It's important to differentiate between manager luck and skill, says fund selector

Yazid Mahadi is head of funds selection at Bank of Singapore (BOS).

Based in the lion city, Mahadi plays a key role in developing the private bank’s funds platform as well as the ESG framework for the funds.

He has over a decade of experience in the institutional space, which involved being primarily responsible for external fund management and asset allocation in a sovereign wealth fund in Brunei.

Mahadi heads a fund selection team that is primarily based in Singapore but also has a presence in Hong Kong.

He explained the fund selection process to AsianInvestor in a recent interview.

“It’s important to differentiate between the skill and luck of a fund manager,” he said, offering insights on how he and his team do that.

The following interview has been edited for brevity and clarity.

Could you tell us about your funds platform?

Bank of Singapore has a big presence in Hong Kong, Dubai, and offices in Luxembourg and London, apart from Singapore.

The selection team supports our funds platform globally.

Our funds platform consists of different asset classes, including fixed income, equities, multi-asset, money market and other funds.

We have about 120 to 150 funds on the platform. Our team looks at long-only active mutual funds.

There is another team that looks after alternative funds, which also has different asset classes including real estate, hedge funds, private assets, etc.

What are the main features of your fund selection process?

Over the last two years, there have been quite a few changes in the way we approach fund selection,

One of the key principles that underpin our approach is quality first. We have a fiduciary responsibility to our clients to ensure the funds we recommend are good.

We also aim to provide an extensive breadth of active funds for our clients. We take in feedback from various stakeholders – from front-office to advisory and our discretionary portfolio management desk.

We have been trying to create a more streamlined approach to selection, ensuring we place quality above quantity in terms of selection.

We don’t want to have a supermarket approach; instead, our value proposition is to have a curated platform for our clients, that emphasises on our differentiation and quality of investment solutions.

Similar to other selectors, we run through all the quantitative filters. The key value add is the qualitative sense of selection.

We have a dedicated team that is well experienced in looking at this process and have followed funds and fund houses for a long time.

We also adhere to the 6 Ps: proposition, understanding the parent, product, process, people and performance.

It’s easy to sometimes get swayed by near-term performance. But what we do is ensure the performance of the fund, or alpha that it generates, is sustainable in the longer term.

Do you work only with big names only or do your consider funds from not so well-known managers?

There are some funds and fund houses that we work with that are household names. These are names that are covered by other competitors that we have in the market.

Because we want to differentiate ourselves, our team also takes a lot of time in understanding the landscape and looking at what we call the ‘hidden gems’.

These could be funds that may not be well covered by the wealth or private banking segment. However, they could be well known on the institutional investor side.

How do decide if a fund is good or not?

If we look at markets in general in 2022, it was very challenging for risky assets across the board. In 2023, however, we saw a good rebound across many assets.

So it’s important to understand the fund inside out, and that means to stress test the fund and see how it reacts during difficult market periods.

We have to see if the fund has gone through a difficult period, while also trying to understand the philosophy and culture of the fund house.

While it’s important to look at the quantitative ratios, being able to understand and look under the hood is crucial.

Looking at a fund’s performance during tough times or market stress, and seeing how they reacted and adapted is important information for us.

It’s important to differentiate between the skill and luck of a fund manager.

Structural changes can also sometimes be potential red flags.

We also tell the fund houses that we will monitor regularly, and they could be potentially replaced if the funds don’t perform as well as expected.

Having said that, we do give a fair timeline for the fund managers to prove themselves or to turn around lagging performance.

Are there any other industry factors that you consider while selecting funds?

Consolidation of the industry is quite a common trend, and if a bigger fund house gets bigger, smaller fund houses we deal with could become targets of acquisition in time.

When that happens, there will be a lot of uncertainty in the team and how the small fund house’s funds will be managed.

As fund selectors, we have to take a lot of time to assess how all these trends will impact future performance.

Sustainability seems to have a mixed reaction among investors – ESG fund flows within the region have fallen in recent years. What trends have you seen with BOS clients?

The approach to sustainability is evolving rapidly, as a result of changing product mixes, regulatory changes etc.

It is still a strategic initiative for us to drive sustainable investing and there is a lot of effort and time being spent in building up awareness and educating our investor clients.

In addition, we are trying to have a more holistic approach to ESG or sustainable investing.

Earlier, the perception about ESG investing is that it was solely about green solutions or renewables – but those are only on the extreme end of a spectrum, and probably accounts for just 10% or so of the entire spectrum.

We try to tell clients that it is possible to implement sustainable or ESG friendly portfolios through various spectrums of ESG in a portfolio-context, and yet be able to benefit from diversification across different asset classes and styles.

It is about allowing investors to understand there are varying levels of ESG investing and they can participate at their own pace.

Bank of Singapore has its own proprietary framework called shades of green, where we identify funds on the platform in three categories – emerald, sage and garden.

Due to the evolving nature of this space, the team have put in time and effort to enhance our proprietary framework – to better understand the investment process and the portfolio mix in a fund through the ESG lens.

It allows everyone to understand the varying degrees of ESG in portfolios.