High interest in income, market-neutral strategies, says HK fund selector

Vincent Au is managing director and head of investments at ALPS Advisory, a Hong Kong-based wealth advisory firm that offers a suite of services to private investors, families, and family foundations.

His main focus areas are designing and developing investment strategies and solutions, selecting external managers and actively managing the ALPS Fund. 

Au's team is based in Hong Kong.

He previously worked in investment roles in Singapore and the UK.

In a detailed interview, Au describes the firm’s intensive fund selection process and what clients have been interested in over the past few months.

"A good fund is not one that delivers the best return but one that delivers consistently on the objective of the fund,” Au told AsianInvestor.

The interview has been lightly edited for brevity and clarity.

Your team's fund selection process is rooted in its portfolio construction approach. Can you explain how that works?

When constructing a multi-asset portfolio, we do not adhere to the traditional 60:40 allocation model.

We believe this approach does not adequately serve the needs of today’s investors.

We look at portfolio segments by function: income generation, return seeking and return diversifying or market neutral.

In the income portion of the portfolio, we aim to achieve returns that exceed cash while prioritizing capital preservation.

The second is on generating returns. This can involve delivering returns higher than the market average or achieving similar returns with significantly lower risk.

And with the market neutral portfolio, we look at having a consistent active return profile, generating, for instance, 10% in absolute returns.

Can you describe your team's fund selection approach?

Given that our assessable universe of funds consists of about 1,000 names, we use a few tools to filter that list down to something manageable.

One of those is using our proprietary scorecard which is the product of the experiences gathered in fund selection over decades.

Our scorecard assesses 6 categories: the organisation; people and resources; the investment process; risk management and implementation; the investment style, and investment services.

 In terms of organisation, you have to consider the firm you are dealing with.

For instance, is it a large entity with a huge stable of products and strategies or is it a boutique firm specialising in particular strategies. Both have their advantages and disadvantages.

The former offers a wide variety of options and a large team of sales and investment staff, but may lack the ability to provide personalized attention.

In contrast, boutique firms can offer more tailored service, though they may be overly reliant on the success of a limited number of strategies.

The quality of the team is crucial. When selecting funds, we should consider factors such as the experience of key personnel, team size, skill sets, and retention policies.

Understanding the investment process is essential, especially regarding its repeatability in generating consistent returns.

A typical question to ask here is what you don’t understand: if your focus is on stable income, you might unintentionally take on some risks, which can be quite dangerous, for instance.

What about risk management, investment style and services?

We pay attention to the risk guidelines in place. Some very large fund houses do very well on this although admittedly it can also become quite restrictive and prevents funds from investing in what they want.

Still, this can be a good thing because it can help to quantify the downside risk. Of course, in risk management, the difficult part is not knowing what you don’t know.

We also pay attention to the track record because it tells us how the manager handled different situations and market environments.

It’s important to consider the composition and expertise of the team involved in implementation, which refers to the trading setup, specifically how orders are executed.

Investment style encompasses more than just identifying whether a manager is a value investor.

It also involves assessing whether value investing is the appropriate approach given the current market conditions. Even the best value manager may underperform in certain market environments.

Communication is crucial. When markets become challenging, we rely on the manager for information and answers to our inquiries.

It's also important to consider whether they have the capacity to provide customised information. Their willingness to offer detailed insights is essential.

This scorecard serves as a foundation for our team to evaluate potential managers for our platform. It is not a one-time assessment.

A high score in one category paired with a low score in another prompts the team to investigate the reasons behind these discrepancies.

This approach fosters a more disciplined evaluation, as multiple factors must be considered in the assessment process.

How important are environment, social and governance (ESG) considerations for fund investors right now?

ESG considerations are still on our clients' minds, but they are not yet actively implementing or requesting them.

Incorporating these factors often requires investors to narrow their investment opportunities to meet specific criteria, which may lead to a decrease in the information ratio. While some might argue that this impact is negligible, quantifying it remains a subjective endeavour.

However, having said that, we do need to get ready for it [more clients asking for ESG overlay]. For now, most of the clients already do one layer of filtering or exclusion/inclusion.

Have you seen any significant trends in investor demands?

Earlier, clients used to ask for higher returns, or least aspire to earn high returns. But now, times have changed. Clients are happy with a stable conservative high single digit return.

There is also certainly a lot more interest in income and market-neutral strategies.

In this high-interest rate environment, clients can get 4-5% on their income portfolio. And the non-income portfolio can give you 7-8% or even more if you’re willing to give up liquidity in the short term.

What advice would you give investors right now?

People are feeling uneasy about the markets right now. On one hand, the US economy is fundamentally sound, and earnings are performing reasonably well.

The markets have also been strong for quite some time. Technically, there is a substantial amount of cash sitting on the sidelines, waiting to be deployed.

However, predicting where this money will flow is challenging, especially since markets like those in the US and India are already quite elevated.

While it’s difficult to take an outright bearish stance, being bullish isn’t straightforward either. The best approach is to remain liquid and nimble.