Research and analysis of funds and fund managers can either be quantitative, qualitative or a mixture of the two.
Quantitative research is objective and compares funds against their peers or a suitable benchmark, using fact-based and measurable attributes such as returns and volatility.
Defaqto’s Diamond Ratings of funds and fund families, which have been running for several years, are an example of quantitative research, comparing funds and fund families against their peers using criteria such as risk-adjusted performance, ongoing charges and fund size indicate the fund’s quality.
Another advantage of quantitative research (in addition to being objective) is that since such data for Oeics and unit trusts is readily available.
Large numbers of funds can be easily compared to each other across a variety of different metrics regularly.
One disadvantage of quantitative research is that it is backwards-looking.
‘Past performance is not a guide to future performance’ is one of the most commonly used phrases in the investment management industry.
Also, there may be reasons behind any underperformance that numbers alone would not pick up.
For example, data might show that an equity fund’s returns have been below those of a broad-based benchmark over recent years.
However, if the manager follows a ‘value’ style of investing then this would be expected, as ‘growth’ funds have fared much better over the last few years.
So sometimes under-performance or other ‘bad’ numbers need to be put into context.
Qualitative research is more subjective and covers the harder to measure aspects around a fund, for example, the quality and ability of the fund manager(s).
The advantage of this type of analysis is that these aspects provide additional insight and are generally more forward-looking, giving a better idea of how the fund might perform in the future.
A disadvantage of this approach is that it is more labour and time-intensive.
Meetings with fund management firms to see key team members and learn about their investment philosophy and process, typically take two to three hours each, and often more than one meeting is required, potentially putting a strain on the resources of adviser firms if they do decide to go down the route of qualitative research themselves.
In the last year, Defaqto has added a qualitative layer to its fund research, in the form of Fund Reviews of funds and fund families.
Defaqto Fund Review documents are around 12 pages long and are divided into quantitative and qualitative parts.
The quantitative section includes the fact-based and measurable information that also forms part of our Diamond Ratings, including returns, risk, fund size and fees.
However, this provides an opportunity to comment around these, both from ourselves and the fund manager.
For example, any periods of under-performance, above-average charges or peculiarities in the asset allocation data can be explained.
The qualitative part of the review then covers what is referred to as ‘the 3 P’s and the 3 R’s’ -
Questions appear on the last page of this article.