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FUND SELECTION


MAY 2012 On the hunt for the pick of the bunch


Jupiter’s John Chatfeild-Roberts says the fund of funds selection process “is both an art and a science”. Kira Nickerson talks to six fund strategists to find out what they like and dislike in a manager and how they distinguish long-term skill.


JOHN


HUSSELBEE Chief executive, North Investment Partners


We are trying to construct a portfolio in much the same way as you would a team – putting funds in a position to do a certain job for various times in the market cycle.


We look at several key areas, the most important of which is process. It has to make sense, be robust and repeatable, and be clearly articulated. In assessing the manager of a fund we look at the depth of their experi- ence. Have they helped run or evolve that process over time? Performance track record is a tool in manager selec- tion, showing whether the application of the investment process has been rewarding.


A manager need not necessarily have been running a fund for a full three years, but must have been run- ning money in that manner at least for some time. We do not necessarily rule out new managers, but we do have a bias towards those who have been run- ning money for a considerable period. We also study performance in the ongoing monitoring of fund managers, looking for consistency, and whether or not performance has been in line with our expectations.


Sometimes a manager will under- perform at certain stages in the mar- ket cycle or environment, but we are less convinced when underperfor- mance is unexpected, when the man- ager’s style or process would have been favoured. Inconsistent or unex- pected outper formance is also cause for review, as it may indicate a devia- tion from style or process.


Groups play a role in our assess- ment as we look for anything that may detract or interfere with the application of a manager’s ability. All groups have a house style, which can affect the way in which managers are reviewed, how analysts are set up, and even where they are located. Not all investment groups are good at all areas.


Yes, financial stability of the group matters. We are looking at fund man- agers and how they are managed, and the more stable managers will stick with the more stable houses.


GARY POTTER Joint head of multi- manager, Thames River Capital


Inevitably, historical performance plays a role in capturing our attention to look at a certain fund. We also study performance to judge a manager’s abil- ity to manage money and generate alpha. We then evaluate that manager’s capability and the degree to which they can repeat performance.


Performance, though, is just one ingredient; we also look to assess capa - city, the number of mandates they run, the quality of the team and the resources and culture of the group. The latter is important, but mostly in regard to the group being the right fit for the manager.


We also look at incentives. There has to be a strong tie-in for a manager to their performance; in our experi- ence this can be highly motivating. With regard to capacity, we favour managers unencumbered by assets, or with fewer funds to run.


The funds do not necessarily have to be small per se, but small enough so the manager has the flexibility to impart their judgment.


When looking at the people and team behind a fund or manager, we are not exclusive. A team does not have to be a certain size; instead, we look at the depth and breadth of the available knowledge.


While we would question managers who have had a tough period, this has to be put into context. Every manager will go through a bad patch, but that is the beauty of multi-manager funds – they don’t all go through it at the same time. We gauge the relevance of the underperformance, such as a small- cap manager underperforming when large companies are outperforming. We take a practical approach to assessing managers so would not rule out a new manager or new fund. In fact, by having a rigid three-year track record rule we could miss some of their most potent performance. New funds and new ideas are fine so long as there is something we can hang our hat on, some form of past record of the process or manager’s ability.


BAMBOS HAMBI Head of fund of funds, Standard Life Investments


We have a universe of more than 5,000 funds – on and offshore – that are eli- gible for sale in the UK with reporting status. Performance screens aimed at identifying consistency are run look- ing at a fund versus its peer group and index over three and five years. If a fund does not have a long enough track record we will examine its performance quarter by quarter and we keep a close eye on new or forthcoming launches, which we have no problem supporting so long as they pass our due diligence or qualitative assessments.


All of this helps to narrow down the list to around 250 onshore and 300 off- shore funds.


In the qualitative portion of our process, we look at the five Ps: philos- ophy, process, people, performance and price.


‘ ‘


New funds and new ideas are fine so long as there is something to hang our hat on, some


form of record of the process or manager’s ability


The first looks at understanding what a manager is trying to achieve and examining the process to ensure it is deliverable and repeatable. We probably spend most of our time in this area of assessment, look- ing through port folios, relating what the holdings tell us, challenging the managers. For instance, I remember a manager telling me he selected com- panies based on quality management and yet when looking at his portfolio there were several examples that didn’t fit.


In analysing those responsible for a fund we look to ascertain who are the key drivers behind the philosophy, process and performance.


We meet all managers before we would ever invest. As part of this, at times we will even sit in on analyst meetings if they are key to the way in which a fund is managed. We also look to spend time with the co- or back-up manager to ensure something is in place in case something were to hap- pen to the lead manager.


Not everything comes down to price but we do look to ensure we use our buying power to get the best pos- sible price for our clients as the better the price, the better our returns.


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