Keep outperformers close but, underperformers closer. Don't fall in love with a strategy and consider manager selection an art, not a science. Fund analysts from Budapest to Santiago reveal their top tips.
Ramon Tol, Senior Fund Managers Equities at Blue Sky Group, Amsterdam
Among others purposes, fund analysis is meant to verify the consistency and style patterns of the investment process. First and foremost, is about understanding the strong and weak points of a fund, ie, when it is likely to out and underperform and exploit that information to your benefit. There is a quantitative part as well as qualitative part to fund analysis.
With the qualitative part I am referring to an analysis of the team, interaction and motivation. Concerning the quantitative part, I would like to mention that one often hears the argument that historical performance is not a guide to future performance. However, historical performance and in particular performance attribution does reveal quite a lot about the investment process and consistency of a fund manager. It can go even further in showing the strong and weak points of the fund manager in question. It is important is to keep your friends (ie, outperforming managers) close, but your 'enemies' (underperforming managers) closer. Outperforming managers might become overconfident and lose inspiration. However, literature shows that performance persistency tends to be larger among underperforming managers which therefore requires more attention.
Mattias Hagen, Head of Manager Research at SEB Wealth Management, Stockholm
Manager research is all about analysing the process and functionality of individuals and organizations. This is indeed a people’s business but to look at it from an art and not science point of view is wrong but if looked from the other perspective (science) it becomes too much of a black box. However, first you must establish if the philosophy and process has an edge over its peers. When you have established that you will have to analyse if this edge is sustainable when applied in a process. You need to analyse the way people behave in different situations, what processes they have in place in order to stick to a discipline, in what way the team members communicate, what makes them tick, that the surrounding organization has the right set up, etc.
Of course is it hard to predict human behaviour but you should strive for an understanding of a potential repeatability and process functionality. The question you have to answer if the particular manager may repeat the functionality of his process and if the outcomes also may be predictable. That is, of course after you have concluded that his philosophy and process has something of an edge to offer.
You would not pay 250 million for Torres just because he is a great goal scorer but you would hopefully have a clear idea on in what makes him tick, which environments and preconditions he would keep on delivering in.
Jonathan Beckett (JB), Fund Assessment at Lloyds Banking Group, Edinburgh, UK
Good fund analysis is about building a working knowledge of fund manager behaviour, the human element and sometimes unseen factors behind the numbers. Before and after any assessment meeting my approach is to look for anomalies from a manager's normal performance pattern, both on the upside and downside. Focusing on perennial underperformance is no better than chasing the tail of risk.
Attila Rébak, CIO at QUANTIS Investment Management Zrt, Budapest, Hungary
In a nutshell, it is about finding and monitoring an investment team who follows a repeatable investment process based on a credible strategy, and for whom the client interest is paramount. The cornerstone is the credible strategy which means different thing for different fund selectors. For me the strategy should invest for the long term (low turnover) seeking some value anomaly which eventually they may come across. These anomalies happen because market players are human individuals with their own behavioural bias.
A repeatable investment process should consist of a structured idea generation, portfolio construction/monitoring and risk management, with built-in rules and limits. It is important to safeguard the manager(s) from their own biases. The risk management is also very important; it is better if the manager shows some asymmetric response towards expected upside and downside movement.
The client interest is the most heterogenic aspect and it two most important features are fees and reporting. The fee level should be in line with the expected value added, while the communication should be timely, honest and as detailed as required by the strategy.
Christian Villouta, CEO at Banco Penta, Santiago, Chile
After deciding which region or sector you would like to invest, the next step is finding the right fund that will deliver the risk/return profile we were looking for our asset allocation. We try to find empirical evidence in the return pattern of the fund that the manager is following the right strategy for us. Of course we would like to have a similar risk/adjusted performance going forward; hence we need to make sure that the fund behaviour would continue to be similar. The problem is that nobody and nothing would guarantee that continuity.
Because those reasons, fund analysis is not only about selecting funds, but also as what to do going forward. Whenever you decide to continue with a fund, you are actively taking an investment decision to buy/hold the fund… because you will always have the ability to divest.
Manuel-Yutaro Rubio Inoue, Head of Alternative Investment Strategies at Allfunds Bank, London
The fund analysis regarding alternative investment analysis is a very holistic process that starts with a sound quantitative analysis combined with a thorough ‘qualitative’ process. Crunching data has been always controversial but those who claim that quantitative analysis is useless only prove that they don’t properly understand what lies behind the numbers. That’s why they probably disregard the use of quant analysis.
Albeit you should keep in mind, this is only one of the tools available. It helps you to bear some independence and avoids you to ‘fall in love’ with some fund managers or houses. The fund analysis hence involves several other topics, including even fund manager’s emotional intelligence or his working environment. How do we combine everything then? It’s a matter of your former experience and ‘common sense’ that allow you to explain the outcome of the quantitative screening (‘the fact’).