MAY 2012


FUND SELECTION


15


TIM GARDNER (L) & ALAN THEIN (R) Co-managers, Legal & General Investments


We give equal consideration to asset allocation and stock selection in con- structing our portfolios.


Both are solid sources of alpha, and we find having a diverse source of returns helps us to perform in differ- ent market conditions.


In examining managers in which to invest, we take into account a wide range of factors, delving into all aspects of their investment process, trying to ascertain, for example, where the alpha in the performance comes from. Is it the manager or another member of the team who is providing most of the best ideas? Do they have a repeatable edge over their competi- tors? Are portfolios constructed effec- tively and is there a sensible approach to risk management?


We spend a lot of time talking to them in detail about the stocks held in their portfolio to determine whether there appears to be any differentiation from their peers in their thought pro - cess and ability to spot opportunities. We do not have any set restrictions or exclusions when it comes to experi- ence or track record as we always approach new funds on a case-by-case basis. However, one area we do not like is when we see managers thinking too much about asset-raising rather than performance, or an incentive structure that encourages this. We spend a significant amount of time on the organisation itself when considering the merits of any of its investment strategies, as the overall management of a group will influence all aspects of the business.


We do not have a pre-determined preference for a large over a small firm, one based in Britain or overseas, or a well-established name over a boutique.


Instead, we look for positive char- acteristics such as strong vision and leadership, and a sound business plan. We like firms to espouse and display a culture of performance first, asset gathering second. We also pay close attention to a firm’s balance sheet dynamics.


DAVID COOMBS Head of multi-asset investments, Rathbones


The first thing we do is to take a top- down decision – where do we want to invest?


Then, which part of that market or sub-class of the asset do I want? Structure is also an important con- sideration.


Do I want an investment trust or an open-ended fund?


If I were looking at smaller com- panies, I would perhaps look at a closed-ended fund, which could better handle liquidity issues.


My next consideration is invest- ment style, such as growth, income, mixed asset or defensive.


After that, I look for a fund man- ager that fits in the above criteria, looking for managers who have per- formed in line with expectations for their investment style. It is about being able to find a predictable pat- tern of returns.


I need to know how a manager is going to behave in a certain environ- ment. I cannot handle a manager who is too inconsistent in style. We invest with the idea of a mini- mum holding period of three years, and we do not invest with any man- ager without seeing them first. Underperformance by a manager doesn’t cause us too much concern, as we will have done enough work to understand why.


Besides, you have to let good man- agers underperform in order for them to outperform; you have to let them take risk. Style drift is of greater con- cern to us.


I do have some set biases in the managers or funds I favour. I prefer those who are experienced, who have been running money for a long time. I also prefer smaller funds, as big ones can become mediocre. In looking at the group, it is all about culture over brand. We look to ascertain a group’s distribution strat- egy as we have an aversion to those pushing their funds hard to amass assets.


We will also examine who they marketing to and why.


JOHN CHATFEILD- ROBERTS


Head of the Jupiter Independent Funds team


Selecting fund managers is part art, part science. Our starting point is to conduct quantitative portfolio and performance analysis to assess how the manager and fund is likely to behave in specific market environ- ments.


Then we conduct interviews with those we have identified as being par- ticularly interesting.


In some cases this will include managers who have been completely out of favour but who we feel could be approaching a recovery in perfor- mance.


During interviews we believe it is crucial to focus not only on the port- folio itself but also on the “soft” fac- tors that may affect performance, such as the environment at home and work.


As well as assessing whether the culture at work is conducive to deliv- ering strong performance, we will also look at the corporate background to ensure the company is financially sound and stable.


‘ ‘


You have to let good managers underperform in order for them to


outperform; you have to let managers take risk. Style drift is of greater


concern to us


Building the portfolio is then about correctly assessing the envi- ronment and selecting the fund man- agers for your shortlist who you believe can perform best in such an environment, with a focus on the overall risk you may be taking and acting in a timely manner to change the portfolio.


We do not place artificial restric- tions on ourselves with regard to the type or size of funds we invest in. As investment is both an art and a science, if you try and turn it into too much of a scientific process, you run the risk of foregoing much of the alpha. We look at each individual fund and its potential inclusion in our portfolios on its own merit. The trick is to identify the best fund managers, work out in which conditions they tend to do well (and when they will do badly), invest in their funds at the right time, and finally, take your profits at the cor- rect time as well. Timing your entry and exit is very important.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48