How to pick multi-manager winners

This article is part of
Guide to multi-manager funds

How to pick multi-manager winners

It is not good enough just to buy funds run by Terry Smith and Nick Train, says Justin Oliver, deputy chief investment officer at Canaccord Genuity Wealth Management. 

He says that while the performance of funds managed by that duo has been exceptional, it has not been a particularly difficult task to identify those funds over the past decade, and so it is difficult for a fund-of-funds manager to justify charging a fee to create a portfolio containing just those high profile names.  

Mr Oliver says: “The value is added by creating diversification. Funds run by Lindsell Train for example have done very well, but there needs to be value funds to complement that style, and funds that are not in fashion today but can do well in future. This is where the value gets added. It also comes down to finding, not the star managers of today, whom anyone can find, but those who will be the stars of the future.” 

The topic of a 'star' manager is itself up for debate. James Davies, investment manager at Close Brothers Asset Management, says that when people talk about star fund managers this tends to mean managers with a good recent track record, or managers that promote their views extensively. 

He says that whether a manager is famous or not is something he is “agnostic” about, and the ability to identify future top performers tends to come from what he calls “boots on the ground”, meaning his contacts in the industry alert him to promising managers. He also attends conferences and manager meetings which are not always open to advisers or their clients.   

When it comes to identifying attractive funds,  the performance chart is “irrelevant initially” according to Fergus Shaw, portfolio manager and partner at Cerno Capital.

Size matters 

He says: “The performance line chart should not be the first thing you consult, the first question is whether the manager is aligned with what we want to achieve. The second question is, are they in control of their work environment?

"For example, if they are getting two graduates thrown at them every year to manage, if they had other responsibilities in the company, then that is a distraction we do not want to see.”  

Darius McDermott, managing director at Chelsea Financial Services and manager of that company’s multi-manager fund range says: “One of the things to look at in terms of performance is whether a fund manager is underperforming relative to their style of investing.

"So a value fund manager underperforming against the growth fund manager is not necessarily a worry, but underperforming against other value fund managers is where there can be an issue.”    

Mr Oliver says the next consideration for a fund picker is the fund size. 

He say: “We can buy small funds, and are happy to do that sometimes, but of course it is one of the things we have to be most aware of, we do not want to own too much of a fund, that isn’t good for us or for the fund manager, who would constantly be worried about his job.