How MGP chooses the best funds for its client

MAPFRE Gestión Patrimonial (MGP), MAPFRE’s financial advisory area, takes the selection of investment managers and funds for its clients very seriously. Not only are the clients’ assets at stake, but so is the Group’s reputation. Ismael García Puente, head of investments and fund selection at MAPFRE Gestión Patrimonial, makes a distinction between two types of risk when selecting an investment firm: those that are visible but difficult to predict, and those that are invisible but predictable.

The first category includes risks related to profitability, volatility, the Sharpe ratio, Beta, and others. “These are observable because they can be calculated from net asset value, but hard to predict as they are always based on historical data,” notes Mr. García Puente.

The second category comprises a range of other variables, such as organizational structure and teams, internal controls, corporate governance, risk committees, regulatory compliance, liquidity risk, investor concentration, assets under management, and others.

“They pertain to the firm's risk-protective culture. These risks aren’t visible because they aren’t reflected in the net asset value, yet they are highly significant,” Mr. García Puente adds. Indeed, in some instances, a fund’s underperformance can be attributed precisely to these types of risks, which are more closely linked to corporate culture and internal controls.

To tackle both types of risks, MGP carries out a process of operational due diligence. The primary goal is to prevent operational and procedural losses, conflicts of interest, and to offer solutions. This process is divided into two separate parts. First, MGP requests a number of documents from the management firm, including its annual accounts and external audit reports.

Next, each firm must complete an individual questionnaire. This is the most novel aspect of the process, inspired by the practices of French asset manager La Financière Responsable (LFR), in which MAPFRE holds a 51% stake. This includes questions about the organization, investment risk, and operational risk.

The questionnaire also includes a section with questions about environmental, social, and governance (ESG) criteria, which the MAPFRE Group always takes into consideration when making investment decisions.

“It’s essential to receive that information from them and analyze it afterward. The goal is to establish three safety nets by requesting that documentation and using the questionnaire: one for investment risk, another for operational risk, and the third for regulatory compliance,” Mr. García Puente explains.

Based on the responses, the management firm’s business performance is analyzed to check that the company is in good shape. “This analysis is the first important safety net. Understanding these variables often sheds light on issues facing the firms,” adds the head of investments and fund selection.

In the responses, certain “minor” flaws may emerge, prompting further discussion or requests for additional information from the firm, while others may be more severe. “Finding any of the latter would result in the management firm not receiving approval to be part of the portfolio universe or the advisory service,” Mr. García Puente says.

The main problem identified in recent months is that the risk team is not independent from the investment team, which is one of the underlying reasons for the fall in net asset values,” he adds.

If the management firm is rejected after this process, none of its funds can be included in MGP’s listings unless there is a change in any of the responses given. If approved, additional inquiries will be made concerning the funds that pique the team’s interest.

Mr. García Puente stresses that this analysis doesn’t replace traditional analysis but adds an extra layer of qualitative scrutiny for a greater number of safety nets. “Our investors can rest assured that they’re investing in something that, in principle, meets all requirements. Through this process, we gain deeper insights into the management firm, compiling a wealth of non-financial data and information that is crucial for our reputation,” he emphasizes.

If you would like more information, MAPFRE Gestión Patrimonial has 10 offices distributed throughout Spain, as well as customer service phone numbers, all of which you can find by clicking here.