaps misses the point in a fund so heavily focussed on currency plays and hedging out

duration risk. Consequently I didn’t push the point but I would clarify if I followed up on this fund.

The team’s absolute return ‘alpha’ strategy takes long-short EM positions against US Dollar with low

beta (benchmark) components. For both funds the team aim to hedge out all duration risk leaving

only currency risk. The third strategy is simpler and trades EM debt in US Dollars (‘hard currency’)

and therefore carries no currency risk per se but does have duration and credit risk. Like BlueBay,

Investec note the lack of liquidity in the local currency corporate market.

The manager’s risk assumption was all focussed on simple volatility, tracking error, beta and alpha.

Given the fund’s bold statements of ‘absolute return’ there was a conspicuous absence of actual

downside measures. Pushing this point yielded only a description of the team’s risk process that

measures at the trade level. There was no aggregate view of the fund’s downside risk. Puzzling.

The process is described as bottom-up with a blended 50:50 quantitative and qualitative currency

process. However the portfolio managers and analysts are also split my geographic region. The

process ranks each country (sounds very top-down to me) that is then blended by a qualitative

process that also ranks each country from the issue up. The average weight of the quant and the

qual’ gives the overall score for each currency. For the bonds themselves the weighting is 70% qual

and 30% quant. The quant model itself has been running since 1997. Thanos then applies a top-

down view to decide which countries the team overweights and underweights against the hybrid

process. Thanos was keen to not rely on macro trending skewing the scores but instead use top-

down to ‘tilt’ only. There was also talk about risk-budgeting at the overall and local level. At times

the message was a little contradictory but it became a bit clearer through the interview. Bottom-up

(capital B) with top-down (small t). Curious…

For most of the session it felt more like a segregated portfolio pitch (and perhaps it was) and this for

me detracted from the funds in focus. I have to remind myself that my European peers are used to

more complexity and flexibility from their bond managers. We didn’t actually start to cover the

funds until about 5 minutes before the end of the session. In terms of actual fund offerings then, the

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team offers a Global Bond and a more aggressive GSI portfolio. The first fund runs to country

constraints; while GSI can invest in High-Yield and most countries, described as the ‘go-anywhere’

fund. Global Bond tends to invest 2/3rds in developed sovereign and only 13% in EMD; with the GSI

holding a more diversified spread with a third in EM, 20% in High Yield, 20% in Investment Grade

with a Duration of around 4 years. Overall both of these funds are run ‘long’; while the team’s multi-

strategy offering is more opportunist around currency and debt arbitrage.

In terms of ‘reading’ the manager, some of the answers sounded a little wooden and flimsy in places

(more balsa than oak). Thanos appeared rushed; a little scripted at times, and susceptible to

tangents. However once we got stuck into actual country tilts then Thanos’ confidence came

through with a good understanding of the fund’s tilts by region. A big problem for me was that

Thanos wanted to talk more about strategies rather than the net performance or positioning of the

funds. In effect he was trying to distil a 5 hour seminar into a 45 minute workshop. Knock knock.

Ambitious in theory; a little messy in execution.

Overall the message was ‘stability’, the team has strength in depth with broad research reach,

there’s continuity in the process and the team. However many fund team’s can say the same and I

would really need to get to the bottom of this fund’s upside and downside profile and to better

understand the fund’s fixation of ‘alpha’ over ‘beta’ and how that translates back to the customer.

Overall=B.

[Back up the stairs to the fourth floor, hastily poured coffee, burn hand in process, no chit chat, into

next room]

Day 2, Manager 8: State Street SPDR ETFs: The Pitch ‘Investment Ideas with Exchange Traded

Funds’. The overview was given by Scott Ebner, head of State Street’s ETF product development. By

this point and both fund managers and fund analysts can start to wane; especially those who failed

to get enough sleep from the night before. This became clear with a couple of MIA fund analysts,

which I tempted to diffuse by suggesting that 2-3 fund analysts do, on average, tend to die at these

events. The majority of this presentation was really about product, i.e. why to use ETFs as an

investment vehicle over traditional funds. The meeting was actually very good and insightful but

because this was basically ‘passive’; with no fund manager to review, then I won’t labour you the

usual summary nor assign a rating.

[Knock, knock.. onto the last workshop of the day, the SPDR session managed to run-on and I arrive

late]

Day 2, Manager 9: LGT Commodity Active Fund: The Pitch ‘How to Generate Alpha through Active

Management in the Commodity Sector’. The introductions were fairly laborious (perhaps they felt

that way after 5 previous workshops that day) but soon we were into Sander Bressers’ section,

manager for this strategy.

This commodity fund is investing in both hard and soft commodity derivatives. Much of the first part

of the meeting was focussed on the asset class story; (unbeknown to my host I also had to leave

promptly due to the APFI session planned for 4.30pm) and as such my focus was not what it should

have been. To distil Sander’s asset story as follows: diversification, demand story from growing

population, supply side issues are pushing prices up, rising needs, higher demand = higher prices and

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China stories were all present and correct. At the fund level drivers discussed include playing

contango and backwardation spreads, deriving alpha (read outperformance) from seeking out low

correlation between assets. Sander then broke into specific markets such as Corn and Soya bean;

with surprisingly little about Energy or metals. As we get into some Q&A there was the usual [knock

knock] but the meeting runs over. I then note I have only 2 minutes to get back for the APFI session

and so make my excuses (head down) only to be met by severe stares from the LGT head of sales.

Overall very little about the actual fund process or performance was discussed in the meeting and

we ran out of time to discuss in the Q&A. In terms of ‘reading’ the manager, Sander was pleasant if

not engaging, informative if not convincing. Eye and hand contact were not great and he displayed a

slight nervousness. However this is being over-critical and in truth there was little time to get to

know Sander or his fund. LGT in many ways is itself like a very large family office and used to running

big assets for the Lichtenstein royals, other dynasties and discrete organisations. Therefore LGT does

not shout or aggressively market; nor does it tend to do things badly and it would be worthwhile

looking into this fund further. I’m intrigued. Overall=B?

[Run down stairs, into the Salle des Congrès to meet up with the APFI guys. I arrive with plenty of

time to spare to run through the format]

Day 3 began early with views over Lake Geneva and breakfast with Laurence; Citywire el Primero,

and APFI co-founder Roland Meedter. The last session by a Dr Graeme Codrington was all very big

picture and his ‘T.I.D.E.S of change’ certainly worth a Google. As the session ended we moved into

the last 3 workshops of the event. The home stretch...

Day 3, Rothschild European Equities: The Pitch ‘Crisis, source of Opportunities for High-Conviction

Strategy’. The manager presenting was Philippe Chaumel. It’s clear the previous night was too much

for some and only I and one other analyst (Riad from Sanlam) turned up, to the understandable [but

polite] disappointment of the fund team. However we make up for it by having one of the best

workshops of the 3 days, both Riad and I taking full advantage of the captive audience.

Leading managers like Philippe are partners to the business and therefore jointly liable for client

losses. This sort of structure is frankly unheard of back in the UK and to be applauded although it

does expose one investor from the liability claim from another investor on the firm (a little like what

we have seen in UK Investment Trusts in the past).

The process is described as ‘high conviction’, taking active bets with high tracking error compared to

the benchmark. Put another way most long-term value managers tend to buy unloved discounted

stocks and then move slower (less turnover) than the wider market and it’s this that generates the

tracking error. Philippe and the team run pension funds and insurance company funds and boast an

array of accolades. It is fair to say this will create an institutional tilt to the way the portfolio is run.

The team of 6 is based in Paris, 4 analysts and 2 managers. The team has been working together for

6 years with many more years of experience behind them (Philippe has 25 yrs). The team adopts a

classic valuation process, seeking out intrinsic value without use of complex tools. In doing so, like

many high-conviction value managers, hey take a contrarian stance to the broader market. The team

targets net earnings (not gross) and thus take into account a company’s operating margin and

looking at profit after operating costs, taxes etc. Philippe moved quickly into sector specific stories

and identified Media and Leisure as 2 of the worst sectors in Europe. At the sector level Philippe was

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able to run through in detail sector-specific operating margins, costs, demand model, price direction

and marginal costs of production.

The process starts with bottom-up analysis; then adds some top-down considerations. The team

deliberately seek high risk premiums to go contrarian and are ‘long’ only. The team apply a screening

process to about 200 companies with each analyst conducting 10-12 in-depth reviews per annum. In

terms of active weight the team will go +/-10% at the sector level and no more than +5% at the

individual stock level. When pushed on whether Philippe would be prepared to zero weight certain

stocks; versus the benchmark, his answer was less than decisive. The team hold 44-43 stocks but

with no defined buy list of stocks.

In terms of performance Philippe makes an honest admission that the team tends to buy too early

and sell too early. This is typical behaviour for traditional value managers and causes me no concern

other than to know that the best returns will come from committing to this fund at a low point in a

depressed market and rotating into the second part of a recovery market. If you hold it like a core

and growth fund then it tends to lag in up markets and prove more resilient in falling markets but

not to the point you would stay vested versus a bond fund. In my experience if you look at these

funds on a 3-5 year basis then the see-saw effect tends to flatter the performance of value funds like

Philippe’s. Like Philippe the fund holder has to be disciplined with a target return and buy and sell

points. On the question of how many current positions were ‘buy’ and ‘hold’ then the answer was

less than clear; Philippe indicating that the team had trimmed overweight cyclical, with no precise

number given.

In terms of ‘reading’ the manager Philippe was clearly comfortable, both in his fund and his own

process and addressed questions head on; dropping into both macro and stock specific stories at

will. He seemed un-phased by the volley of questions from both Riad and I. Would it be fair to say

we over-compensated for the lack of attendees, perhaps but I came away impressed by Philippe’s

clear experience and insight into the European market. There were times he appeared quite scripted

(undoubtedly to aid language) and eye contact remained good throughout the meeting; using his

hands to convey strong imagery of his process. There were perhaps a couple of tells that showed

some nervousness but I suspect these were more pause to allow Philippe to translate some of the

finer points of his process/outlook. Knock knock...

Overall this is a simple, easy to understand, high conviction stuff. I like its lack of frills and add-ons,

all very French. It seems liberated by a simple pursuit of value and a portfolio that is on just the right

side of concentrated and yet safe from benchmarking. Of course you would need to do work at the

portfolio allocation stage to integrate this fund. However the combination of experience, compact

research team and refreshingly simple goals make this my best fund of the event. Overall=BBB.

[This time stay on the fourth floor, time for a coffee and some sort of petite tarte au citron, mmm

very nice, bit of confab with Riad with 5 minutes to spare before the next session]

Day 3, Manager 11: Martin Currie Global Resources: The Pitch ‘Around the World in 8 Trades’. It’s

nice [if weird] to travel all the way to Switzerland to then attend a workshop from guys that literally

work about half a mile away from my office in Edinburgh. Duncan Goodwin comes across like most

good UK managers, confident and articulate. Martin Currie is a relative small fish compared to some

of the managers in attendance; yet I have had a soft spot for the Edinburgh fund boutique. The

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funds come in the form of a long-only and long-short SICAV. The long-only product has a 7 year track

record.

The team has 6 members dedicated to resources, 4 of the 6 have 15-20 years experience. Like many

resources managers, Duncan came across from the Energy sector (Shell). Ken Hughes was a Steels

analyst, Matt Franklin joined from Schroder and has strong Industrials and Utilities experience.

Portfolio construction and research are separated. The entire team and the regional desks are all

based in Edinburgh. The small scale on the research side perhaps appears a little dwarfed by the

likes of JPM and Blackrock, which remain the leaders in this sector.

The team aim to identify inefficiencies in the market in relation to company prices. The fund holds

around 30-50 long stocks and around 35 currently. The fund hols only equities and does not engage

in CTAs and hence very liquid. The fund is market cap weighted and can sell the whole portfolio in a

couple of days without impacting the depth and resilience of the stock price. The fund takes a

bottom-up approach rather than a top-down view. Screening starts around 800 stocks and the team

look for company change indicators and commodity arbitrage opportunities at a global level

between regions. Less pleasing to me were the regular references to peer group positioning and

performance rankings, given the mixed-bag of strategies to be found. This was something I picked up

on and the rankings were quickly down-played. At least the use of sub peer-group was welcome.

Duncan appeared comfortable to get into the actual trades, unsurprising given the title of the

presentation. Areas/names covered included: PTT Group, Iron Ore company Rios, M&A activity, Thai

Energy etc. On Shale gas the team are taking a wait and see approach and look for indirect exposure

through the larger Petrochemicals rather than the high leveraged exploration companies. The team

then look for mispricing E.g. between the commodity spot price and the equity price for a

corresponding mining stock. No complex pair trading here but sound economic rationale. Knock

knock...

In terms of ‘reading’ the manager, eye contact with Duncan was actually quite poor. However he

began to warm in the Q&A and appeared to enjoy the conversation (no mean feat after 10 previous

sessions). Overall I liked Duncan by the end of the session; he has a well settled team, close knit,

compact and potentially low cost in Edinburgh. Ultimately Martin Currie the research scale of the

sector leaders but potentially can enjoy a level of nimbleness from fewer assets. In an asset class

with fund asset bubbles; and a lack of choice of managers, then I am interested. Overall=BB.

[And so... onto the last workshop presented by Cazenove, and back down the stairs (again) to third

floor, hang the coffee, grab a glass of water, once more unto the breach...]

Day 3, Manager 12: Cazenove UK Absolute Target Fund: The Pitch ‘A Leader in Generating Absolute

Returns’. The pitch has that typical UK ‘modesty’ about it that I’ve grown to know over the last 12 or

so years. However Cordell does have some strong returns to back up the claim and so I remain open-

minded for another 45 minutes. In knowing this is the last workshop gives you a boost of adrenalin

and you tend to find you can attack the last session as if it was the first day (unless of course you

were sporting a hangover and you have instead adopted a foetal position under a table). I didn’t

have a hangover although I could name and shame many who did (but I decide not to). Instead both

fund manager and fund analyst almost reach a giddy delirium, knowing that lunch and a well earned

weekend lies ahead. Steve manages various funds (and one seg’ mandate) for Cazenove but they are

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all complimentary and so does not cause me too much concern. The team runs the Target fund as

both UK OEIC and as a SICAV.

Cordell’s performance record was even more stand-out by the way it dealt with the falls in Q3 2011;

coupled to lower than average volatility, having taken over the fund in 2011. Very few absolute

return managers actually managed this and worthwhile understanding why that is. The process

carries across from HSBC to Cazenove and focuses on buy and sell signals in the business cycle. The

team were prepared to switch between defensive to consumer cyclical to catch the Q1 uptick. Again

since March the team shorted Industrials on the back of softening data. The fund takes tilts and

stances to the market like ‘short metals; long oil’ and ‘long mining; neutral oil’. On questioning

whether Cordell would take a zero weight on oil the answer was an emphatic ‘yes’. This is high

conviction stuff; the team may hedge but is not taking paired trades but instead adopting a decisive

long or short ‘view’. The undertone is very clear, this is an ‘absolute return’ fund all of the time.

The fund’s ability to flip the strategy is heavily reliant on prevailing liquidity and Cordell seemed

aware and comfortable around this fact. Similarly Cordell appears comfortable to work within IMA

guidelines and exploit the available 20% threshold into non-UK positions. Cordell will also exploit

M&A and IPO activity if opportunities arise but he nods that the UK market is difficult having

suffered from a poor performing short on Xstrata in the run up to the proposed Glencore merger.

Cordell then runs through a variety of different trades through 2011 into 2012, including why he is

underweight Media and shorting Industrials and Commodities. The reality is that the combination of

these trades only really makes sense to the fund manager and harder for the fund analyse to

attribute against the overall numbers. However Cordell comes across as open and I suspect detailed

information would be forthcoming.

Cordell and his team appear to lack a strict traditional risk-management approach; ironically that is

probably a good thing in terms of what he sets out to achieve. The bias to low downside; low

volatility should enable relatively easy monitoring for the investor. In terms of ‘reading’ the manager

Cordell came across as bullish, self-assured and confident in the process and performance of the

fund. Unwavering with strong eye contact; he was a little jaded at times (verging on disinterest) but

understandable given the schedule. Overall this is a proven process with compelling performance

and volatility track record and would be near the top of my list; especially given the mixed bag of

returns from other UK absolute return funds last year. Overall=BB. Knock knock...

[By now it is about 11.30am and all (well most) delegates re-group back in the Salle des Congrès for

Angus’ closing address. Then onto the buffet lunch, pick up bag and out of the hotel. Fortuitously a

shuttle is heading to Geneva airport early, I am not sure who should be on the list but I manage to

blag my way aboard by saying ‘Citywire, qui?’ The main shuttles are not scheduled until 3pm (too

late for my flight) and it’s better than walking to the train station. 10 minutes later into the drive to

the airport and the French driver gets a call and says there is a stowaway aboard (I keep my head

down and shrug my shoulders). We arrive at the airport nice and early with time to buy a souvenir

box of over-priced Swiss chocolates, for the wife, and negotiate the security area, then flight to

Heathrow, connector to Edinburgh and I eventually get back to the house for 11pm, collapse].

Reflections of Montreux:

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The buzzword everywhere was ‘absolute return’ and it seemed to follow me around Montreux, with

almost every manager touting it this year. Relative return management has become a pariah since

2008. I am fairly sure that this is 70% marketing spin and only 30% reality in some cases.

Bottom-up versus Top-down? Seemingly this year everyone was also a stock-picker; those with top-

down overlays downplaying the macro. Why? I suspect it’s because the industry is becoming more

attuned that asset allocation can be achieved passively. That and the sheer mess the macro situation

appears to be in due to the Eurozone. Perhaps I’m being cynical but not every manager I

encountered were textbook stock-pickers, in their process, whatever their marketing pack said.

Asia: Lots of positive sentiment; given the Eurozone is in the toilet and the US looking pricey then I’m

not surprised. Common themes coming through were around Malaysia, Indonesia, Thailand and,

curiously, Japan. Expanding middle classes and Asian dividend yields was something I kept hearing.

Emerging markets: Both in terms of Equities but also in terms of Emerging Market and Asian debt.

Various managers had their tilt to similar themes: corporate debt, local currency, hard currency and

actively playing the currency game. Russia was certainly discussed my Liam Halligan but less so in the

workshops. Instead Asia and Latin America were tipped; only one manager felt Brazil was/is an

overheating economy.

Commodities: Natural Resources and Soft Commodity themes stood out over the three days and

both LGT and Martin Currie warrant another look. If you buy into Emerging Markets then it would be

1-dimensional not to consider how commodities fit into that strategy.

Risk: Most fund managers have now embedded some sort of quant process by way of risk control;

yet few seem to grasp the net impact on their own process. Undoubtedly recent markets have left

many stock-pickers feeling somewhat exposed. Many managers have now added some sort of

quantitative overlay to their process to varying extents. Some seem comfortable and will integrated;

others more bolt-on and awkward, and for other managers it’s clear that quant screening remains a

necessary evil or a background noise, like a annoying fly in the middle of a fund manager interview.

On the wrist: It’s official, the Panerai has taken over from the Brietling as the US/UK fund managers’

des res oversize timepiece of choice at Montreux. European fund managers remain more reserved

(less showy) and tend to sport smaller Pateks, other obscure ‘manufacture’ or indeed quite humble

watches that are far less shouty in appearance. This in itself typifies US/London managers from their

European counterparts. Like their watches US managers are high-gloss and all about big facts and

figures in their marketing, process and performance. Londonites on the other hand tend to have an

air of quiet confidence (verging on smugness) that we should already know that London is where

business is done. The expectation is that investors should implicitly trust the ‘City’ with their money.

European managers, especially French are modest almost to the point of fault but show great

intuition. I would include Japanese and some Scottish-based managers in this group; albeit the Scots

even manage to be dourer than their French brethren (a true skill). On paper there are far fewer

European managers CFA qualified; yet they tend to have far greater years experience. Perhaps there

is something tragic about US fund management today; while European managers despite their

modesty show great attention to the small details, much like their watches. I am of course

generalising and being more than a little asinine. Freud would have a field day.

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Overall this was another great Citywire event; intense and rewarding, yielding more than one

potential fund buy to take back to Scotland. Happy fund hunting. JB

The views and the information contained in this article belong only to the writer and no warranty can be given for their

accuracy. These views have no association to any employer, Citywire or the Chartered Institute for Securities and

Investments (CISI).