Only 5% of active funds tracked meet our standards, says specialist

Devyani Daga is a managing director in Cambridge Associates’ Singapore office. She works with a variety of institutional investors across the region on asset allocation strategy, manager selection, and investment program evaluation.

The teams Daga works with manage and builds custom portfolios for clients in Asia and also for global clients who are looking to invest in Asia.

Cambridge Associates provides investment portfolio management and advisory services to institutional investors, including foundations and endowments, pensions, private clients, and corporate and government entities.

Daga, who joined CA in 2010, is also part of the firm’s sustainable and impact investing council, as a member of the Council’s Portfolio Construction Working Group.

She is also part of the firm’s Asia Strategy team which has been established to enhance business initiatives in the region.

Daga told AsianInvestor that CA's fund research and selection process has very quality thresholds.

"We tracked close to 11,000 fund managers and over 40,000 fund at the end of December 2023. Only about 5% of the active funds tracked meet our rigorous standards for investment," she said.

This interview has been edited for clarity and brevity.

Can you explain Cambridge Associates’ broad approach to fund research?

We conduct an exhaustive due diligence process to identify organisationally stable investment managers likely to generate premium returns for our clients’ portfolios over the long term.

When evaluating a manager, our manager research team assesses a variety of factors including firm ownership, succession plans, team experience and turnover, key person dependency as well as remuneration and incentives.

We also consider experience investing in the specific strategy, rationale of the investment process, competitive advantage, risk management, portfolio transparency, detailed performance attribution and analysis of track record, as well as fees and terms.

Our operational due diligence team assesses the operational business risk of managers by evaluating several factors, including people, systems, and service providers, to ensure that a manager’s business infrastructure is appropriately structured and supported.

Only managers who have undergone our investment and operational due diligence process and met our rigorous standards are chosen for client portfolios.

We tracked close to 11,000 fund managers and over 40,000 funds at the end of December 2023. Only about 5% of the active funds tracked meet our rigorous standards for investment.

How do you separate the good funds from the bad ones?

Our goal is to identify institutional quality funds that are most relevant to our client portfolios, and this is what our manager research process focuses on.

We monitor these managers on a regular basis and re-underwrite our investment thesis if there are any significant developments such as team turnover or any organisational changes, meaningful process changes or style drift, growth in assets which may hamper the ability to deliver alpha, etc.

This regular monitoring ensures that our best ideas remain current.   

The work of our fund research team ultimately feeds into building customised client portfolios that are tailored to individual client’s risk and return objectives, as well as deliver higher risk adjusted returns than the benchmark.

It is important to build the portfolio keeping in view the unique characteristics of each manager and how they fit together, and how each manager should be sized given its specific risk and return characteristics.

This helps build a diversified portfolio that is not dependent on any single factor or manager to do well, thereby smoothing portfolio returns during periods of stress and market volatility.

What are some red flags when picking funds?

It is important for us to understand how alpha has been historically delivered, whether it is repeatable and whether there is transparency into the investment process.

Performance must make sense within the context of the strategy and the investment universe in which the fund operates.

If we cannot get comfort around how returns are generated, we will not underwrite the fund, no matter how spectacular the returns look.

What kind of ESG criteria do you consider important while picking funds? How has that changed over the past five years in your view?

ESG considerations are a key element of building portfolios for our clients and our work is customised to align with each client’s ESG objectives. We also systematically look at material ESG factors across our research process.

All our investment research across asset classes integrates ESG as part of the process, and we look at both manager and holdings level information to create a more complete ESG assessment.

In our due diligence process, we seek to truly understand managers’ approach to ESG.

We use both specialist managers focusing on sustainability and managers where the focus is less explicit but where the alignment comes naturally through the investment process.

A manager marketing its output as sustainable neither guarantees it will be nor that they have any kind of investment edge, while there are many managers avoiding such labels who are investing with increasing awareness of sustainability trends and building robust future proof portfolios as a result.

We also encourage managers to have better transparency, to formalise an ESG policy (if they don’t have one) or to integrate ESG in a deeper or more systematic way.

Climate and DEI [diversity, equity and inclusion] are key themes that are important for our clients, and we are interested in learning how all managers—regardless of whether they label themselves as an ESG manager—are integrating the risks and opportunities arising from these themes into their investment strategy.

We have been and will continue to evaluate managers on these criteria systematically across asset classes, so that this work can be better leveraged across our client base.

What are clients interested in right now? How do you expect that to evolve over next 12 months?

Sustainable and impact investing is a key theme that clients continue to remain committed to, and we work with both institutional investors and families who remain focused on defining their priorities and delivering impact through their investment portfolios.

Our data also shows that institutional and family clients with higher allocations to private investments (PI) have delivered higher returns historically, and the allocation to PI has generally increased for our clients over time.

The long time horizon that most of our clients have naturally aligns with the time horizon and patience required to build a successful PI program, and the higher allocation to PI also allows for more targeted exposure to sustainable and impact investing priority areas such as climate solutions.