Jörg Schmidt is Senior Portfolio Manager and Head of Multi Management & Portfolio Construction within Union Investment’s Multi Asset division since 2010. His responsibilities include the fund selection process and the portfolio construction of the multi-manager strategy for absolute return products, which are integrated in the mutual funds managed by the team. Before moving to his current position, Jörg spent nine years focusing on fund-of-funds management. He established the investment process for the selection of external managers at Union Investment. He began his career with Union Investment in 1998, as a technical and quantitative analyst within Portfolio Management.
Jörg studied business administration at Justus Liebig University in Giessen. After receiving his degree in business administration, he completed a management trainee programme with Commerzbank AG in Frankfurt. He published several articles in various German and international financial journals and books on the topics of style investing and fund selection.
Could you please tell us about the Fund Selection process at Union Investment?
We apply an integrated approach to the fund selection process, which combines manager selection and portfolio construction. When we select managers, we always do this from the perspective of a pre-existing portfolio, which means that we have to make sure that the manager brings something new to our portfolios. We have to be sure that we really find alpha in the manager’s active return stream and no unintended betas to traditional asset classes or style factors. Our whole selection process is based on this core philosophy, so all quantitative screens have to control for betas to asset classes or style factors.
The shortlist of managers who – based on these screenings – qualify for interviews have to prove where they are specialized and where they might have a competitive edge. The next step is multi management, which means that we construct portfolios of very different building blocks. Difference between managers and their return profiles is key for diversification, and from my perspective the most compelling argument for multi management. Different alpha sources provide large potential for diversification and therefore superior risk-adjusted returns. I think you can learn a lot about the advantages of this philosophy if you look at how large multi strategy platforms in the hedge fund business create their multi manager portfolios. We use dedicated optimization tools that look at drawdown behaviour, drawdown interaction between managers and cluster analysis to create a robust book of very different alphas.
How many people are there in your team, and how is it organised?
The manager selection process at Union is organized in a matrix structure, which means that there are no dedicated full time fund analysts. All manager research is done by multi asset portfolio managers, so we have dual roles that combine research and portfolio management. There are several key advantages to this model, for example there is a much quicker implementation in our multi asset funds as we reduce the internal “marketing” procedure between analysts and portfolio managers.
If a portfolio manager invests in a fund that is in his or her area of coverage, it is a very strong signal for all other colleagues as the portfolio manager now has “skin in the game”, to quote Nassim Taleb. The research coverage is broadly split, it is quite rare that a colleague has more than two peer groups under coverage. We believe in specialization when it comes to research coverage, because otherwise it becomes very difficult to ask the right questions.
What parts from your job as a Head of Multi Management & Portfolio Construction do you find more challenging? And what parts do you enjoy the most?
It is probably no surprise that periods of markets stress are challenging times, especially during a liquidity crisis like 2008 or the Spring of 2020 when large degrossings hit markets and fundamentals didn’t seem to work anymore. In retrospect, these are also the periods that have the largest opportunities. As I am responsible for the alternative UCITS book, I remember March 2020 quite well. For example, the dislocations in the merger arbitrage space were so massive that we could not believe the NAV moves we saw day-by-day.
They made absolutely no sense regarding the implied fail rate in the merger spreads and helped us to stick to our course and also to add to some of these strategies. We were proven right and experienced a huge recovery, I would take this also as an example of the things I enjoy most. To stay calm in these periods and grab these opportunities was a great reward for the temporary stress of March 2020. The worst thing to do would have been to go with the crowd and sell out at ridiculous prices.
What aspects do you consider more important when selecting a fund for a portfolio?
To make sure that you have really found alpha and no beta in disguise. And to diversify as many alphas as possible. Don´t fear “overdiversification” – which is simply not possible as long as you find enough positive alphas. And maybe the most important: it could be better to add a lower sharpe ratio strategy with a low correlation to your existing portfolio than to chase the latest high sharpe ratio strategies, which might not bring something really new to your portfolio. Always evaluate managers from the perspective of your current portfolio, not from a standalone perspective.
What processes do you have in place to identify a good manager? And which are the factors, in your opinion, that differentiate a good manager from a not so good one?
As I described above, we initially use a lot of quantitative tools to control for factor risk and similarity of managers. I always have huge sympathy for managers who maintained their style over longer periods even if this might have been out of fashion for some time – take value managers, for example. They have become a rare species, but we added a lot of them – also in the long-short space – in the recent past.
This has played out very well. But these people need the right organizational structure to make sure that they can still do what they do best even if their style does not work for some time. This is one of the reasons why a boutique structure could be an advantage in some cases.
Do you have any red lines when selecting a fund? Are there any sectors, or themes where you would never invest in?
Never say never, because there is always a price – or rather value – attached to every market segment. So this is a question about timing and valuation. Of course, there are always critical elements to analyse, for example capacity management, incentive structures or the transfer coefficient of a thematic fund. With transfer coefficient we mean if a thematic fund is really able to capture the underlying theme with the current asset base or if the access to the theme gets diluted by other – in some cases unintended – factors.
Which themes or sectors do you think are particularly interesting at the moment? And which ones are you trying to keep out of your portfolio?
I am a large believer in market neutral strategies in the equity space, as they bring a large package of advantages to the portfolio, for example: First, they provide excellent diversification between each other if you combine them in the right way. Second, they can use huge opportunity sets based on the large number of stocks in the universe and their ability to also use the short side. Third, they can focus on niches where the manager has got a competitive edge. And fourth, they can be a very good alternative for the defensive part of multi asset funds based on their compelling risk/return profile and relatively low volatility.
Do you have any advice for anyone wanting to start their careers in the financial sector?
At first, create a belief system of manager attributes you will be searching for. Next, create the right tools and steps in your investment process to identify these manager profiles. Then, avoid the noise, stick to your defined profile and let the diversification of alphas work for you.