How do multi-managers pick the funds they will invest in?

This article is part of
Multi-Manager Funds: Under the Bonnet - May 2013

Outsourcing investment decisions to a multi-manager or fund of funds vehicle may seem like a simple solution, passing on the burden of research and asset allocation.

But with 430 funds in the mixed investment and flexible investment IMA sectors, the majority of which are multi-manager or fund of fund vehicles, there is inevitably a diversity of approach that advisers much get to grips with. How are these managers choosing which funds to invest in?

A sample of 10 funds from the Mixed Investment 40-85 per cent shares sector, investing in collective investment schemes as well as individual equities and bonds, reveal portfolios ranging from 11 to 195 holdings.

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Some only invest in funds from their own investment house but many multi-manager funds invest in a range of vehicles – both open and closed ended - across companies. So with a rough average of 60 holdings per multi-manager fund the same level of due diligence, research and conviction is needed to invest in and create a portfolio of fund managers as it is to pick an individual stock.

Assessing managers

Mona Shah, assistant fund manager on the Rathbone multi-asset portfolios, explains: “Our process begins with an asset allocation perspective, and so the starting point is whether or not the asset class is attractive. We are long-term investors and, generally speaking, ignore sectors/fads that are en vogue.

“We may like an asset class a great deal, but we may be unable to find funds in which we have sufficient conviction. Funds do not necessarily have to demonstrate a certain level of assets, but the investment house in question must be a going concern.

“For example, if it were a boutique, we would check the report and accounts to ensure this was the case. If the track record of a fund is not very long, but the manager has a good track record from his previous house, and we are confident his performance can be maintained in his new role, we would still invest.

“We buy funds where we have conviction in the manager, and believe that the investment process is robust and sustainable to ensure consistent returns. Managers who can display they have an information edge are preferred.”

David Hambidge, director, Premier Multi-Asset Funds, notes the team carry out detailed research and analysis with a focus on “paying the right price for an investment”. He adds this tends to give the fund a contrarian investment style.

Mr Hambidge adds: “When we are selecting fund managers, we only invest with those who use consistent and repeatable processes. We assess each manager’s track record, process and style through extensive analysis and hundreds of face-to-face interviews each year.

“We apply the same rigour when we select any of our investments, but it’s not just about picking investments that we believe have good potential. Any new holding must also fit within each fund’s risk profile.”