Comparing Mixed Investment funds

Ken Rayner, director of Rayner Spencer Mills, says a performance filter is important, but that this is only relevant if combined with an understanding of how the fund is operated and other qualitative aspects of the fund.

“It is also important for the adviser to link this information to the risk profiling evaluation they undertake on each client. This can focus the requirement on risk or return or on specific asset allocations so the selection is tailored to client goals.

“For us the managers’ resources and research process is the most important factors in evaluation of the fund. This allows us to understand how the fund will be run and therefore how to use it in combination with other assets.”

It is essential that advisers get under the bonnet of the fund they are considering.

David Cartwright, head of insight at Defaqto, says: “In recent years it has become clear that many advisory businesses don’t have the time or resource to run investment propositions for their clients, so many now look to outsource much of this.

“Our research indicates that managed funds have evolved into two distinct groups: return-focused and risk-targeted. However, many advisers have continually fed back to us that it has been a real challenge to make fair and relevant comparisons in this market.”

Ben Yearsley, head of investment research at Charles Stanley Direct, adds that a key question is whether the client uses a fund of funds or not.

Mr Yearsley points out they would get more active management but pay about 1 per cent a year more for the privilege. Whether to go down the fettered or unfettered route is another consideration.

Do you want your chosen fund to be able to invest in the entire market place or simply funds from that house? This is before you get to risk and how a fund is managed, for example benchmark orientated versus a big asset allocator.

Gavin Haynes, managing director of Whitechurch Securities, cautions it is vital that a fund must be managed in line with an asset allocation that is suitable for the client.

While looking at performance versus the peer group is useful, as these sectors are so broad ranging the adviser needs to look at how performance has been achieved, looking at the risk taken versus the benchmark and assessing factors such as volatility and drawdown.

“A key feature that advisers should be looking for is funds that have a demonstrable consistent track record of outperforming in rising and falling stock markets and can demonstrate a record of strong ‘alpha’, that is beating their respective benchmark.

“I also believe that it is very much the manager’s track record that the adviser should focus upon when selecting funds. I am a great believer in accountability... it should be the fund manager who is responsible for the performance.”