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Evan-Cook: Why you’ll never find the perfect fund

12 August 2015

Simon Evan-Cook, senior investment manager at Premier, uses his own experiences to explain why, like dishwashers, investors will never be able to find the perfect fund for their portfolio.

By Simon Evan-Cook,

Senior investment manager, Premier

Premier has a problem. It is a stubborn problem that has, so far, defied all attempts to fix it. In fact, it seems to be getting worse. Our problem, I’m ashamed to admit, is dirty dishes.

The population on the first floor of our office has recently expanded. So much so that the old kitchen had to be revamped. As anyone who has shared a kitchen will know; the usual pinch point is washing up.

To avoid a quagmire, it was our collective responsibility to keep the kitchen usable by filling or emptying a standard domestic dishwasher throughout the working day. While this had (mostly) worked in the past, it was clear that this machine wouldn’t be up to its expanded role. So it was, with regret, fired.

In its place came two new, commercial washers. Their advantage was clear: the wash cycle is only five minutes. So it was goodbye to that hour-long wait, during which plates and cups piled up in the sink. Now, we need wait just a few minutes before unloading the machine, thereby clearing it for use again. In this way, the kitchen remains satisfyingly clear all day.

The new machines are, in theory, perfect.

Only they’re not. As the great Yogi Berra once said, presumably after another failed picnic heist; “In theory there is no difference between theory and practice. In practice there is.” And where this theory failed is that, while the new machines may be perfect, we, the users of the machines, are not.

Far from it, in fact. All it would have taken for the system to run smoothly was us - the users - learning a few simple operating rules.

Rules as simple as, for example, rinsing your plate first. Yet our frequent failure here has meant mugs being sluiced in what is best described as a disappointingly under-seasoned minestrone.

If that rule is simple, then this one is Forrest-Gump grade: “don’t put soap in it”. For, as it turns out,  pouring washing up liquid (washing up liquid! There isn’t even a place to put it!) into a commercial dishwasher is a sure-fire way to recreate an Ibiza foam party circa 1998, albeit without the music, whistles or class-A drugs.

There are many more issues to boot. All have resulted in the kitchen clogging up with dirty bowls, and all have been generated by our collective failure (and/or unwillingness) to learn how to use these simple new machines.

I mention this not as a gripe about colleagues (that’s what post-it notes are for), but because it reminds me of the fund world. I have spent much of my fund-picking career pursuing of the Perfect Fund, but have never found it. I now know, however, that the Perfect Fund does not exist. It does not exist because it cannot exist.

Why is this so?

It cannot exist because of us; the users. The Perfect Fund, in my book, would have a number of features. Among other things, it would be entirely unconstrained by benchmark, highly concentrated into the very best ideas and willing to hold niche, illiquid assets that could take years to pay off.

 

In theory, a fund run like this could be a world beater. In practice, however, it would be completely unusable.

Unusable because its stellar returns would, necessarily, be interrupted by long and severe periods of underperformance. Even if I (and that’s a big ‘if’) was prepared to stomach these, chances are that other users would not.

And if they do not, this Perfect Fund would be forced to close, most likely at an inconvenient and costly point in time. QED the Perfect Fund is not the perfect fund. It is a highly imperfect fund. The Perfect Fund, like the perfect dishwasher, is a paradox.

A paradox caused not by its design, but by the competence of its users.

Fund buyers need to understand this. In studying a candidate, we need to work out how susceptible it is to user error. That incredible run up it just had may be enticing, but we need to be sure not just whether we could stand it reversing, but whether its other holders could too.

Because even if we do stand firm, we may be left holding the baby if others cave in.

Likewise, product providers and fund managers also need to understand this paradox. I am second to no-one in encouraging fund managers to step away from the benchmark. But they too need to be wary of taking their holders on too wild a ride, lest they render their fund unusable.

I get the sense that the industry is starting to pick up on this, but only just. It will wise up eventually though, particularly when it realises capital is flowing away from funds they think buyers should use, to those that buyers actually want to use.

 

Simon Evan-Cook is a senior investment manager at Premier and co-heads a number of the group’s funds of funds such as Premier Multi Asset Distribution, Premier Multi Asset Growth & Income, Premier Multi Asset Global Growth and Premier Multi Asset Absolute Return.

Performance of manager versus peer group composite

 

Source: FE Analytics

According to FE Analytics, he has returned 41.10 per cent to his investors during his career (which began in June 2008) meaning he has narrowly outperformed his peer group composite over that time.

Evan-Cook is also outperforming over one, three and five years. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.