News stories about liquidity concerns in several funds have highlighted the need for rigorous fund selection. At Architas we pride ourselves on robust due diligence processes that can help avoid unsuitable investments. We deliberately set a high hurdle for underlying fund selection, because we only want to hold the very best funds.
This article explains the benefits investors in our funds gain from Architas' five key fund selection factors:
- Well-resourced investment team
- Rigorous system of fund scoring
- Thorough vetting of each fund by the Architas investment team
- Strict fund monitoring system
- Thorough investigation of the operational aspects of funds and fund houses by the Architas operational due diligence team.
Many investors watched with concern the downturn of Neil Woodford's Equity Income Fund. Woodford, whose long and successful track record created huge investor interest, was compelled to stop investors making withdrawals from his fund. He did so to give himself time to sell some relatively illiquid private equity assets and purchase assets that are easier to trade.
Such headline-grabbing stories can arouse fears among investors that they might end up trapped in underperforming funds. This is a particular risk with funds that invest in relatively illiquid assets, such as private equity and property.
Our selection processes give investors in Architas funds the reassurance that every fund we hold on their behalf has been thoroughly researched, reviewed and analysed before being chosen. Moreover, funds are monitored continuously, to ensure they remain suitable and attractive.
1. Well-resourced investment team
Architas has a large investment team, in which each analyst has specialist expertise in a particular investment area, such as UK equities or emerging market debt. Portfolio managers can only buy funds recommended by the analysts and formally approved. The analysts, meanwhile, decide which funds they want to propose by using quantitative and qualitative approaches.
We have a proprietary system of screens and filters, helping us to assess quantitatively those funds that have consistently performed well compared to peers. However, in our view, the best way to assess fund managers is to meet them and get to know their asset management approach. This more qualitative method generally gives us greater insight into what we are buying.
2. Fund scoring
Analysts can't themselves decide which funds to hold, as all funds must go through a thorough approval process. Analysts bring their proposed funds to the Fund Approval Forum, which comprises the entire investment team, headed by the Chief Investment Officer (CIO).
There are three key elements to our fund analysis:
- People: we consider the expertise, experience, stability and incentivisation of the management team of the funds we are considering
- Process: we analyse the investment process of a fund, for example looking at how fund holdings are decided upon, and what conditions would trigger asset sales, to ensure the portfolio remains suitable
- Performance: we look for performance that is consistently strong, and consistent with the stated style and philosophy of the fund.
We score funds based on these three elements, which gives us a common language when it comes to analysing funds. So if someone says, 'This is a 3 for Performance and 4 for People,' we all broadly understand what this means. Importantly, we keep these scores updated: this is key to monitoring funds, as it allows us to identify any changes as soon as possible.
3. Thorough vetting process
Each analyst is responsible for covering the funds in their area. The analyst presents a fund for approval. The entire investment team sits in the Fund Approval Forum and quizzes the analyst about how the fund might meet particular objectives.
The Forum harnesses the collective wisdom of the team. But it recognises that the analyst is the sector specialist who knows the relevant funds better than anyone else in the team.
4. Strict fund monitoring system
We have a disciplined monitoring regime. There are rules in place at the investment and operational due diligence level to ensure we stay on top of developments in funds we invest in.
Underperformance can often be the first indicator of problems in a fund. Any fund that triggers our underperformance warning signals must be resubmitted to the Fund Approval Forum. A decision is made to maintain the fund on the recommended list, remove it from the list, or put it on hold. We have the following rules:
- Funds removed from the list must be sold within one month
- Funds on hold don't have to be sold, but further purchases cannot be made
- Analysts can't keep funds on hold for more than three consecutive months.
5. Operational due diligence team
Crucial for Architas is our strong operational due diligence process. We conduct this work ourselves, whereas some other asset management companies contract it out.
Our due diligence team is independent from the investment team. It analyses the operational, practical aspects of investment funds and its work starts where the investment team's work ends.
Our rigorous fund selection processes are in place because we want to hold the very best funds for our investors. Even so, this does not mean we will always get our fund selection right. But our fund screening methods give investors the reassurance their investments have been thoroughly vetted, and it means they don't have to do the vetting themselves.
This Financial Promotion is issued by Architas. This is for professional clients only and should not be issued to or relied upon by retail clients.
AMML is an investment company that provides access to other investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. AMML in the UK works with strategic partners and AXA Group internal fund managers, to find out more information about this please visit architas.com/inhousestratpartners/ AXA is a worldwide leader in financial protection and wealth management. In the UK, one of the AXA companies is Architas Multi Manager Limited, an investment company that provides access to other *investment managers’ services through a range of multi-manager solutions, including regulated collective investment schemes. Architas Multi Manager Limited is a company limited by shares and authorised and regulated by the Financial Conduct Authority (Firm Reference Number 477328). The company is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD.