InvestmentsOct 1 2020

How to pick multi-manager winners

Supported by
Close Brothers Asset Management
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Supported by
Close Brothers Asset Management
How to pick multi-manager winners
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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.

"What we want to see is that the fund has the capacity to grow in future.” 

Mr Shaw says: “If a fund has strong performance but continues to be small in size, then you have to question why.

"You have to ask whether the firm in question is backing the manager, or whether the fund manager is worried about his job, and that is distracting him from running the fund, so eventually performance tails off.”

Mr Shaw gave one example of when he invested in a small fund, which met this criteria. 

He says: “Douglas Brodie at Baillie Gifford managed a fund which we invested in when it was £26m in size.

"We would normally view £26m as too small for us. It is over £1bn in size now. What we saw was that the partners at Baillie Gifford were backing the fund, and that this fund would be Doug’s route to becoming a partner, so we backed it, and the returns have been very strong.”   

Rob Burdett, who is part of the multi-manager team at BMO Asset Management is concerned about fund size, from the other perspective - he is determined that a fund should not grow too large.

He says: “We want to meet the manager and understand what they are trying to achieve. Once we have done that, one of the things we are very focused on is capacity control.

"We want the manager of a fund to be able to tell us how big they think their fund can get. There isn’t a magic number in terms of where we say a fund is now too large, it varies by investment style and by asset class.”

He added that BMO has frequently provided the seed capital for new funds coming to market, and are quite relaxed about being the largest owners of a fund, and also invests in investment trusts as a way to get very specific exposure.  

Performance perspectives 

John Moore, senior investment manager at Brewin Dolphin says that there is the potential risk of a fund getting too large to be managed properly, and this is a significant consideration for him when choosing funds. 

James McDaid, investment manager at GAM, says the major considerations for him when choosing a fund do include historic performance, but if the performance is poor he wants to know what the explanation is for the performance, and if the explanation is satisfactory then he may still buy the fund.

He added that a fund manager needs to have a substantial team working with them on the fund.