Tips for grilling fund managers


Selecting funds for clients is one of the most crucial decisions advisers make and manager meetings are key to the process. Not only do they increase an understanding of a strategy but they also provide the opportunity to ask your own questions, rather than just the ones the managers want to answer.

Getting an understanding of a manager’s career history is very important. Ask why they were attracted to the fund management industry in the first place and what roles they had previously. And try to look beyond the lead manager. Find out about the other team members so you can understand more about their career records. All this helps with an understanding of the overall team’s style and motivations, and will show whether they have a real passion for the job.

It is also important to find out what other responsibilities managers have. If they are overloaded with work elsewhere then they may only have limited time to devote to the fund in question. Also ask what they think they can achieve with the portfolio. This will uncover the real investment objective, which could actually be quite different from a lot of its peers.

And what about the fund size and the total amount run in the strategy? Liquidity issues can impact on performance, especially in less liquid markets.  For example, if the fund is small but the total amount of assets under management in the strategy is large, then it could lose the advantage of nimbleness.

When considering performance, it is necessary to see the longer-term strategy on a discrete year basis. This helps to identify managers with a strong style bias or if particular market or economic conditions suit the way money is managed.  It also demonstrates whether outperformance has been generated on a consistent basis or just through one or two particularly strong years. This, in turn, will help you to understand when the fund might struggle. The use of currency hedging is also important, as this could make performance seem much better or worse than would otherwise be the case.

Looking at the investment process, it is crucial to understand how responsibilities in the team are divided and how this fits with research and portfolio construction. Find out if macro analysis is included or if it is purely bottom-up. Ask how long the process has been in place. This will demonstrate if it is tried and tested through an economic cycle.

Finding out what a manager is trying to achieve is important to know: targeted alpha can vary between country/sector and bottom-up stock selection. Find out what the manager looks for in individual companies and what they consider important. It is also useful to know what a manager’s sell discipline is, as many find selling harder than buying. Meanwhile, some managers are prepared to hold cash and use it as an asset allocation tool, whereas others are prepared to be fully invested.

Risk management should also be discussed. There can be controls at country, sector, stock or market capitalisation levels, or it could be an unconstrained mandate. Finding out whether a manager uses or relies on tracking error or value at risk is also important. Investors can do a common sense check by looking at minimum/maximum stock positions or seeing if leverage is used in portfolio construction.

We focus on a manager’s current strategy and the types of positions held, then we check that these fit with the process they have described. We also look at whether the fund’s worst performers over the last 12 months are still held and, if so, why.

The final thing to consider is fund turnover. Turnover costs money but some managers are able to implement trading strategies successfully. If turnover shoots up at a time when a manager is underperforming, it can be a warning sign there is a lack of conviction in decisions made and can be a pre-cursor to further underperformance.

A face to face meeting with a fund manager is a great opportunity to find out what he or she thinks their competitive edge is. Prepare carefully and you will find out an awful lot more than you will read on the KIID.

Jon Lycett is business development manager at RSMR