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Stay the course

Funds that perform constantly over the long term are key to successful fund selection

I did not place a bet on Padraig Harrington to win at the Open at Carnoustie last week so I didn’t benefit financially from his surprising, yet great win.

The first thing that strikes me is that on no particular day of the tournament did Harrington score in the top four. He ranged from fifth place on days three and four, to 10th on day one and to 20th on day two. He did not win on any one day of the tournament, yet he won the tournament overall.

This experience is not dissimilar to those involved in the process of fund selection, which is so important to advisers and their clients when choosing a fund for their long-term savings.

To have won with Harrington was a complicated selection. Select him in the first place and then maintain faith in him during the ups and downs of the tournament seem to be a process which involved as much luck as judgement.

So, why did I not select him? The short answer is he did not pass one of my key initial screens – this was based on a previous major winner being more likely to win than a first timer. This was the main selection criterion for me and the basis of my short list which included Woods, Els, Goosen, Singh, Daly and Furyk and Cabrera. Once this list was chosen, I then had to narrow this to my actual choices.

Even if I had chosen Harrington, how would my ongoing review of his performance have stacked up? Day one was fine, top quartile, but at the end of day two, the picture had changed – he dropped to second quartile.

To pick the outright winner is difficult, especially when there is a big field of contenders. And if this is true of a field of 120 golf players, how much more of a challenge would it be if the choices numbered in their thousands, as they do in fund management?

There could be two opposite ways to approach this. Take a flier by making a random selection or take time to do the research – studying the field and using indepth research as the foundations for objective decisions to be made in fund selection. Either way can produce a winning outcome, but which is more reliable and more likely to produce results?

Selection should not be built on finding a single winner but around picking consistent performers whose track record indicates a high probability of above-average performance. This creates a far greater chance of winning.

Els and Furyk did not win but they were top-decile performers for the tournament. While I did not win any money on them, they delivered great performance and in fund performance terms would have been ahead of benchmark or median performance.

Unlike the Open at Carnoustie, backing the winning fund is not the key to building an investment portfolio for the long-term. The key is looking out for those first-quartile performers who maintain a position at the head of the pack.

Good, short-term performance shouldn’t overshadow the advantages of longer-term performance, the only measure of substance in the selection process.

All my short-term bets – among them Daly, Cabrera and Bjorn – ended up poorly. Judgements made in the heat of the moment, based on some short-term performance led nowhere.

Proper analysis and judgement are needed to determine the quality players in the field.

The good news is help is at hand. One of the recent developments which has gained momentum in our industry is the trend towards multi-manager offerings. A well resourced multi-manager offering should monitor the investment risks and include a range of best-of-breed managers, while having a transparent and documented audit trail of their investment decision making.

It takes time, effort and expertise to do all the research necessary to form the basis of a good selection process. Few advisers may be able to devote the time and effort to this process. If this is an issue, be honest and find a source which provides this somewhat time-consuming, but critical information.

Robert Noach is head of UK financial institutions at Schroders

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