When multi-managers choose external funds for their portfolios they want to see particular characteristics from their managers.
John Chatfeild-Roberts, head of strategy, independent funds at Jupiter Asset Management, believes top performers all share similar attributes. ‘They are almost always inquisitive, extremely hard working and ultra-competitive, have a clear head and can think for themselves,’ he said.
Template for success
He believes the best managers come to their own conclusions, refuse to follow the herd, and are humble enough to admit when they have made the wrong call. ‘While we all make mistakes, the key is to make sure those mistakes harm the fund’s performance as little as possible,’ he added.
Chatfeild-Roberts also likes combining experienced hands with fresh talent. ‘We try to identify rising stars when we can. This includes backing Hugh Yarrow and Ben Peters at Evenlode Income a couple of years ago, when the fund was only about £50 million in size,’ he said.
It can also be beneficial to select managers with ‘the wind behind them’. He said: ‘This is in the sense of operating in sectors or countries, or using an investment style, you think will do best.’
Nathan Sweeney, senior investment manager at Architas, focuses on how key figures in the organisation communicate with each other. ‘Team dynamics are important, particularly how the manager interacts with other departments, such as risk management, economists or the asset allocation committee,’ he said. ‘You also want to know the process for a stock to be included or excluded from the fund.’
Sweeney wants managers to provide the rationale for the current portfolio, explain how the portfolio is constructed, and how it fits in with the process and philosophy. ‘The mix of risk and potential outperformance is also important, and whether a fund can bring diversification benefits to our existing portfolio,’ he added.
Resources and solid corporate backing are important but not vital, according to Nick Watson, fund manager at Janus Henderson Investors. ‘Some very good fund managers deliver exceptional performance in relatively modest sized boutiques and investment teams, such as Nick Train and his Lindsell Train UK Equity fund,’ he said.
The key is understanding the exposure the manager offers, and deciding how that could tie in with your own asset allocation views. ‘Tools such as Morningstar Direct, Bloomberg, Style Research, and some proprietary quantitative tools, help us look at the return drivers of a particular manager,’ he added. This helps confirm or challenge the approach the manager is taking and looks at whether performance is correlated with factors that would be expected with their style.
Constant monitoring of chosen funds is also crucial. ‘It is important funds perform as expected and fulfil their role,’ he said. ‘If a manager adapts their investment approach to chase performance, the overall shape of our portfolio may change and expose clients to excessive risk.’
Watson said there were three reasons for the complete sale of an underlying holding, all of them concerned with conviction in the manager. The first is deciding if, from an asset allocation perspective, the exposure offered by a particular fund in the portfolio is no longer wanted. ‘A good example is selling out of UK mid-caps in 2015,’ he said. ‘There are some fantastic managers here but we decided not to have exposure to the asset class.’
Then there is the loss of conviction in a manager, perhaps from a prolonged period of underperformance. In addition, a change of fund manager at the helm or a deterioration in the corporate background supporting a fund could trigger a change.
‘There is also the need to find a replacement that offers the same type of exposure but potentially in a higher conviction fund,’ added Watson.