Battling behavioural bias: DBS and fund selection
Pierre DeGagne is responsible for DBS Private Bank’s selection of funds in both the traditional and alternative assets space. The Singapore-based funds specialist identifies, reviews and communicates the bank’s investment convictions to investors across multiple channels.
An 15-year industry fund selection veteran, DeGagne joined DBS in September 2013 from Standard Chartered, where he had also been head of fund selection. He has also worked at Merrill Lynch and Mercer.
He explained to AsianInvestor how behavioural biases can undermine the fund selection process.
Q Could you explain the fund selection process at DBS?
We have a very qualitative approach to fund selection. As the big overarching concept, we are very focused on trying to identify a sustainable competitive advantage within an investment strategy. On the Singapore funds platform, we have a little over 260 funds.
We have five people who are solely dedicated to fund strategy research and write regular reports on the funds we track. We have full access to the fund managers and the full holdings in their portfolios, which allows us to closely monitor how the managers are managing their portfolios over time. While the assessment of whether a fund manager has competitive advantage or not is qualitative, we also have a stringent quantitative monitoring system.
We start with the view that the overall universe of funds has the same distribution as our universe of funds. As a structural factor, we also know that only 40% of funds beat their benchmark every year, so we would positively recommend only about 100 of the 260-odd funds. From that list, we recommend around 30 on an evergreen asset allocation basis—funds that should be used as the building blocks of portfolio construction.
In addition, there are 10 funds that we recommend as focus funds every quarter after consulting with our chief investment office (CIO). We publish research material on them in the quarterly CIO insights investment strategy report.
Q How do you select a new fund?
When we look at a new idea, we start by looking at all available funds in the space. Eventually five funds make it to the final review process. This will be based on various factors including the quality of the team, their history and the history of the product. We narrow the list down to three funds.
Given that only 40% of funds can have positive ratings, only one out of the three is likely to get a positive rating, despite the fact that all three are good enough to qualify for our platform. That’s why we need to be very discriminating in what we select. The analyst needs to forecast the likelihood of the fund outperforming—is it 55% or 90%? Our process also gauges our analyst conviction, who is judged on that conviction. I add my views to the analyst views and together we come up with a team score for each fund.
We take behavioural biases very seriously, as selection bias can hugely undermine results. While committees are more confident in funds that have performed well, in part because they are easier to sell, we take a very dim view of performance, because it is the number one factor in undermining good selection.
For example, two years ago we wanted to expand our global equity offering. We already had a very good income biased manager that had performed well, but all income-oriented funds had done well. Basic quant screening suggested that we add another, but instead we chose a growth manager that had not performed as well but had a great team and process.
By the end of the following year, that growth fund was one the best performing global equity funds. We achieved that because we had looked beyond just what was performing well. We are always seeking this balance of managers.
Look out for the second part of this Q&A taken from AsianInvestor's June/July 2018 magazine, in which DeGagne discusses the challenges faced by fund selectors as well as the reasons why the private bank decided to consolidate its funds platform.