Multi-managerOct 12 2012

Bottom-up investing

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ByAidan Kearney

Despite European Central Bank President Mario Draghi’s reassuring “whatever it takes” words, Europe is still entrenched in a vortex of austerity and has much work to do on the political front. As summits come and go and the eurozone lurches from one phase of the crisis to the next, any progress towards a lasting and viable solution seems painfully slow.

This should not come as a surprise though because the problem is more political than economic. The decisions and agreements which are necessary to hold the euro together will not happen overnight – we could be looking at a weak European economic outlook for many years to come.

Political and economic uncertainty surrounding matters of such global importance leads to nervousness. Choosing fund managers is difficult in any environment, but trying to shut out all the ‘market noise’ and focus solely on the merits and qualities of underlying investments is particularly difficult.

Such uncertainty has pervaded investment markets for quite some time now and, while a resumption to more fundamental, bottom-up investment is clear, exactly when this will be is not. However, via careful and skilful stockpicking it has still been possible to generate strong returns through diligent bottom-up investing. This is also how some approach fund selection. Fund managers rigorously interview and monitor managers and, as best as possible, look beyond any immediate market concerns.

The difference between the best and worst performing funds between June 2011 and June 2012 was a staggering 79 per cent. Of course, this disparity of returns between investment funds is nothing new, but it does serve to highlight the importance of effective fund selection and the challenges that investors face in this regard.

Through active management and constant monitoring, managers seek to identify fund managers who can consistently outperform their peers as well as those who perform well in certain markets. Resources are dedicated to finding future long-term top performing funds. Furthermore, once a fund is chosen the work has only just begun. In order to ensure that the funds remain at the top of their game, managers continually monitor their selections and their peers using quantitative and qualitative methods which private investors simply do not have access to; at the slightest sign of weakness managers scrutinise their selections vigorously so as to determine whether the issue is merely a blip or something more fundamental that requires action. However, managers take pains to avoid tinkering with the portfolio needlessly, acting only when we believe necessary.