FUND BOUTIQUES & PRIVATE LABEL FUNDS: Family Offices, Manager Selection, Incubators & “Evolution instead of Revolution” (Interview – Martin Friedrich, Lansdowne Partners Austria GmbH)

Asset allocation and fund selection also pose a particular challenge for decision-makers from family offices in Corona times. In the run-up to a joint Family Offices panel with Martin Friedrich, Lansdowne Partners Austria, Markus Hill spoke about selection criteria for fund boutiques and “traditional” asset managers as well as the current assessment of the topic “investment in illiquid asset classes”. Also discussed were the different views on the topic “Use of Emerging Managers” in contrast to portfolio management in the endowment fund concept for an organization that has positioned itself as an incubator in the asset management sector for quite some time. The differentiated view on the selection of managers is supplemented by thoughts on the topic of know-how expansion in their own company. (Event note: Vienna, 15.10.2020, “The Stock Puzzle in 2020”).

Hill: What criteria do you use to select asset managers?

Friedrich: We proceed just as systematically in our selection as we do with all other investment decisions. First, each search relates to a distinct area of the portfolio. We only consider managers if they represent the asset class we want to invest in a style that is true to our top-down guidelines. If there are many managers in one area, we first narrow the selection using quantitative filters. The filters are deliberately kept simple. Criteria such as investable within the scope of our strategy or low costs are given priority. This is followed by a qualitative assessment of the most promising candidates. For this purpose, we take the time to understand each strategy, first based on a study of written documents and then in personal interviews. Sometimes we also carry out cross-checks with external consultants. Finally, we ask ourselves, how well does the manager fit into the portfolio? We put together a team of managers for each of our investment segments in the fund. And in a good team, the members complement each other. The strengths and weaknesses of the various strategies should complement each other, ideally in such a way that in the end one plus one equals more than two.

Hill: Which asset classes are of particular interest in Corona times? Has there been a change in investment behavior?

Friedrich: The asset class structure has changed partially due to Corona. Our strategy is long-term oriented and does not live from changing positions in staccato. Nevertheless, due to the changed data situation in June, we increased the weighting in commodities, emerging markets, and inflation-linked bonds. Besides, we are currently overweight in absolute return strategies and catastrophe bonds.

Hill: How do you see the importance of investments in illiquid asset classes? What type of asset manager is of particular interest to you?

Friedrich: Illiquid asset classes are traditionally important for endowment strategies. In our case, however, only liquid positions come into question because we are subject to UCITS regulations. Fortunately, listed investments can also very well reflect the risk characteristics of real assets like private equity, real estate, or infrastructure, especially if you have a long investment horizon. The additional advantage we see here is that valuations are generally lower than in the private capital market. When selecting investments, we again place great emphasis on a high degree of specialization of the strategies invested in the respective universe. We also welcome managers who share our long-term philosophy.

Hill: You work in a firm that is itself the “incubator” of new funds. How do you see the role of emerging managers in asset allocation in general?

Friedrich: Indeed, the Vienna office of Lansdowne Partners in particular has always played a pioneering role in the development of new approaches in the fund sector. It is a very top-class and powerful team that I have around me. In addition to the flexibility of such an environment, I have the backing of a highly professional asset management organization. This combination naturally offers a huge advantage in the implementation of innovative ideas. The situation is somewhat different when we talk about the Endowment Fund that I manage. The investment process of this strategy usually requires a track record of 3 years. However, there are exceptions in justified cases: For example, when known strategies appear in a new form. This may be the case if teams change companies, or if a strategy has already existed for some time in a different regulatory environment and is then newly provided in the UCITS mantle. Here I can act relatively flexibly, but of course, I must also take responsibility for such decisions.

Hill: How important are fund boutiques in your selection of asset managers?

Friedrich: Boutiques have the advantage, as I just mentioned, that they can react unbureaucratically to changes in the market environment and we appreciate this ability to adapt. We are therefore in constant contact with several smaller providers and have already invested with some of them. But there are also areas of the capital market where a large house if it is well organized, enjoys clear advantages. If, for example, you need to keep an eye on the interest rate, currency, and credit risks in 80 countries at the same time to manage an asset class, the resources of a large, internationally positioned house are already significant advantage. In the end, it’s all about the mix. We like to be diversified, and that also applies to the selection of managers.

Hill: Has Corona changed your information behavior in the selection of managers?

Friedrich: Of course we – like probably all investors – now do more video conferences than 1-on-1 meetings. The frequency has rather increased as a result. Many of our managers were also very proactive and offered conference calls on their initiative in March and April. We gladly accepted this offer. As a result, I worked extremely long hours, which paid off – because I was able to get to know many of the managers even better.

Hill: Which topics are currently being dealt with more intensively?

Friedrich: Mostly with the enlargement of the team! We would like to enlarge the team and are currently holding preliminary talks. Secondly, the manager portfolio is constantly being analyzed and we always find great opportunities, especially in today’s environment. If everything is right, we also exchange positions and make selective improvements. The motto here, however, is “evolution instead of revolution”.

Martin Friedrich is Head of Economic & Market Research and Portfolio Manager of the Lansdowne Endowment Fund. He joined Lansdowne Partners Austria in January 2019 from HQ Trust, one of the largest independent multi-family offices in Germany. Mr. Friedrich has been employed there since 2009, most recently as Head of Capital Market Analysis and Co-Chief Investment Officer. He also managed customer portfolios and was responsible for the investment process of LIQID, a Fintech company in Berlin. He was also active in the Wigmore Association.

Wigmore is an innovative global cooperation of eight different single and multi-family offices.

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