A common question we get asked in our business is how we rate an investment fund. This then leads to how do we decide that one manager or process is better than the next and where is the best place for an investor to park their money?
In order for me to answer these questions it is important to give some perspective on the industry. The Investment Association (IA) is the trade body that represents UK investment managers. Given the huge variety of funds available in the UK, the IA provides a framework which categorises over 3,500 funds into over 35 sectors, with each sector having a clear definition setting out the criteria that funds must fulfil. Sectors are organised between income and growth producing assets, further classified based on the asset type, region or specific objectives. Each sector is governed by both a sector committee and independent monitoring company to ensure they comply with their sector definition.
The sector groupings provide a starting point for our analytical work. Each sector will vary by size, including a combination of both active and passive funds. We use both quantitative and qualitative methods to understand and compare the funds comprising an individual sector. If we take the UK Equity Income sector for example, which currently comprises 87 funds, we will find that there are a number of approaches that managers take within this grouping. Some managers have highly diversified portfolios, others have more concentrated portfolios, some seek dividend income from small and mid-cap companies while others rely on larger multinationals such as Royal Dutch Shell, HSBC, BP, GSK and Vodafone, which account for a high proportion of total dividends in the UK market. Some managers seek to invest in dividend growing companies while others will use derivative strategies to enhance their income generation. There are numerous ways to slice and dice the sector in addition to the traditional 'growth' and 'value' style orientations. This leads me back to the initial question of how do we decide one fund over the other?
I recently read Superinvestors, by Matthew Partridge, which gives an informative account of some of the most well-known investors in finance over the past two hundred years. He selects twenty of the most successful investors over this period and rates them based on four simple metrics – performance, longevity, influence and ease of replication, before assigning an overall rating to each investor. From traders to stock pickers to venture capitalists, the author selects a group of investors across a variety of specialisms. He compares the likes of Warren Buffett, Benjamin Graham and George Soros to some familiar names in the fund management industry today, including Neil Woodford and Nick Train, using his qualitative rating metrics. The original founders of global investment firms T.Rowe Price and Templeton Investments are included, while the 'father of index investing' Jack Bogle also appears on the list. The author provides a biography of each investor before outlining their respective investment philosophies, examples of their successful (and not so successful) strategies and an assessment on how the reader can learn from each individual story. The author concludes that a variety of approaches have been successfully employed over the past two centuries. The key message, however, is that each investor has created their own 'investment edge', each with their own unique preferences for the types of investments they invest in.
At RSMR, we are similarly looking for managers and teams that have that 'investment edge' over their peers. This may come through specialist knowledge and experience, dedicated teams and resources, and differentiated styles and techniques. We build a collection of data on each fund over time and maintain ongoing dialogue with fund managers and teams to monitor any changes that take place. Therefore, we do not seek to determine that one manager or process is better than the next, but rather to identify managers and teams that have crafted a process which can demonstrate consistency in line with their investment objectives. With a highly diversified universe of rated funds across the IA sectors, we are then confident that we can deliver a range of portfolios for investors according to their risk tolerance and preferences.