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How to pick the perfect the fund for you

10 May 2015

A panel of financial experts tell FE Trustnet how they choose an appropriate fund manager, how they work their cash as hard as possible and what they look out for when making an investment decision.

By Lauren Mason,

Reporter, FE Trustnet

Even the most experienced investors often skip steps or forget a number of investment golden rules, according to Thomas Miller’s Matt Lonsdale, Orbis’ Dan Brocklebank (pictured) and Apollo Multi Asset’s Ryan Hughes.

One of the major challenges investors face is simply the huge selection of possible funds to choose from. For example, there are some 3,490 funds in the Investment Association universe alone –  as well as hundreds of off-shore funds and investment trusts – and the fact that investors are  bombarded with advertisements and ‘top fund lists’ doesn’t help matters. 

What’s more, as we all know, there are various risks involved with any investment as its common knowledge that the market cannot be timed accurately and that some things can’t be predicted.

However, financial professionals agree that while investors face a daunting task when it comes to building a portfolio, steps can be taken to make sure investors pick the right funds and that there is a substantial amount of damage limitation that an investor can do to protect their savings without necessarily having to time to the market.

With that in mind, a panel of financial experts share their golden rules for investments.


Understand what you’re buying

One of the most important factors when choosing an investment is understanding the fund’s motives. For instance, if the aim of the fund is to protect capital, it may not provide the heady returns that a higher-risk growth fund might.

 “The key thing for me, before ever investing a penny into anything, is to make sure you understand what it does, where it invests and what the risks are,” Apollo Multi Asset’s Ryan Hughes said.

“If you understand this before you invest, you’re setting your expectations so that, if the manager has a period of underperformance, it might be expected and you’ll feel comfortable with it.”

“This means you’re far less likely to buy and sell at the wrong times. It’s not about buying something that’s done well. It’s making sure that you really understand where they invest.”

The multi-asset fund manager says that he compiles a mental list of factors that would cause him concern before considering buying into an investment. This list includes how important the team is to the investment process, how important the investment universe is and the maximum capacity of the fund, amongst other factors.

“All these different questions are mapped out before I’ve invested a penny,” he explained.

“If they say they’re a mid-cap growth manager, they genuinely are a mid-cap growth manager. You’ve got to understand this so you know that, when mid-cap growth is doing badly, their under-performance is justified.”

“People forget that. So often people don’t do enough work up-front to make sure that their expectations are well mapped-out before they invest.”

However, Hughes admits that this is time-consuming and such levels of depth may not be possible for retail investors.


“It takes time and it’s not easy, but it’s not meant to be easy,” he said.

“If it was easy, everyone would make lots of money and that’s not how it works. Do your work before you invest a penny – that mantra is crucial to anybody, be it a professional or a private investor.”

 

Find an investing style that suits you

Orbis fund manager Dan Brocklebank enlists what he calls the “three Ps” checklist before investing – philosophy, process, and people.

However, he personally deems an investment’s philosophy as the most important factor to consider before making a decision.

He said: “There are many investment philosophies out there - there are many ways to skin a cat.  I’m sure many of those philosophies are very successful, but there are going to be some that aren’t.”

“We feel comfortable with an investment philosophy that can trace its roots all the way back to various investors, but most notably Warren Buffett and Charlie Munger all the way through to Benjamin Graham, who was really the father of manual investing.”

Graham, an American investor who was born in the late 19th century and whose disciples included Graham Kahn and Warren Buffett himself, taught a process he called “value investing”.

“His philosophy is that you have to think of it as a share – not a number on a screen or a bit of paper. You’re buying a fraction of a business, so there’s no reason just looking at a chart. You’ve got to think what that business as a whole is worth,” Brocklebank explained.

When getting under the bonnet of a fund and analysing their stocks, he believes that it’s important to adopt the role of a business analyst as well as an investor.

In fact, with the exception of incredibly fast-growing businesses such as Facebook, Brocklebank says that the intrinsic value of most businesses remains fairly consistent on a day-to-day basis, and that short-termism is an issue that many investors share.

“[Business value] might go up, but the vast majority [of businesses] are about changes over time. And yet the stock market is this crazy volatile animal that bounces around all over the shop because it’s driven by human psychology.”

“Look for funds who wait for the opportunities where share prices have been pushed away from the intrinsic value of the business.”

“You see many people make mistakes, and it’s firstly when people focus on factors that are only really relevant in the short term – they’re transient factors. People get fixated about them for various reasons.”

However, this raises the question of whether a fund’s poor performance is a blip in the market or if it’s simply a bad fund.


Check whether the fund’s process works

While past performance is not an indicator of future performance, it’s important to know that the fund is able to meet its aims. For example, if a funds aim is to protect capital, a logical step would be to check how it performed in previous falling markets.

Matt Lonsdale, head of business development at Thomas Miller Investment believes that analysing fund’s long-term performance can provide a flavour of what the fund manager’s motives are.

However, he stresses that this is just one factor in a series of traits that investors should look at closely.

“If you’ve got an unconstrained manager and he’s been at an investment house for five years and he’s still there and that investment process is still the same, you start to get a bit of a feel for his investment style,” he said.

“Also, if you’ve got an idea of where the markets are going or how positive and negatively volatile departments are - that’s also going to give you a bit of a measure. But if you look at the fund and it’s had three different managers, and the group’s had a new CIO then you won’t have a handle on the consistency of what that fund does.”

“Look at investment style, look at management tenure to give you a bit of a feel. If you were to be more technical or you’re working with an advisor, you can take that further and look at beta, so, “How much more or less will this fund move?”

“If you understand the style of the house and what it’s trying to achieve, you start to get a feel for whether it’s right for you.”

 

Figure out your risk appetite

Lonsdale also believes that one of the most fundamental factors which is often overlooked is how strong the investor’s stomach is, though this is often only realised after some challenging learning curves.

“You don’t find this out using a massive array of quad screens, you can get a feel for this yourself depending on your financial situation and how comfortable you feel with the market,” Lonsdale explained.

Once an investor feels comfortable with their chosen risk threshold, the business development head says that the next important stage is to ensure that what the investment vehicle they choose does exactly what they want it to do.

“If a waitress gives you a pint of beer and you’ve ordered a coffee, it’s normal to say “I don’t want this”. So why would you take your money and say “that will do”?” He asked.

“People will get swayed by headline lists, top buy lists, and that’s marketing. You’ve got to be exacting with what you want, though.”

“If you look at these lists and none of them on there are what you want, just don’t buy them. If you can’t find what you want, seek advice. If it doesn’t exist because you’re looking for a fund with no risk that gives you 15 per cent income and 12 per cent upside, you maybe need to have a re-think.” 

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Ryan Hughes

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