Adrian Lowcock, senior investment manager of Bristol-based Hargreaves Lansdown, says he does quantitative analysis to filter out the managers that are actively adding value.
He says: “A lot of work goes into identifying out performance and value added. We do a lot of statistical analysis to see if a manager is adding value through his investment style, his approach to stock picking.
“We look through the portfolio to the holdings and look at the activity on that and see whether or not their investment decisions have added value, whether or not they would be better off not making those changes and examining their sector rotations.
“What sectors have they been picking up and what are their relevant positions to benchmarks? All of this information helps determine whether the managers are active and adding value. You do all that before you meet the manager.
“When you meet the manager, what you try and do is identify the manager’s view of the world and determine whether those reflect in the activity in the portfolio. You don’t want their view to be one thing and their actions another. That would be concerning.
“Usually you are looking for an understanding of their decisions. If you have a stock picker, who bases their reputation on being a stock picker, but when you meet them you must make sure they understand the businesses they are buying.
“If you have a macro economic, top down guy who looks at the global economy you want to see what his view on the global economy is and how accurate he has been in the past because that is the skills they claim.
“You want to match their expertise with what they claim their expertise is.
To demonstrate why you picked a fund for a client, Mr Lowcock says you must make sure you recorded the meeting and the research you did.
Ongoing assessment and due diligence is also essential, he adds.
Mr Lowcock says: “Businesses change and management changes and people change. The manager’s views and approach can change. You need to make sure the manager is doing what they said they would.”
There are a wide range of research tools available, both for specific fund research (such as those from Financial Express, Bloomberg and O&M) and also for combing client risk profiles with sector allocation (for example, Dynamic Planner or Finimetrica).
Paul Rutland, investment business development manager of Prudential, says the important thing is to fully understand what these tools are doing for both the adviser and the client; and not to allow the tool itself to become a ‘black box’ with adviser/client slavishly following the outcomes without understanding, discussion and ‘sense checking’.
Unlike portfolios which invest in just one asset class (for example, UK equities), Peter Fitzgerald, head of multi-asset retail funds at Aviva Investors, says a manager who specialises in multi-asset or multi-manager must have access to significant resources including asset allocation, manager selection, risk and strategy.