“The things that will cause us to get rid of a manager is a degradation of skill,” he said. “Red flags that show that they are not sticking to their process, that their investment philosophy has changed.”
Poole’s team meets with fund managers quarterly. Although the firm’s investment philosophy centres around a seven-year investment cycle, and even though a three-to-five year track record is usually needed to judge a fund manager’s skill, Poole said that the firm is also happy to work with managers of newly-launched funds.
“Research shows that in the first five-six years of manager’s professional life they can be most productive, because they’ve got all their great ideas and are able to implement them,” Poole said. “They are looking to be nimble and really deliver performance.”
Oreana has licences to operate in Hong Kong and Australia, and the firm sees this as its competitive advantage. It caters mostly to Australians now living in Hong Kong, and to former Hong Kong residents now living in Australia but who still have substantial assets in the territory.
Positive returns over the last three years could be generated by luck, as much as by skill. So just the quantitative screen is not enough
The majority of the firm’s portfolios are managed on a discretionary basis, Poole told FSA. Around half of them are based on model portfolios and the other half are managed directly by financial advisors, who “take a lot of their views from the model portfolios”.
Fund selection process
The process of selecting a fund for inclusion on the list of around 80 products for clients aims to “get a sense whether [the fund managers] are skillful and whether they are sticking to the investment process as they’ve promised”, Poole said. The firm currently uses only actively-managed funds.
The process is a mixture of quantitative screening of the manager’s performance metrics and qualitative evaluation of their approach as discussed in direct meetings.
“You can get a lot of initial information from quantitative screening of results, ownership structure, employees’ tenure and, within the history — risk-adjusted returns, volatility and stability,” Poole said.
However, a positive outcome of the screening doesn’t tell the whole story. “Positive returns over the last three years could be generated by luck, as much as by skill,” Poole said. “So just the quantitative screen is not enough.”
The team meets with fund managers to get a sense of their process, philosophy, skill and how they relate to returns.
“If returns haven’t been great over the last three years, it could be driven entirely by very poor beta in the market,” Poole said.
“By asking, ‘have you been true to your philosophy, to your process, through those three years’, we can get a sense whether the skills still look right and whether they’re likely to recapture the alpha that they’ve lost to beta over the last three years.
“When you find a skillful manger, someone who is true to his process — and it’s a repeatable process — then you should look to engage and build a long-term relationship with that manager,” Poole said.