Traditional fund selection processes are doomed to fail by picking managers at the top of their cycle, an investment analyst has claimed.
Anthony Murphy, investment analyst for GAM Fund Research, told advisers at the FTAdviser Redefining Safe Havens roadshow in Chepstow today (22 March) that traditional processes are "set up to underperform."
He said: "Typically, multi-managers use a quant screen to provide the metrics for managers in the investment universe they are looking at.
"Then they filter this according to performance, before overlaying a qualitative analysis and finally read through various newsletters.
"This is set up to underperform as the likelihood of picking a winner is low. The odds are stacked against you.
"The process itself leads to the underperformance as it is most likely the adviser or portfolio manager will pick a manager or fund that is at the very top of the cycle, thereby increasing the likelihood of him heading into a long period of underperformance, enhancing the magnitude of losses and leaving advisers having to explain this poor form to clients over the next three years."
Mitigating this, Mr Murphy said, was to start by looking more widely, examining managers from across the globe who have different ways of doing things and who generate true alpha, rather than closely following the herd or a given index.
He said: "We look for managers with high active share, not closet indexers.
"It is also good to search for contrarian, longer-term managers who may have underperformed recently but historically have a good longer-term track record.
"Why? We will look out for this as a short-term underperformance could identify an inflection point in the market, which means the fund's strategy is due for a rebound in the performance."