So, whether an adviser speaks to the manager or a product specialist how can they be sure to get useful information on how the fund is managed? The adviser needs to ask the right questions; these normally begin with why, and come from preparation before the meeting.
If the adviser simply asks, what is your investment objective and how do you manage the fund to achieve the objective?, it’s easy to receive a bog-standard presentation which could be recorded and accessed online.
However, if he asks, for example, why the manager went overweight sub-investment-grade credit during a period when similar funds were buying government bonds, or why they had a significant drawdown in a month when peers made money, they are more likely to get answers that give an insight into how the manager really thinks and how the fund is actually managed.
With that information, a decision can be made whether that manager is following the investment objectives and therefore providing what is expected.
Ratings agencies
Doing homework on a fund can take a lot of time, checking out the performance history and digging into past annual reports and factsheets for historical positioning, investments bought and sold over the years, etc. Meeting with the fund manager and/or product specialist also takes time.
The adviser who has decided to outsource has probably taken this decision because they have limited time. They may therefore prefer to get the help of a rating agency or consultant that does qualitative research on funds.
Rating agencies that do qualitative research normally check all of the documents mentioned above and the established ones normally get regular access to the fund managers. Those with experienced analysts will normally go into a meeting well prepared and will generally be asking probing questions that get to the heart of what makes the fund tick.
They are usually able to bring this to the attention of advisers, although it may not be in publicly available reports and the adviser may need to pay to subscribe to a premium service.
How can you be sure that a fund is sticking with its objective and mandate?
If the adviser (or rating agency) has done a thorough investigation of portfolio positioning overtime, and noted the periods in which the fund has outperformed or lagged they should get a clear idea of how consistently the fund has been managed with its investment objective and mandate.
For example, if the manager of a fund in the Mixed Investments Flexible peer group said that they aimed to outperform the median fund over three years rolling with below-average risk, but the performance history showed they had a worse drawdown than the old Active Managed sector in the second half of 2008, that should prompt some questioning about risk control and the thinking behind his portfolio positioning at the time. Any positions that exceed stated limits should also be questioned.
