The Vital Importance of Fund Selection and Lessons Learned from Long Experience

Tuck Meng Yee, Head of Investment Solutions Asia at fund distributor Allfunds, knows just how vital it is for Asia’s high-net-worth investors and intermediaries to select the funds they invest in wisely, amidst a proliferation of choice the world has witnessed in the past two decades and more. He gave a presentation at the Hubbis Thailand Wealth Management Forum in Bangkok to explain the principles and how working with Allfunds can help achieve more optimal outcomes for HNWIs.

“Fund selection,” Yee remarked, “is perhaps one of the toughest jobs in the investment world for investors and for intermediaries.” For intermediaries, he added, the end-clients might have many different needs and resources, they will have different risk profiles and expectations, different family considerations, different expectations. And once funds are selected, the intermediaries are sometimes faced with a lack of support from the fund managers who had promoted their funds in the first place.

The HNW and mass-affluent investor market is different from the institutional investor market, Yee continued. This category does not invest so regularly, they might not have a deep understanding of the need for diversification, they have modest or little support, they have limited understanding of the investment and markets, especially the more esoteric varieties, and they might not be transparent in their approach to the advisers they do have. Similar challenges exist for many of the wealth management intermediaries, especially the smaller firms who increasingly need the support of larger providers such as Allfunds.

Step back and decide

With that, Yee mined down to the detail of the fund selection process, noting that there are three core elements, namely quantitative, qualitative, and operational. 

Quantitative focuses on the numbers, for example, length of track record, annualised return compared to a benchmark and also to peers,  volatility, drawdowns, and performance attribution.

Qualitative involves an assessment of the investment process, the investment team, the investment outlook and portfolio construction. And operational focuses on the structure of the fund, the separation of functions, as well as the risk, settlement and payment protocols.

Painting by numbers…

Commenting on the quantitative aspects, Yee noted that numbers are like paintings, with much of the appreciation determined by the interpretation and context. And returns must be compared not just to the market but also to their peer fund managers, so selecting the right peer group is also both vital and very difficult.

“There are so many difficult areas to navigate,” Yee observed, “and so many nuances within each of these areas.”

Focusing on the operational aspects, for example, Yee noted that once the investor has a grasp of the quantitative and qualitative aspects, they need to know whether the fund offers a framework solid enough to offer reassurance that money and assets are managed safely, they need to understand who has control over the movement of cash, where the cash is kept, and where are the assets are custodised.

“If, for example,” he remarked, “the custodian goes out of business how long would it take to get the assets back and think back only to the global financial crisis to realise this is a real issue to consider.”

What really matters…

Yee then went into considerable detail to look at some hypothetical examples of fund analysis based on the three critical criteria he had outlined. “So, what really matters?” he asked rhetorically. “Intermediaries must communicate their experience and how it impacts their understanding of the markets, which are not the same as five or 10 years ago. That communication is important because it is vital to give your clients appropriate transparency.”

He clarified what he means by ‘appropriate transparency’ as it should be offered by intermediaries. “I mean that the clients come to you for advice and to offer that you must know their backgrounds, so you can offer them the appropriate level of key information to help them make their decisions. One key factor also is diversification of their portfolios, and again to do that you need to adapt your language to the target, so they understand clearly. Recently, for example, I had to explain the wind turbine business hardware and supply chain to the family office of a software developer, and I employed ‘stack language’ to explain it, and not only did it keep their interest but they understood what I was saying more clearly. Communication is vital and how you communicate is just as crucial.”

Keeping on top of change

He also stressed the importance of ongoing communication and fund monitoring. “Whatever your initial premise might be, the fund moves over time, the market moves over time, so you need to be on top of that, you need to be on top of all the usual metrics, and you need to use all sources of information, and alternative data, enabled by technology.”

Yee concluded by explaining that as a long-established, highly professional, well-reputed funds platform, Allfunds offers the types of solutions that intermediaries in the modern world of wealth management need for their businesses and their clients. “That,” he said, “is why we are today the world’s largest third-party fund distribution platform and growing so rapidly in the Asia Pacific region, where we are addressing the needs of numerous major and boutique banks, advisers, asset managers and intermediaries.”