Daniel Zachmann, head of research at Bedrock, seeks unconstrained fund managers that are not tied to benchmarks. He cites the Alken European equity fund and TCW Unconstrained Plus Bond fund as examples. Zachmann closely monitors funds' historical exposures and performance to ensure consistency and avoid style drift. He also considers recommendations from fund managers on new opportunities. Zachmann is excited about opportunities in peer-to-peer lending and alternatives despite these being nascent markets.

1. June 2015 Issue 55 CITYWIREGLOBAL.COM
WITH THIS ISSUE
Convertibles and European
assets under the microscope
BREAKING OUTBedrock’s research chief Daniel Zachmann
on tapping unconstrained opportunities
M&A MANIA
How top selectors
are dealing with
the dealmakers
ABENOMICS AGONY
James Salter on fighting
Japan’s liquidity love-in
BLEEDERS
TO LEADERS
Legg Mason McLemore’s
steep learning curve
page 28
page 56
page 36
page 10

2. JUNE 2015 ISSUE 5528
PLAYERS > FUND SELECTOR > DANIEL ZACHMANN
A
s a fund selector across multiple asset
classes, Bedrock’s Daniel Zachmann
needs an open mind, but the shutters
come down on index huggers. ‘We
are not looking for any one thing in
particular but there is a characteristic I want all
our managers to share – I don’t want them tied to
a benchmark,’ he says.
‘While some of our allocation views are largely
in line with consensus, the only thing that really
unites our picks in terms of style or belief is this
unconstrained idea.’
Zachmann, who oversees CHF 3 billion (€2.8
billion) in discretionary mandates as head of research
at the Swiss independent wealth manager, cites
a fund selector favourite to illustrate his point.
‘We were increasing our allocation to Europe
towards the end of last year and, despite recent
wobbles, we still think European equities offer a
lot of value and should outperform other regions
in the future.
‘Therefore, we are invested in Alken, which is
admittedly a popular choice, but its investment
philosophy is exactly what we look for in a manager.
It is unconstrained, long-term, with a very strong
track record and investment team.
‘We complement this active management
style with passive exposure through ETFs.’
This strategic focus on benchmark-free
equity managers follows through to bonds.
‘The areas that we find attractive at this
stage are the unconstrained bond fund
strategies. Essentially, we want fixed income
investors to have a broad mandate and be able to
actively manage their duration exposure.’ Zachmann
is well aware of the increasing scrutiny unconstrained
bond funds face due to the added complexity and risk
that some of them can carry but he believes careful
selection within this market can actually reduce risk.
‘Despite what is going on in the bond markets,
we think these funds can protect capital. Also,
these strategies are more likely to have powder
dry for when opportunities present themselves.’
Here Zachmann names the TCW Unconstrained
Plus Bond fund as his preferred pick. The strategy
is managed by US mutual funds group TCW, former
home of revered bond investor Jeffrey Gundlach.
BACK TO THE FUTURE
Freedom comes with responsibility so Zachmann
wants to know exactly what he is getting into when
he chooses an unconstrained manager. While all
fund selectors must pay some attention to past
Daniel Zachmann has one key pointer when it comes
to picking funds: look for an unconstrained approach.
Bedrock’s head of research talks to Chris Sloley about
the rigours of choosing active managers, investing in
nascent markets and zero tolerance on style drift
performance, Zachmann puts particular emphasis
on how fund managers have previously positioned
their portfolios.
‘Before investing in a manager we try to really
understand their style and what makes them
different from others.
‘We spend a lot of time looking at their historical
exposures to make sure their track record is
consistent and that they have been able to
generate alpha steadily over time.’
Armed with spreadsheets, Zachmann believes
in the old adage that you can tell a lot about where
a person is going if you can see where they have
been. This isn’t purely for performance, as
Zachmann accepts historical results can be an
unreliable indicator of the future, but for
psychological reasons too.
‘With all this close monitoring we try to be as
granular as possible. The biggest red flag for us
would be style drift,’ he says.
So once a fund manager makes it into
Zachmann’s portfolios the scrutiny continues.
‘We watch them very closely month by month
and then we do quarterly updates and at least
two face-to-face meetings a year,’ he says.
To maintain this focus, Zachmann shuns the
idea of a formal ‘watch list’ which, in his eyes,
can be an unwanted distraction. ‘We try not to be
influenced by short-term performance and one way
to do that is to not be too focused on a watch list.
If you are, you will always be tempted to allocate
to those that have been the best performers over
a short-term period.’
Nevertheless, Zachmann still keeps an
eye on new developments and often uses
the fund managers themselves as a
soundboard for fresh ideas. ‘We ask them
for recommendations, who they rate in their
peer group, and that is a great source of
information,’ he says.
‘Unconstrained bond
funds are more likely
to have powder dry for
when opportunities
present themselves’

3. CITYWIREGLOBAL.COM 29
DANIEL ZACHMANN < FUND SELECTOR < PLAYERS
GUIDING
LIGHTS

4. JUNE 2015 ISSUE 5530
PLAYERS > FUND SELECTOR > DANIEL ZACHMANN
Zachmann says there is no fear of fund managers stealing
market share from one another and they are more than happy
to suggest new names for his team to consider, especially if
they’re nearing their capacity limits.
One of these names at the top end of its assets range is
Egerton Capital. The US group’s long-only fund has been a
mainstay of Zachmann’s core equity holdings for a number
of years.
Elsewhere, Zachmann is happy to go slightly off the beaten
track and name-checks Cantillon Capital Management as a
good investment.
‘Cantillon was established in 2003 as a hedge fund manager
and we started investing with them in their long-only product
when they launched it in 2005. It is a great investment firm
with a strong track record and impressive team,’ he says.
MOVE ON UP
Attention to detail and knowledge of niche markets is part of
the reason Zachmann has risen to prominence in the firm he
joined as something of a rookie in 2006.
Fresh off an internship in his native Geneva, Zachmann was
first hired by Bedrock as an analyst before being promoted to
head of research four years ago.
Rather than reinventing the wheel, Zachmann says he sought
to build on the approach the group had worked hard to develop
following the financial crisis.
‘We stamped our mark on everything from 2009-2011 and
really improved the investment process,’ he says.
‘Since then it has been more about tweaks than major
changes but as with any firm we are always looking at how we
can do things better.’
One area that Zachmann is particularly animated about is
the alternatives side of his portfolios. The firm’s moderate
risk portfolio currently allocates 45% to equities, 35% to fixed
income and 20% to alternatives. ‘Over the last few years, we
have tried to find attractive opportunities that have emerged as
the investment environment evolved. For instance we invested
in US non-agency mortgages, and more recently in a direct
lending fund. But really the investment we are most excited
about is in the peer-to-peer lending space.
‘This market is in its infancy and will
continue to grow and innovate, while
disrupting the traditional banking sector.
This will make it easier for investors to
access different asset classes and
types of return streams that weren’t
available before.
‘Peer-to-peer lending platforms in
the US have issued around $10 billion
in loans, which is tiny when you think
that the numbers for consumer credit
in the country are probably around $2
trillion.’
The firm’s first moves into this area
are relatively tentative and Zachmann
While Zachmann says the bulk of his assets are in traditional markets,
his client base has become more expansive. His original clientele of Swiss
high-net-worth individuals has extended to Western Europe
and now the Middle East and Latin America.
‘Our LatAm business is doing very well and we are seeing
more and more clients there. What is interesting about our
approach is that we offer truly global mandates. So we are
putting together discretionary portfolios which can work
for LatAm clients as much as Middle Eastern ones.’
As a relatively small player which oversees CHF 7.5 billion
($8 billion) in assets, Bedrock could potentially benefit, rather
than suffer, from complexities facing the Swiss financial market,
Zachmann says.
‘We are an independent wealth management company
and we don’t actually have custody of the assets, so,
unlike for some of our peers, the increased regulation
in Switzerland has not been an issue.
‘While there might be a concern in that there is less
traffic towards Switzerland, it really has been a great
opportunity for us. Given the added complexities and
burdens, a lot of private bankers have been looking
to move into smaller, more nimble investment firms.
‘We operate a totally independent platform,
meaning we have open architecture, and investors
like that.’
NEW AREAS OF ALLOCATION
JUNE 2015 ISSUE 55
pp g
ent evolved. For instance we invested
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FOOD FOR THOUGHT
Zachmann’s entrepreneurial
edge extends beyond the fund
managers he favours and, along
with two friends, he has formed
gluten-free food company Free’d.
‘We always wanted to create a
business together and we thought
about a lot of different ideas,
then one day we had our eureka
moment.
‘We looked at trends and noted
that healthy living and gluten-free
food was a fast-developing one.
So we thought, why don’t we try
to create a brand which is fun and
approachable and tastes good and
we did that and it is going great.’
Having formed in early 2014,
the brand has already made its
way into high street stores such
as Holland & Barrett and Whole
Foods.
Delicious gluten-free
crispbreads
‘The investment we
are most excited about
is in the peer-to-peer
lending space’
is likely to apply his usual levels of scrutiny here once he
decides to take the plunge.
‘We are targeting 10% net return from the asset class
with limited risk. We think there is tremendous room for
growth and attractive risk return numbers.’