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

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.

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.”

People over processes

Aviva Investors has a specific process for adding holdings to its fund of fund vehicles, according to Peter Fitzgerald, co-head of the multi-manager team.

Called the ‘Seven P Process’ it looks equally at the parent company’s strength; the people; the ‘philosophy’; the investment process; the performance; the positioning and the product itself. Of all of them, Mr Fitzgerald highlights the importance of ‘people’.

He notes: “Regarding people we look at who are the people managing the portfolio, are they experienced, how many of them are there and are they sufficiently resourced? That for us is absolutely essential.

“Many firms will say it’s the process that is important, and that is one of our P’s, but we think it is the people that effectively make the process, so the people for us is very important and we like to see experienced individuals.”

Mr Fitzgerald adds the product part of the process has recently expanded. “The reason we’ve expanded on this is that our funds of funds are ‘Nurs’ [Non-Ucits Retail Funds] so we can invest up to 20 per cent into non-UK regulated funds.

“So it is very important to understand the product structure, not just for the offshore funds but also the onshore funds. It is understanding what are the costs? What are the fees associated with this fund? How much money is the manager running? Is it at capacity or is the manager running enough money to make it viable?

“We also look at the prospectus and the annual report and accounts really to understand the detailed working of the actual product.”

Selling out

But while deciding on an initial investment takes time and research, selling out of a holding requires just as much work, especially when dealing with portfolios that are carefully balanced.

Ms Shah notes: “Changes in the portfolio depend on the opportunity set of the asset classes we invest in and whether or not we have conviction in the managers.

“We would not necessarily sell a manager because they had underperformed; instead, we would review performance over several quarters to understand the reasons for this - if the investment case remains robust we would continue to hold.

“We may sell a fund if we feel it is quite large and there is another more nimble fund that is better able to take advantage of the opportunity in that asset class.”

Mr Fitzgerald notes a further part of the ‘Seven P Process’ includes writing a detailed research report on every manager before they are used in the funds. These are then updated every six months at a minimum, following a meeting with the manager.

He adds: “We update each of those seven sections in our report, and if anything has changed substantially and we’re not necessarily happy with those changes that would most likely trigger an exit from the fund. What tends to trigger sells prior to those six month reviews is a manager departure or a significant departure from the team.”

Each multi-manager has their own processes for selecting and selling holdings in their portfolios and these differ from investment house and even teams within the same company. The key is to understand how the process works and that it is relevant for the risk profile of the client.