June 2023 marks the tenth anniversary of Fabrice Kremer's arrival at the helm of BL Fund Selection 0-50. Ten years in which the fund has weathered a great variety of market configurations. This anniversary is an ideal opportunity to talk to him about the strategy's key principles and the results obtained.
Can you remind us of the fundamentals of BL Fund Selection 0-50's strategy?
BL Fund Selection 0-50 is a conservative-allocation fund of funds, geared to both capital preservation and generating returns. If I had to sum up my approach to managing the fund in a nutshell, I'd say "Protect regularly. Take risks prudently." For me, the Fund's DNA lies in that delicate balance between generating returns and taking risks.
In practice, the fund aims to generate long-term performance of 2% to 3% above cash yield while seeking to control the level of potential losses at tolerable levels for a cautious investor, possibly 5% to 8% in crisis periods.
The strategy is intended to be more resilient during equity market downturns, even if this means capturing less of the upside in excessively fast or quite long bull markets.
How does BL Fund Selection 0-50's asset allocation differ from funds investing in direct lines?
In quite a traditional way, the portfolio is built around an equity risk allocation that can vary between 0% and 50%. This allocation is supplemented by other asset classes to diversify the sources of return, each component having a specific role to play depending on the market environment.
What sets the fund apart from funds that invest directly in securities is the possibility of supplementing the traditional asset classes of equities and bonds with specific absolute return strategies that offer further opportunity to diversify the portfolio. This added flexibility can prove very useful in periods when both equity and bond markets are under pressure, as was the case in 2022, for example.
In addition to asset class diversification, what other levers do you use to influence the portfolio's risk profile?
We start from the basis that while equities are the primary driver of portfolio performance, they are also the main source of volatility and risk. With this in mind – and knowing that I want to leave the management styles of the selected strategies full liberty to create added value in relation to their benchmarks – I don’t adjust my exposure to the underlying funds too frequently.
In order to maintain a portfolio with risk-return characteristics that are appropriate for changes in the market environment, exposure to equity risk is dynamically managed through hedging strategies (index futures). These can be implemented rapidly and therefore respond quickly to changes in market sentiment.
In simple terms, always mindful of the balance to be maintained between potential gains and risks, I tend to reduce my exposure to equity markets when they have appreciated sharply and the risk of a correction is greater, and to increase it after a strong correction in order to take full advantage of the coming rebound.
What are the main principles underlying the analysis and selection of the underlying funds?
Multi-management is one of BLI's long-standing areas of expertise. We are a team of six working in this segment, four of whom are analysts entirely dedicated to fund analysis. Our fund analysis focuses on quantitative performance and risk criteria but is also based on an in-depth qualitative analysis of the underlying funds, with the ultimate aim of understanding how each fund is managed and therefore what we should expect from each in terms of behaviour in different market phases.
To what extent do you invest in funds managed by BLI?
For BL Fund Selection 0-50, I have chosen not to invest in funds managed by my colleagues, which ensures the absence of any conflict of interest in the fund analysis and selection process.
Given that BL Fund Selection 0-50 is managed with a long-term, conservative approach, how has this translated in terms of performance and risk/return profile?
Over 10 years, the fund has been able to generate cumulative performance of 29.6%, equivalent to annualised performance of 2.6%, thereby significantly outperforming the universe of comparable funds (Lipper Global Mixed Asset EUR Cons – Global), which posts cumulative performance of 8.4% (0.8% annualised). What's even more important to me is that this significant outperformance was generated with volatility relatively close to that of the average of competing funds.
10-year performance history
Note: performance net of fees for the B share in euros. Past performance is not a guarantee of future results. Data at 31 May 2023. Source: Lipper/BLI.
In my view, the cornerstone of the portfolio's long-term performance lies in what I would call ‘performance convexity’, which means the portfolio's ability to get ahead in bear markets and maintain its lead in bull markets.
This convexity of performance, which exemplifies the approach I use in the portfolio, is rooted in the Fund's two major characteristics which I mentioned earlier. Firstly, the depth of our investment universe, which enables us to combine numerous asset classes whose strategies are difficult to access via direct-line investments. And secondly, the great flexibility and responsiveness I have to adjust the portfolio's exposure to equity risk in response to short-term market trends.
What lessons have you learned after 10 years at the helm of this strategy?
The lessons I've learned over the last 10 years mainly revolve around the nature of the markets. You could say that the markets function like elastic bands that stretch and ease at regular intervals. This offers recurring opportunities to act, react and correct.
It is therefore generally advisable not to make decisions under pressure from the markets, but to wait until they give us an opportunity to make the decision in our own time, a good deal more comfortably.
In this sense, I now tend to have a central scenario on which I base an approach that is simultaneously flexible and patient, opportunistic and thoughtful, sometimes tactical and sometimes strategic, bearing in mind that time often provides a second chance (or something approaching it) to intervene if an opportunity was initially missed. This seems to me to be an effective way of avoiding any accumulation of misinterpretations and the notorious ‘revolving door’ effect in allocation decisions.
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Fabrice Kremer, Fund Manager BL Fund Selection 0-50, email@example.com
Final date of writing: 14 June 2023
Date of publication: 14 June 2023 at 14:30.
The author of this document is employed́ by BLI - Banque de Luxembourg Investments, a management company licensed by the Commission de Surveillance du Secteur Financier Luxembourg (CSSF).