Comment: Family offices, fund boutiques, and fund selection – Talent beats process?

“And just as water has no stable form, so too in war there are no stable conditions” (Sun Zi). The words of a well-known strategist seem true-to-life and understandable – economic parameters change, markets, correlations, and other parameters are constantly changing. Whether head, gut, or machine: hardly any fund selector can do without the existence of an “apparently” systematic, comprehensible investment process when selecting talent in fund management. Family offices, for example, have their own “glasses” when it comes to selecting fund boutiques for mandates (due diligence), and the approaches of different houses are often similar. Which factors often appear interesting in the selection process? Which factors are perhaps over- or underestimated when discovering talent?

Fund selection – neither Rocket Science nor trivial

1 – “Hard” facts
As with other groups of fund selectors, family offices, which have developed a strong interest in independent asset managers (fund boutiques) over the years, use many of the common filters for selecting fund managers, for example, track record over several years – performance, the risk taken, behaviour in market phases, tracking error, costs and fund size are all areas that are addressed. Quantitative factors can be used as a good preliminary filter for further qualitative considerations, at least at the beginning. Benchmark or absolute return? Maximum drawdown? These seemingly “hard” facts are naturally taken as standardizable, measurable, comparable, and easy to integrate into process structures during due diligence. A dilemma: performance, correlations, volatilities – all facts viewed through the rear-view mirror – but the selection of the manager should produce success in the future.

2 – “Soft” ways
Management approaches are discussed just as intensively as transparency and systematic, comprehensible investment processes. Man and belly versus machine? Discretionary versus rule-based? “Artistry”, “dice” versus unimaginative numeracy? Ambiguities in the definitions often meet here together with prejudices and the fund selectors’ preferences – to put it positively: If fund management should mean art as well as science, then there are perhaps many roads that could lead to Rome. Of course, there is no such thing as a management style that is successful across all market cycles. It is also often forgotten that family offices represent a certain clientele and due to the origins of many assets, have a certain resistance to stress in “lively” stock markets – the time factor is crucial. The intensive discussions about active, pseudo-active, and passive approaches show that many things are not always clear on firm ground, even in the fact-based financial world.

3 – “Spongy” processes
Malicious tongues claim that too much communication about processes heaps up to cover up a lack of talent. The stories of brilliant processes in funds with more than mediocre results are often found. To be fair, however, it must be said that there are also a large number of apparently talented, less rule-based fund managers who are not even able to convince with their results. The one investment process that guarantees success does not seem to exist. Assuming that it can nevertheless be more than useful to be able to understand a manager’s investment process, the following questions may arise:
*Does the manager do what he claims in his descriptions of the process?
*Don’t many fund managers know what fund selectors want to hear?
*Is the investment process presented by the fund manager consistent with the process explained in the fund company’s marketing materials?

By raising such questions, which could offer interesting links between family offices and the professional dialogue, one might conclude that the search for talent among specialized managers is perhaps more similar to the “truffle search” than a systematic, purely quantitative search process with results that can be repeated at any time. Solid housekeeping and conventional trial-and-error heuristics in combination with a gut feeling, intuition, experience, etc. are required. Databases for pre-selection are important, research is the core factor in basic work.

Knowledge Management
Networks have also formed in the family office sector. Fans of boutiques are coming together. Practice shows that there are a large number of enthusiastic selectors whose heart beats for independent, specialized asset management. If you talk to family office representatives in different countries, similar structures become apparent: Interestingly enough, if the selection processes are very similar, it repeatedly becomes apparent that not all addresses can be lumped together: Although seed money donors, for example, are supposedly hard to find, there are a large number of addresses that see themselves as “sponsors” of talent. Even more surprising: Fund sizes are relative. There are also houses for which a minimum track record of three years, for example, is not a minimum criterion, and even backtesting concepts find open ears, at least with a smaller number of houses.

If one is in exchange with other groups of selectors, at least one thing in common with many family offices is noticeable: Networking within one’s group is frequent, and the various groups seem to engage in intensive dialogue with each other less frequently: Family offices, foundations, fund of funds management, private banking, etc. Perhaps this phenomenon is somewhat due to the lack of visibility in the family office sector. Collectively, the heterogeneous mix of fund selectors and analysts is more often found at houses specializing in fund boutiques, such as Universal-Investment, Axxion, Ampega, and many other providers. Fan circles come together, for example, at investor events, but also at events that go beyond the usual industry meetings. In short: professional exchange of ideas in fund boutiques is appreciated – content before sales: the fund companies that offer added value here are knocking on boutique fans’ doors!


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