what lies beneath

The club’s Spanish midfielders, notably Andrés Iniesta and Xavi, are considered instrumental to Messi’s prolific goal-scoring.

About 20 minutes’ drive northwest of Camp Nou, FC Barcelona’s cavernous 100,000-seat stadium, Alexandre Garrabou von Trotha looks beyond the headline achievements of fund management’s star players. After joining Sabadell Inversión as head of fund selection in April 2006, he began reforming the system by which the firm narrows down the universe of 5,000 Spanish-registered investment funds, to create a recommended focus list of about 250 long-only Ucits products.

Improvements to the process were soon recognised by the asset manager’s parent, Banc Sabadell – one of Spain’s largest private banking groups. “Since we had the most experience in fund selection, at a certain point the bank asked us to organise the third-party fund selection for the whole group,” Garrabou explains. “Now we run a complete fund selection process for all the different client units of Banc Sabadell, including private banking, retail banking, and to some extent pension funds. Everyone uses our focus list.”

Garrabou’s system starts with a pair of quantitative screens – the first designed to identify the top 20% of funds on a risk/reward basis, and the second to determine consistency of performance. Factors such as maximum drawdown and Sharpe ratio come into play at this stage, measured in rolling windows. In the final phase, Garrabou carries out extensive qualitative due diligence on the fund, as well as the company running it.

“We make sure they are up to the standards we require, in terms of the service providers they have – from fund auditors to custodians,” he says. “It is important for us to know if they externalise any parts of their investment process or their operations. And to make sure the company that actually does that part is recognised, and operates at the standards that we consider the minimum.”

Backing a big hitter?

So, what if Garrabou found a consistently brilliant ‘Messi-esque’ portfolio manager who was not backed by strong support? Would he be tempted to add the fund to the list anyway?

“The thing that catches our attention is a brilliant performance on the quantitative side, in terms of return and risk,” Garrabou responds. “But if we find something we don’t like in our qualitative due diligence, the fund will not enter our focus list. So yes, the qualitative part could stop a very good fund from getting onto the list – the extreme [example] would be a very smart guy who is investing on his own, but with absolutely no infrastructure behind him.”

Nevertheless, Garrabou is a firm believer in the benefits of using active managers, and says he finds consistent alpha-generators in most sectors – even US equities. “It’s a fact that there are much fewer funds in the US equities category than Europe or the emerging markets, that consistently beat their index,” he adds. “But we have found value in big asset managers, and in small boutiques. It’s a matter of being systematic and not letting any potentially interesting managers out of the quantitative part of our selection process.”

Garrabou uses the same methodology for BS Fondos Gran Selección – a fund portfolio service with about €160m in assets under management, down from almost €1bn before the global financial crisis despite strong performance over the past three years (see chart above). Clients are placed into five globally-diversified strategies according to their risk tolerance.

Although each portfolio has a long-term strategic asset allocation (see chart, left), Garrabou is able to take tactical bets to capitalise on short-term market trends, as well as overweighting and underweighting the equity portion depending on his world view.

A neutral stance

At present, Garrabou characterises the positioning of the portfolios as neutral, owing to uncertainty surrounding the impact of central bank actions in the developed world. “We see a long-term macro environment that is not favourable,” he says. “There are many doubts about the business cycle and growth in general – in almost all parts of the world, with the exception of the US and emerging markets. But even there, there is a substantial risk of a slowdown.

“Debt, in terms of the percentage of GDP, is still at unprecedented levels and it has increased since the beginning of the crisis. If the current weak signs of recovery evaporate and there is another growth slowdown, there are hardly any monetary policy margins left.

“We need growth in order to solve the debt problem. The thing is that governments have failed to address structural issues for decades and now it seems to be the central bankers who are trying to get economies out of trouble with massive liquidity injections. We have seen the last round of that in Japan, and it is difficult to understand if this unprecedented amount of liquidity will be able to offset those structural factors and trigger real growth, or if it will only induce bubbles in financial assets and perhaps strong inflation.”

Japan back in the fold

Despite his concerns on monetary easing around the world – which he likens to a game of Monopoly – Garrabou is not yet positioning his portfolios for rampant inflation. The most significant shift this year was a return to Japanese equities, after several years of avoiding the asset class. However, as for many asset allocators, the move was an attempt to surf the extraordinary wave of liquidity unleashed by the Bank of Japan – rather than a bullish call on the long-term outlook for Asia’s second-largest economy.

“The Japanese economy faces many fundamental problems that remain unsolved. The difference is that monetary and currency policy has changed dramatically. The measures that have been taken are really very desperate – it’s as though they have tried almost everything without any success, and now they are doing the only thing that was left to do.

“I would qualify it as an interesting economic experiment. How much more can the Japanese government increase its debt? How big can the balance sheet of a central bank grow? It was a good decision for us to enter Japanese equities at the beginning of this year but we are also cautious. It has gone a long way already. And who knows – maybe the best part is already over.”