Although it must be acknowledged that the past is not a guide to the future, says Gleeson, managers who have a clear and strict investment strategy are usually the same managers investors can depend upon for consistent results further down the road. He says that understanding their approach is the best way to decide if a fund is right for your portfolio.
"The most important aspect when analysing a fund is to see what drives its performance," he said.
"What is making a portfolio outperform or underperform? Unless you understand that, it is difficult to analyse a fund."
"Underperforming isn’t necessarily a bad thing either, but by looking at what the drivers are you can see whether a fund’s performance is repeatable."
"The funds that can repeat their outperformance are the ones with a sound and robust strategy, a good example of that are Julian Fosh and Anthony Cross," he added.
FE Alpha Managers Cross and Fosh run three portfolios – Liontrust Special Situations, Liontrust UK Smaller Companies and Liontrust UK Growth – all of which have a five crown-rating.
Across all of their portfolios, the duo focus on a company’s "economic advantage" and ignore market noise because in their view those who react to short-term news are "merely pawns in the macroeconomic environment".
Every company they invest in must have three intangible assets: intellectual property, distribution channels and repeat business.
"They have a process whereby they have a fairly set idea of what makes a good company and they have proven they can identify long-term winners," Gleeson said.
"You can see what drives their fund’s performance is the companies they invest in. They are not taking a guess or flipping a coin. Their returns can be explained because you can see they did this because the companies they like did that."
This approach certainly seems to have worked. According to FE Analytics, their Liontrust Special Situations fund has been the third best-performing portfolio in the IMA UK All Companies sector since its launch in November 2005.
Over that time the £833m fund has returned 166.73 per cent, while the FTSE All Share and the sector have returned 61.76 per cent and 54.48 per cent, respectively.
Performance of fund vs sector and index since Nov 2005
Source: FE Analytics
However, it is the fund’s ability to preserve its investors' capital that is the most eye-catching.
Liontrust Special Situations has both the second-lowest annualised volatility and the second-best downside risk in the sector over five years.
It is a top-quartile performer for maximum drawdown and has the highest Sharpe ratio over that time as well.
Liontrust Special Situations has an ongoing charges figure (OCF) of 1.88 per cent and requires a minimum investment of £1,000.
Gleeson says it is equally important to make sure investors know they are buying a fund whose manager’s approach cannot guarantee similar drivers of performance.
"When you see a fund that is topping the three-year chart, but you can’t understand why, then that is concerning," he said.
"It could be down to the fact the manager has made a call, a gut feeling, which may be part of their process but it can’t tell you what will drive future performance," he added.
Although Gleeson is a fan of FE Alpha Managers Jan Luthman and Stephen Bailey, he says the process they use on their Liontrust Macro UK Growth and Liontrust Macro Equity Income funds means it is harder to judge whether their performance is consistently repeatable.
"They use a less formal process: they try to identify global growth trends and position their portfolio to benefit from them. They identified in early 2007 the huge amount of debt in the banking sector," he said.
"They moved out of the banks and avoided the credit crunch – which looked amazing. They missed the banking crisis, that’s what drove performance, but it wasn’t necessarily down to a specific process."
"You can’t expect that sort of judgement call to be repeated again," he added.
When looking at their emerging market exposure, investors will be well aware of the dominance of First State and Aberdeen funds.
In both the IMA Global Emerging Markets and the IMA Asia Pacific ex Japan sectors, an Aberdeen or a First State portfolio has topped the performance tables over one, three and five years.
Performance of funds vs sectors over 10yrs
| Name | 3yr | Rank | 5yr | Rank |
|---|---|---|---|---|
| Aberdeen Global - Asian Smaller Companies | 66.58 | 1 | 154.43 | 1 |
| First State - Asia Pacific Sustainability | 47.07 | 2 | 91.87 | 2 |
| First State - Asia Pacific | 39.12 | 7 | 76.89 | 5 |
| First State - Asia Pacific Leaders | 37 | 9 | 71.71 | 7 |
| Aberdeen - Asia Pacific | 28.23 | 16 | 63.46 | 11 |
| Aberdeen Global - Asia Pacific Equity | 27.31 | 18 | 62.37 | 12 |
| IMA Asia Pacific Excluding Japan | 20.16 | N/A |
41.67 | N/A |
| Aberdeen Global - Emerging Markets Smaller Companies |
52.76 | 1 | 138.74 | 1 |
| First State - Global Emerging Markets | 38.37 | 3 | 85.53 | 2 |
| First State - Global Emerging Markets Leaders |
37.98 | 4 | 83.35 | 3 |
| Aberdeen Global - Emerging Markets Equity |
29.9 | 9 | 82.68 | 4 |
| IMA Global Emerging Markets | 7.67 | N/A | 21.71 | N/A |
| First State - Global Emerging Markets Sustainability | 45.05 | 2 | N/A | N/A |
Source: FE Analytics
Gleeson says this helps investors to judge whether a fund's performance is repeatable, as both Aberdeen and First State have a set investment approach – despite the fact their larger holdings may look similar to other funds in the sector.
"Emerging markets funds are index-constrained, so their top-10 holdings usually look the same, with the likes of Taiwan Semiconductor," he said.
"It would be a massive risk to not hold a stock like that, because if it was to have one good day and you didn’t hold it, you would massively underperform. The reason First State and Aberdeen outperform is because the difference is made at the margins."
"Emerging markets are a global theme, but they pick individual companies instead of just buying into that growth."
"When looking at companies, they manage risk by holding stable, cash-generative and well-managed businesses with good corporate governance."
"That’s why they outperform, because they have the resources on the ground that allows them to do that analysis."
"Anyone can make money in the emerging markets when markets are going up, but the level of outperformance they have achieved comes from marginal difference," he added.