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Fund selection should focus on quality, says Barclays' Arguello

Date: Friday, June 8, 2012
Author: James Norris, Investment Europe

Until recently, the thinking behind a funds platform of third-party fund managers was that it should be comprehensive, that it should ‘cover the waterfront’. But the credit crisis has forced many banking groups to radically rethink their asset management strategies.

Three years ago, Barclays was offering 350 funds just in the long-only space. Today, that number has been whittled down to 110. Jaime Arguello, director of multi-management at Barclays, says: “Our strategy is about quality over quantity, where ‘less is more’.” In the alternatives space, the Barclays funds platform has 35 single manager hedge funds, 12 Ucits funds (“a new area for us”) and two funds of funds. Barclays manages £7bn of multi-manager funds and there are some £5bn invested in funds on their platform.

The steady reduction of the funds on offer comes at a time when the overall number of funds continues to grow, currently at about 60,000. The US alone accounts for at least 25,000 funds. As Arguello says: “There are more funds than stocks now, making the business of fund selection all the more important. The concept of open architecture is based on the premise that no fund manager will be good at everything. It is important for us to be able to offer our clients the best specialists in each sector.”

Barclays’ adoption of open architecture is, appropriately, selective. Arguello says: “Open architecture is good but we present our clients with a shortlist of managers, based on the clients’ needs.” However, he says, this presents Barclays with a problem: “Investors focus far too much on past performance. So we ask our clients if they believe in fund manager skill. Those that don’t are offered ETFs as one option, while those that do are offered actively managed funds.”

The managers’ performance is a key determinant for entry to the shortlist: “We expect our managers to generate alpha over a market cycle. Selecting managers is a bit like selecting stocks.” Looking at his stable of managers, Arguello says 75% of the hedge fund managers outperformed last year, while the fixed income teams did better at 90%. But the equities teams last year had to contend with exceptionally volatile market conditions, with only 60-70% of them outperforming.

Within this new approach, specialists and boutique fund managers have established increasingly important roles. Barclays does not necessarily favour “the big funds houses that are trying to be all things to all people”, Arguello says. Barclays does not buy whole ranges of funds, preferring instead a policy of picking only the best-in-class fund managers. 

The Barclays funds platform will feature the big names, such as BlackRock, because their funds are backed up by some of the industry’s best research teams and fund management talent. But boutiques can compete with the big names thanks to their expertise within certain sectors, especially in absolute return. Among the boutiques on the Barclays platform are Lindsell Train, Delaware Investments, Cramer Rosenthal McGlynn, Majedie and Montanaro Investment Managers.

Barclays typically looks for boutiques with a minimum AUM of £100m and three- to five-year track record when assessing their merits, but there are exceptions. “Many of the best managers are difficult to access, so we have a policy of getting in early with new fund managers, effectively of nurturing talent,” Arguello says.

An example is Heronbridge, a long-only UK equity boutique based in Bath, in south-west England. When Barclays first decided to invest with them, launched in 2005, Heronbridge was managing £60m. Arguello says: “We hired them to manage a £50m mandate and today they manage more than £400m.”

The need to ‘get in early’ with new fund managers is all the more acute some of the best have no particular ambition to go beyond an AUM of about £1bn, like Heronbridge. Often, the founders of these boutiques are former employees of the big banking groups, who left with a clear strategy of focusing on pure fund management.

“There are many pitfalls in managing money,” Arguello says. He views with a certain suspicion those fund mangers that look simply to build their assets base. Particularly evident in bull markets, when valuations rise with the markets, the business of asset gathering encourages loose investment habits, such as style drift and over-diversification. “This is how capital crowds out returns,” he says.

The large majority of the fund managers covering European assets on the Barclays funds platform are based in London. Paradoxically perhaps this is because of Barclays’ global outlook. Arguello explains: “Many of the continental fund managers have a strong country bias. We have a few fund managers in France and a few in Germany. Paris-based Moneta has European equities expertise, and we also use Dexia Asset Management for their absolute return fund, and Rothschild, among others.”