How to… Compose a panel of funds

Where to start and what to look out for when aiming to meet the financial requirements of the client

For their advocates, fund panels are like a palette, which advisers can choose from to come up with a tailor-made investment solution for individual clients.

As an efficient tool at the adviser’s disposal, a panel of funds can make their job easier. Money Marketing asked Square Mile head of risk-based solutions research Alex Farlow, Morningstar Investment Management head of manager selection Ruli Viljoen and FundCalibre managing director Darius McDermott to give their take on what to look for when comprising a panel that would work for both the adviser and client.

What are the advantages of having a fund panel?

Farlow: For an adviser firm, you get consistency of recommendation. For the adviser, you have more control over your own advice process. Advisers get less burden with choosing their own funds. When they have a panel, they don’t have to spend time on research, so that could hopefully increase the time they spend on financial planning. From an adviser point of view, the advantages are a decreased research burden and time savings, and from a business leader’s point of view, it is risk reduction – they are in control of centralised processes, which is certainly a big plus.

McDermott: Fund performance should be better, which will mean happier clients, less switching, and more time to give good service.

What is a good starting point for advisers for coming up with a fund panel?

McDermott: Use some software like FE Analytics to screen out serial underperformers, avoid closet trackers and look for funds with high active share that have consistently done well. Cost is a factor and also having a good mix of funds in different asset classes with different investment styles. Advisers can also use high quality, independent fund ratings companies – where they know each manager has been interviewed, passed a quantitative screen and there is no “pay-to-play”. It is hard to ensure that the panel covers everything, which is why perhaps using something like FundCalibre as a “sanity check” at the very least is a good idea.

Farlow: From our perspective, you would want to cover all major asset classes and regions. The starting point needs to be knowing your clients and the types of recommendation that they generally want, then mix those needs. Clearly, there are always going to be certain funds or investments that don’t fall under the core recommendations, and we would deal with them on an exceptional basis. But in a panel, you need to cover the majority of recommendations.

Viljoen: We work with our clients to determine the parameters of the Select List, including a number of funds and asset classes to be included, as well as any specific requirements they may have in terms of share classes, platform availability, minimum investment amount and fees. Our manager selection services team will construct a Select List, to make sure all the client requirements are met and that we provide sufficient choice to give investors the opportunity to diversify by style, investment process and market capitalisation.

How many funds should the panel include?

Viljoen: It is important to have a panel big enough to cover everything, but not to have too many funds included, so it doesn’t become overwhelming. An optimal number for a panel of funds which would cover all asset classes is typically 50 to 100.

Farlow: It depends on how gradual you want to be with it and how many options you want to have. When someone wants to make a recommendation for a European fund, there can be only one choice. But there are a lot of different flavours. What we are trying to do is say that in certain market conditions, you could use a particular style of fund, like growth or value. Somewhere between 60 to 100 funds should cover most.

How often should advisers review the panel?

Farlow: We formally review our panels on a quarterly basis, but informally we review funds every day. We are looking at them to see if there are any manager changes or any other issues that come out in between time, but it is usually best to sit aside and look at the funds and their merits on a quarterly basis.

McDermott: A couple of times a year, no more, unless there is a change of fund manager or big market event.

How many adjustments should be made to the panel?

Viljoen: Lots of factors can influence this, such as the length of lists and the extent to which we can select suitable alternatives. On average, a list that has about 100 funds might see 10-15 per cent turnover in the space of a year.

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