A few weeks ago I had the pleasure to chat to Jaouad OLQMA, Senior Fund Selector at ABN AMRO Investment Solutions. During the interview I asked him about their fund selection process, and what makes, in his opinion and experience, a great portfolio manager, and how he is navigating the current market situation.
“Successful ones (Portfolio Managers) all have common qualities such as curiosity, humility, open-mindedness, the ability to face the pressure and, last but not least, a sense of team spirit.”
Patricia: Could you tell us about the Fund Selection Process in ABN AMRO Investment Solutions ?
Jaouad: Our fund selection process aims to identify the best portfolio managers for each investment style. The idea is to build a complementary range of solutions for our clients so as to be able to build a balanced portfolio, or even adjust the selection, expressing therefore their allocation views. Once a peer group of homogenous funds is defined, we are performing a deep quantitative screening to identify managers that are able to perform well but also manage their risk. We like asymmetric profiles, for example, funds that are able to perform well in cyclical markets while being also resilient in more defensive ones. Understanding the historical performance drivers on the long term is key. Perceiving the future perspective of alpha is also crucial.
This qualitative review requires a knowledge of the parent culture, the cohesion and dynamic of the team. Several other elements can be identified only by spending time with the investment team, asking the relevant questions or paying attention to weak signals. It is important to break the monotony of the exercise, so that everyone can step out of the comfort zone and provide added value elements. How ESG criteria are integrated is also crucial to the quality of our fund selection process, knowing that ESG commitment is at the heart of our business model since ABN AMRO Investment Solutions’ creation in 1998.
P: How many people are in your team, and how it is organised?
J: Our team includes 10 fund selectors and 4 operational due diligence analysts who are responsible for analysing, selecting and monitoring managers. The fund selectors are specialized by asset class and the team is large. This is a must-have as it is time consuming to capture new ideas, have a deep knowledge of the universe and identify upstream a style drift, a performance issue, a controversy or any important event that could impact a fund. We are supported, in our job, by 5 quantitative engineers and 3 ESG managers, but also by structuring capabilities, risk managers and compliance officers to secure the full process.
P: What would you say is the most important part of your role?
J: We have a fiduciary duty towards our clients. This is a huge responsibility as we need to anticipate future trends in a changing industry. However, this is also a great opportunity to be an actor in facing challenges. The transition to a more sustainable world is probably the biggest one. It may sound like an utopia but, as professional investors, we have a significant role to make things change.
P: How do you identify a successful portfolio manager from an average one?
J: Once we have performed our quantitative screening, meeting with the portfolio management team is key. This is the opportunity to know more about the people. I have been sitting in portfolio management teams for 18 years and have met with very different investment professionals. Successful ones all have common qualities such as curiosity, humility, open-mindedness, the ability to face the pressure and, last but not least, a sense of team spirit.
I could compare this exercise to a hiring interview: we need to build trust with one another as the relationship will be, of course, more productive if it based on the long term. I value a portfolio manager who can recognize a weakness. He can work to improve but, most of all, I think he should leverage on his strength. Some managers recognize that they don’t invest in sectors such as oil companies or utilities as being strongly related to variables they cannot predict such as , in this case, oil prices or regulations. They prefer allocating their risk budget to areas of expertise, which is, in my opinion, very smart.
P: Which would you say have been the most difficult parts of the fund selector job during these two years of pandemic and work home policies?
J: It was, definitely, the inability to meet people physically. Of course, thanks to the use of technology, we were able to maintain virtual meetings, but, on-site meetings have a significant added value enabling to perceive weak signals, to assess how people interact together, to feel the overall atmosphere that is lost in front of our screens. Before COVID, I remember a particular meeting with an external manager: the ESG specialist was presenting how the team avoided a huge controversy while the Portfolio manager was looking at his phone. It gave me more insights about their ESG integration process than any slide!
“I remember a particular meeting with an external manager: the ESG specialist was presenting how the team avoided a huge controversy while the Portfolio manager was looking at his phone, It gave me more insights about their ESG integration process than any slide!”
P: Do you have any redline when selecting a portfolio manager?
J: All portfolio managers have their weaknesses. But, what is most important, is for us to be able to trust them. It goes with integrity and transparency. In addition, we need to feel their passion for the job. We tend to consider the portfolio manager role as a very sophisticated job, but it is mainly about understanding the surrounding world and keeping eyes wide open. It is also very important to take the market sentiment into consideration. In a nutshell, it is about going deep in the analysis, without losing the global picture.
P. What is the main change on the markets that have affected you fund selection role recently?
J: Historically, the European market has been quite efficient and a significant part of active managers have outperformed their reference index. The depth and the heterogeneity of the universe are opportunities for active managers to outperform. The recent context has been more challenging as only few names such as ASML, Novo Nordisk, Nestlé or LVMH have contributed to a substantial part of the outperformance. In a way, it can be compared to the polarization of the US market with the GAFAM, even if it is proportionally much lower in Europe. These stocks are indeed perceived by investors as safe-haven in view of their size and quality characteristics in a context of very volatile markets.
Active managers usually seek for high active share and are, on average, underweight to these top index names. The relatively high level of valuation is also taken into account. These underweights have led to negative contributions for some European managers. This is typically the kind of changes that we are considering. And in our reviews, we are constantly supported by the investment team at ABN AMRO Investment Solutions, to adapt to a constantly changing market.
“The recent context has been more challenging as only few names such as ASML, Novo Nordisk, Nestlé or LVMH have contributed to a substantial part of the outperformance.”
P: What role plays ESG in your fund selection process?
J: It is crucial. First, because we believe it is urgent to acknowledge all the challenges such as the climate change and global warming, the biodiversity preservation and the defense of human rights. As an asset manager, we have an important role. Then, I think extra-financials criteria and financial performance are inextricably linked.
If you invest in a company that is polluting massively, customers, becoming more and more sensitized to these topics, will lose their confidence in the brand. Moreover, the company will be impacted by heavier taxation on carbon emissions rapidly… It is therefore our responsibility to identify these stranded assets and prevent our clients to invest in those. Last but not least, these sustainable trends are representing huge opportunities. It is not about punishing the bad behaviours, but about being determined to engage with companies willing to improve. It is also about collaborating with other financial players to share best practices so as to accelerate the transition to a better world.