Pension funds, charities, advisers and investors are finding it increasingly difficult to select and, more important, keep track of investments.
Volatile markets are sadly not the only problem. External factors such as corporate activity, declining client bases, forced redemptions, high staff turnover and changing processes are all too common in the current environment.
So is it any wonder that independent advisers are looking for professional help to ease the burden of fund selection and provide an enhanced level of monitoring?
One solution to this problem is to appoint a multi-manager provider where an investor can buy, for a given risk/return profile, a selection of funds thoroughly researched to achieve a given return against a varied range of global, international, country and, in some circumstances, specialist benchmarks.
Given the factors covered above and the problems inherent in selecting any fund, it is important that fund manager research departments keep constantly up to date with the investment management world with a continuous, rigorous research programme. This should provide an ongoing assessment of any funds already selected and also aim to identify new smaller boutiques where the skill of the investment managers/ research analysts may be high but, as yet, undiscovered.
The aim of the research process among multi-manager providers is to identify funds that can demonstrate a sustained competitive advantage, which should ultimately equate to a good level risk-adjusted outperformance.
Finally, following thorough fundamental and quantitative analysis, a diversified selection of funds can be combined for each product.
Our multi-manager approach is to analyse funds through three key areas:
The reason for looking in more detail at the business structure and people managing the assets is due to the competitive advantage associated with the investment process being continually eroded. In fact, due to the vast amounts of accurate up-to-the-minute information now readily available through data providers and the internet combined with the explosion of hedge funds and their ability to arbitrage out market inefficiencies, the process, albeit very important, is not the driving factor it once was.
We believe a more fundamental understanding of the overall business structure and investment professionals is key to selecting successful funds in the current environment.
The nature of the asset management business is cyclical. This means businesses will go through peaks and troughs, often coinciding with the performance from the underlying funds. One of the biggest problems that asset managers have seen over recent times has been ownership. Where asset managers have been bought by big institutions such as investment banks, under the right conditions, given the enhanced financial backing, this could prove to develop a very successful relationship but this is very seldom the case.
It is vital for the parent company to understand the cyclical nature of asset management and not be too hasty to cut costs or realign the business during short periods of underperformance and ultimately loss of revenue.
Over the last five years, mergers and acquisitions have taken place in the asset management business. The general theme has been to integrate two businesses whose processes and client bases have been very different therefore causing major disruption in one or both of the businesses destroying the culture built up over a number of years.
We believe it is extremely important to gain a good understanding of the overall business structure to help avoid investing in funds where there are likely to be significant business changes over the short term. In essence, we are trying to replace the techniques used by analysts at asset management companies when they are researching companies for their own portfolios.
As discussed earlier, t he battle to attract and retain quality investment professionals has become a major factor in the overall success of asset management businesses and ultimately the success of individual funds. The high level of staff turnover evident in recent years is one of the main reasons that so little emphasis can be placed on past performance and, to a degree, the investment process.
If, for example, a particular fund (say, a UK equity growth fund) has a strong performance track record over one, three and five years but the team/individual responsible for that performance moved to another company six months ago then the track record becomes virtually meaningless as the process driving that performance will be change under new management.
Staff turnover has undoub-tedly been exaggerated over the last couple of years due to factors out of the control of individual fund managers such as redundancies.
However, combine redundancies with the attraction of hedge funds and a general feeling of the grass is always greener on the other side attitude and it is no wonder that turnover has increased.
Companies which have demonstrated success in retaining key fund managers and analysts in this volatile climate have tended to be those offering sensible remuneration structures and clear, well defined roles where all members of the team feel as though they are contributing to overall process.
However, it is important to note that some degree of turnover is quite healthy. New ideas and techniques are always being developed and it often takes new blood to help identify where possible enhancements can be made.
Part of our research process is to sit in on analysts' meetings at asset management houses and it is very encouraging to witness a healthy debate over stock selection for model portfolios.
It is interesting that the industry is beginning to shy away from a star-manager approach to a more analyst-driven process.
Often, even the most successful star managers have analysts they rely on for particular sectors and it is important to understand how the team works together. Meeting the right people does not always mean just meeting the name on the top of a factsheet but also meeting other members of the team.
Other areas we will cover relate to remuneration. We believe the most successful structures involve a rolling long-term incentive plans (LTIPs) linked both to individual and team performance. This structure helps to limit severe disappointment during short periods of underperformance but aims to remunerate adequately in periods of good performance. Equity ownership in the business is also important to tie in key team members of the team.
It is becoming more apparent that good people are becoming the most important factor in delivering successful performance. Companies need to be able to offer a range of incentives to retain a competitive advantage.
We believe the investment process, although important, does not drive performance alone. As already discussed, asset managers need the right blend of people and a structured business plan to produce successful returns for clients.
However, understanding the fund's process is imperative in selecting funds for multi-manager products.
An in-depth analysis of the valuation techniques, risk controls and overall level of experience of fund managers/ analysts is key to understanding those factors will be positive contributors to the fund over different market conditions and produce the performance required.