Starting with asset allocation is logical, says Schroders’ Brookes
When asked what is at the core of his selection process, Marcus Brookes, fund manager on the multi-manager team at Schroders, has no hesitation: “Asset allocation should always drive the fund selection process,” he says
When selecting a fund, a good fund selector should, in his opinion, start from the asset allocation first as this leads the decision for which style of fund manager is required for the future environment.
According to Brookes, many fund analysts spend too much time with fund managers who tend to always be bullish on their own portfolio, so this can be counterproductive if the analyst does not hold an opinion about the likely path of markets.
“Starting with asset allocation is logical, and we can find it very helpful to gauge the opinions of experienced fund managers to test these decisions.
“Counter-intuitively we seek managers that are underperforming, because it may be that their style is under appreciated and due a resurgence,” he explains.
At the earliest stage of the selection process, Brookes says he normally
take into consideration performance using Lipper. “A good risk tool that we use to insulate the funds is to hedge currency exposure when required,” Brookes, who manages some €3bn in funds under management, he explains.
Brookes also warns managers to bear in mind that sometimes a five-year horizon is not enough to judge the good performance of a fund and even less to decide to invest in it, as most economic cycles run through a period of eight years instead.
“Many managers can be exceptionally good in different environments. Although it is difficult to generalise, if you look at the data you realise that it is generally true,” he explains.
In Brookes’ opinion, moreover, the fund selection process should also be a blend of a qualitative and quantitative approaches as, he explains, looking only at the quantitative side may not be exhaustive nor helpful to track an asset class performance.
“Actually, underperforming funds/assets are the ones we should be looking at. I’d say analyse funds that are in the toughest position because they are probably unloved, under owned and due a mean reversion,” Brookes says.
STRATEGIES AND MANAGER SKILLS
When asked what the most requested strategies are among his clients, Brookes points at balanced strategies, which he says have been very successful over the last six years.
“Over the past four years, however, people have become increasingly confident about their investments and are counting more and more on IFAs and retail clients,” he says.
As for key attributes to look for in managers, Brookes says the Schroders
selection team pays a particular attention to understanding what fund managers are doing and how they are operating across different economic and business cycles.
“We always scrupulously double check if what the managers tell us is true, which is why we run them through a very detailed interview process where we ask them to talk us through the reason behind, for instance, an investment decision that they recently took,” he explains.
Lack of trust as well as a sudden change of manager are the most common red flags Brookes and his team would look out for before making a sensitive decision on a fund.
“Changes in management are always tricky. We choose funds with the right manager for the right market environment, if the manager change means the portfolio changes, then it is necessary to exit,” he says.
Also, Brookes explains, he is on the hunt for very decisive managers – “the best risk control skill out there,” as he puts it – who do not change their minds often and are “very comfortable with managing money in their particular style.”