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Galaxy closed to new investments

The longer we manage our fund of funds at Hargreaves Lansdown, the greater the similarities we see between fund of funds management and traditional equity fund management. The equity fund manager performs company analysis to determine the quality of businesses and to ensure they are not paying too much for the quality. This involves finding companies with a viable and desirable business structure, as reflected in the balance sheet. They also look to identify good management that can consistently deliver returns for shareholders.

A fund of funds manager generally does not have to spend as much time ensuring the viability of a fund but we certainly have to identify managers that can deliver quality performance.

The macroeconomic picture may not drive the equity manager’s decision-making process but they understand that any company can have a good year of performance when its sector is in the sweet spot of the economy. The key is identifying those companies that will suffer less in a downturn and benefit more in an upturn for their particular line of business.

In much the same way, we realise that fund managers can have good years of performance when their style is in favour. The key is to understand what makes the fund tick, irrespective of market conditions, and identify managers who can perform relatively well even when their style is out of favour. To do that, we employ a proprietary quantitative modelling tool that separates skill from luck. This analysis allows us to understand the style (value or growth) and size bias (large or small cap) that the manager employs over time and how this affects the fund’s performance, positively or negatively.

For the equity manager, the next stage is to meet the management and try to identify those that are truly exceptional. Many equity managers look at director dealing to see whether the management believe in the business and are incentivised to make it work. Similarly, we spend a lot of time ensuring that fund managers’ interests are aligned with those of the unitholders and that they are highly incentivised to perform. Equity fund managers try to gauge the quality of management by looking at what they have done in previous roles. As fund of fund managers, we have built a database to track fund manager movements to ensure that the track record of any fund is linked to the individual or team that produced the performance. Equity fund managers often try to get access to the second tier of management to try to fully understand the workings of the business; we try to meet in-house analysts to understand how the team work together.

Once an equity fund manager has identified the stocks they wish to hold, they have to consider portfolio construction. A manager is unlikely to want to put all his eggs in one basket and will balance the portfolio with core stocks which provide stability while unlikely to be top performers. Within the Hargreaves Lansdown income and growth portfolio trust, such a holding would be Artemis income.

The equity manager then has more aggressive positions in stocks with greater risks but also greater outperformance potential over the shorter run. Such a holding within our fund would be Framlington equity income. By combining core holdings with other potentially more esoteric holdings, the equity manager as well as the fund of fund manager attempts to provide not just consistent but consistently good performance.

Both equity fund managers and fund of fund managers are looking for opportunities in businesses that will stand the test of time and perform better than their competitors over the market cycle. Investments are made in companies where there is proven management expertise and whose management interests are aligned with those of investors. By fully understanding the opportunity presented, we both attempt to build portfolios that have a blend of stability and opportunity that will allow us to produce the best performance for unitholders.

New Star’s Galaxy portfolio has closed to new investments.

The £190m portfolio service, which has more than 7,000 investors, offered three funds of funds managed by Mark Harris – the performance portfolio, fund of funds and managed growth.

The New Star monthly income unit trust managed by John Cornes was also included in the service.

It was closed for business at the end of November after it became clear that investors were increasingly preferring fund supermarkets or life office platforms to investing direct.

It was thought that products such as Galaxy were less relevant to platform-based investment since they could only be made available for direct investors.

New Star expects the service for existing investors will not be affected and all terms will be honoured. Life cover, which was available within the portfolio, will continue in line with original terms and conditions. The four underlying funds in the Galaxy portfolio can still be accessed separately outside the portfolio.

Marketing director Rob Page says: “Since we took over this portfolio, we have just not seen significant enough demand for the product to keep it open. We consulted with a number of IFAs to see how they felt about it and then took a decision in house to close to new business.”

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