In Asia, some private banks and wealth management firms are outsourcing fund selection in specific areas, said Stéphane Pouchoulin, CEO of Fund Quest Advisor, a separate fund selection business inside BNP Paribas.
For example, selection is outsourced for niche products offered by boutique firms or for funds that have an ESG-orientation.
But most demand is for selection of low and high risk products, Pouchoulin said. “Either they really want to find the passive or less risky solutions or they want funds that are really risky.”
Some clients are also asking for an ETF buy list because they may have small teams without ETF expertise, Poucholin said. “They do not have big teams, and most of the time, fund selection is a cost center.”
The service creates a buy list of funds, which varies by client, he said. A full buy list has around 400 funds across asset classes, but some firms want customised lists (Pouchoulin said BNP Paribas Asset Management funds are not recommended unless requested by a client).
Funds are selected from the broader universe through quantitative screening. An algorithm groups funds by clusters and peer groups. For example, there is a US equity peer group, and under that peer group, there are sub-groups categorised by capitalisation and style, such as value and growth.
The funds are then put through qualitative manager research.
“The second step of the process consists of assessing if the outperformance of a fund could be repeated,” Pouchoulin said. Analysts then challenge each others’ fund recommendations.
Robotising fund selection
Perhaps outsourced fund selection could evolve into automated selection. While algorithms have become very popular to make the fund selection process easier, sources believe human judgment remains the key to choosing the right products.
Matthias Weber, partner at Ifund Services, a provider of fund due diligence, speaking at Fund Forum Asia 2017 in April, said he prefers a hybrid model where there is a quantitative approach combined with a human in charge of the system.
However, algorithms that Fund Quest, Ifund Services and other automated services use are not popular in the private banking and wealth management industry.
Alex Ypsilanti, CEO and co-founder of Quantifeed, which provides digital solutions to wealth management firms in Asia, said that robotising fund selection is fairly nascent.
“At many of the institutions we work with, 90% of fund selection is done manually,” he said.
