Canaccord Genuity Wealth Management has pinpointed five “red flags” that prompt it to avoid buying a fund for its clients, according to the firm’s investment director.
According to Adam Ross meeting fund managers to discuss how they run investors' money is high on this list of things he considers important to judge a fund.
“You can definitely get a good steer as to how well they will perform from a face to face.
"They might not be the best presenter in the world, but to run a successful fund, you don't need to be a great public speaker.
"Similarly, those that are almost too slick in face to face situations might not have the best attributes for running a fund. Your gut instinct is an excellent indicator though and you should trust it. “
Mr Ross said the first warning sign he looks for is “style discipline”, meaning he wants fund managers to stick to the style of investment they typically use, and if the manager begins to drift from that, it is a signal to sell the fund.
He said: “We look at how it has performed relative to other funds. You need to have a proper understanding of where that performance has come from - that it is part of a concerted strategy rather than just chasing income."
He gave as an example former Invesco star manager Neil Woodford, who has had a rocky time since striking out on his own with Woodford Investment Management.
"With [Woodford's] defensive strategy he's really not had a great year these past 12 months." admitted Mr Ross.
"But he has faith that his strategy will come good in the long term.
"You have to look at a three-five year cycle. You really don't want to go with a fund manager who abandons their strategy on a whim and changes direction in order to try and maximise income in other areas.
"If a manager starts changing their strategy like that, the alarm bells should start ringing.”
Mr Ross said he is also concerned when there is what he called a “lack of disclosure".
“If your fund manager is opaque about what is going on with his fund, you might want to think twice," he said.
"If someone is a bit reticent about letting people know what's going on with their strategy, that may well be because there is something they would rather keep hidden."
Mr Ross said investors should beware of fund managers who are reluctant to tell you what positions they hold, how much they have allocated to particular sectors, or what geographies they are invested in.
"If someone is a bit lacking in communication, then you probably need to dig a little deeper,” Mr Ross said.
Mr Ross said liquidity is also a potential red flag
He said: “We carefully assess whether there's enough liquidity in the fund and also in its underlying assets.
"For example, after Brexit, the liquidity in open ended property funds shrank considerably. As a result, we don't invest in open ended property funds - we only invest through investment trusts.”
The size of a fund is also a consideration for adviser Philip Milton, who runs Philip J Milton and Co, an advice firm in Devon.
He said the problem is that when funds get to a certain size following a period of strong performance, “it stops being able to invest in the same things that gave it the strong performance in the first place”.
Mr Ross said the final consideration is the quality and experience of the people running the fund management business. He said that while there are very many large, reputable fund houses, there are smaller operators that need to be checked.
David.Thorpe@ft.com
