July 2009

DISTRIBUTION: Moving ahead while others fall behind

RBC Wealth Management plans to add several fund managers to its platform, including a fund of hedge funds, finds Angele Spiteri Paris david_mcfadzean.jpgAs rumours of consolidation sweep the funds industry and managers of managers look at shrinking their rosters and cutting jobs, RBC Wealth Management is taking a different tack.

The firm has global expansion in its sights and plans to add managers to its roster within the next year – including a fund of hedge funds (FoHFs) manager.

David McFadzean, director of manager research at RBC Wealth Management, says: “Over the next six to twelve months we’re looking to add three or four managers to our roster. One fund of hedge funds manager, three corporate bond managers and two
cash managers.”

In an environment where investor sentiment is shaky at best and many have been disillusioned by hedge funds, the
move to select a FoHF may be considered quite brave.

“We think there’s a great opportunity there,” said McFadzean. “Hedge funds will come out of this looking quite different, but this actually plays into our hands quite well.” He says that the fear and wariness of hedge funds will put a firm like RBC Wealth Management at an advantage.

“No one’s going to want to buy a hedge fund unless the manager has gone through face-to-face meetings, proper due diligence, documentation, etc,” he says.

When assessing a manager, McFadzean’s team takes note of what they call the “nine Ps”. These stand for things like people, performance, philosophy and process.

He says there are many similarities in the research methods used across all asset classes although when it comes to selecting FoHFs the team spends more time on non-investment issues.

“We look at operational issues,” says McFadzean. “We question things like who the administrator is and how securities are priced.”

The checks don’t only serve to protect the investor, but also to safeguard’s RBC itself, since the bank takes on a sub-advisory role in its discretionary business.

“We’re actually custodying the assets in our own fund and we’re just outsourcing the investment management,” he says. “That’s been very reassuring for our clients over recent times because RBC is actually holding the assets rather than any other sub-custodian.”

Satisfaction formula
RBC Wealth Management highly prizes client reassurance and satisfaction. “An internal formula I have is that client satisfaction equals results minus expectations. We’re responsible for the results. We’re not responsible for the expectations but we have to make sure we know what they are and the clients have to be able to articulate them with our help,” says McFadzean.

The firm has managed its clients’ expectations quite well throughout the crisis, he says. “Most of our clients have been very happy with the way that things have gone in the circumstances because we’ve had ongoing dialogue and it hasn’t been this huge surprise to them.” He says that RBC clients lost less value on their assets than the average investor.

One of the main reasons for this, says McFadzean, is the bank’s naturally conservative attitude towards investment. “Our clients’ risk assets were invested with good, defensive investment managers. In the last quarter of 2008 and even in the first quarter of 2009 eleven of our twelve equity managers outperformed their benchmarks and three of those outperformed by more than 5%. We were expecting these results.”

Some of those managers may not have outperformed spectacularly in the bull market, but the ability to generate steady returns throughout the economic cycle is a preferred characteristic.

Stability of income is important in the wealth management business because the clients are not looking to double their money. “Clients don’t want to get rich twice, they’ve already become rich. It’s about maintaining their assets and growing them responsibly. People hate losing a dollar much more than they love making a dollar.”

This is why McFadzean, and all others in his position, have to be very cautious in their selection of managers. “We were looking for a US equity manager a couple of years ago. During a face-to-face meeting in New York the principal of this particular firm was telling us about her past experience. By word of mouth we found out she’d been vastly overstating her experience and you could tell she wasn’t giving us the full facts. Subsequently, last year the SEC investigated them and found them guilty of fraud.”

RBC didn’t invest in Madoff. McFadzean says: “I find it strange that people didn’t realise something was not right. Then again, in the absence of other information if all you have to go on is the return and that looks great… you can see how some may have been attracted to that.”

Taking advantage
Since sub-prime hit, McFadzean explains that the names on his roster haven’t really changed. Rather, he has tweaked the way that managers are used according to risk factors.

“Taking global equity as an example. We have one core investment manager, one who takes more risk, another is more of an absolute-return type manager and another focuses on high-dividend-yielding companies. At the start of the crisis in August 2007, we didn’t have much emphasis on the core asset manager, expecting him to outperform 1% a year. Over the last 18 months,

however, we changed that weighting and now we have 40% allocation to the core investment manager. Our results show we’ve been successful.”

McFadzean says three or four months ago the firm launched an opportunistic approach to take advantage of short-term market movements. “The crux of investment is trying to anticipate things and do that ahead of time. As a result of the credit crisis we have introduced a more active approach, essentially to try and be more nimble, because things are moving fast.”

This opportunistic approach would only be used in an average of 10-20% of a typical portfolio but allows for tactical plays in an ever-changing market.

RBC makes use of instruments like exchange-traded funds to deliver this service. The research into these vehicles is less onerous and carrying out in-depth research into instruments that may only be used for a month is “a bit of overkill”.

On the corporate front, McFadzean says international expansion is a strategy of the bank and that wealth management is a major part of it.

“We used to view ourselves differently. Previously we thought of ourselves as a Canadian bank with international offices. However, we and others now view RBC as a global bank headquartered in Canada,” he says.

In February this year, RBC Private Wealth acquired the Jersey-based firm Mourant Private Wealth, adding more than £3.5bn (€4.1bn) to its asset base. This acquisition forms part of the bank’s focus on the UK.

Over the past year, RBC made 900 new hires across its wealth management and capital markets divisions. One of the most high-profile appointments was Phillip Harris as head of UK wealth management. Before taking the job, Harris was head of the high-net-worth client business at UBS.

©2009 funds europe

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