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Fighting infection

When we launched the Lawrence House Oeic, we established some strict rules by which we manage the underlying portfolios. One rule is that no fund will appear in more than one portfolio and each sub-fund limits exposure to any one investment group to a maximum of two of its funds. In our opinion, this is a simple way of reducing risk. In the event of one of our selected funds failing to perform, we have limited the damage to just one of the sub-funds. This rule also ensures that each of our funds has a very different identity.

Recent events highlight our concerns. Out of the blue, the US authorities passed a bill against online betting and the price of PartyGaming shares plummeted overnight. While the attitude of the US authorities had been flagged over recent months, I had not met anyone who felt that a bill would be passed with such disastrous ramifications without some form of warning. As a consequence, a number of funds were hit, depending on their exposure to this stock, as they saw their unit prices marked down. Some funds fell by over 1 per cent. If you had held the same fund in more than one of your portfolios, this could have been painful for your investors.

I am not having a go at individual managers for holding this stock in their portfolio but am suggesting that holding the same funds across more than one portfolio is an increased risk and one that is not thought about by many IFAs when selecting a multi-manager fund for their clients.

I have been involved in managing unit trust portfolios in one form or another since 1979 and have witnessed a number of events which you could not plan for, notably the Morgan Grenfell and Baring debacles. In each case, unitholders were protected and did not lose out financially in the long term. But in the case of Baring, who would have thought that a trader in Singapore would cause an unrelated part of the business, Baring Unit Trusts, to suspend dealing in its funds for days while it sought clarification of its position?

As a fund manager, whose pension is invested in his own funds, I am acutely aware of risk. It is not a question of avoiding risk in your portfolios but attempting to find that illusive balance between risk and reward. With the number of available investments greater than at any time in my career, building portfolios with separate identities is not difficult so why limit myself?

If you have an infectious disease, a hospital will keep you in isolation to prevent cross-contamination to its other patients. I have used this simple philosophy to protect my patients who are invested in one of my funds.

Alan Stoakes is head of multi-manager funds at Lawrence House Fund Managers


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