How to spot red flags when selecting managers

Throughout my career managing multi manager portfolios, I have analysed a wide range of funds and met with countless portfolio managers. While there is no way to guarantee performance or completely avoid being disappointed by managers, there are some key principles that we adhere to within the Fidelity Multi Asset team, which serve to help mitigate the risks of investing in actively managed funds.

If a manager was to show exceptional outperformance in rising markets or experience more drawdown than their benchmark during a selloff, this would be cause for concern as the manager has deviated from their stated aim.

Make sure it does what it says on the tin

An important part of manager selection is analysing a fund's style across the cycle. For example, if a manager has a more defensive philosophy, it is reasonable to expect them to preserve capital in difficult markets and to perhaps lag in strongly rising markets. If they were to show exceptional outperformance in rising markets or experience more drawdown than their benchmark during a selloff, this would be cause for concern as the manager has deviated from their stated aim.

Don't understand it? Don't buy it

Generating alpha is becoming increasingly difficult, and while good managers will likely employ a wide range of tools to manage a portfolio, the risks should be clear. This doesn't mean that the use of derivatives or alternative strategies is necessarily a negative, but it is important to understand how these instruments are used.

If you are employing an active manager, be sure they aren't simply piggy-backing on the index, as there are cheaper ways to get this exposure. High active share doesn't necessarily mean the manager is doing a good job, however, but it is one of a number of measures to monitor over time to see if a fund is being managed in line with expectations.

Beware closet indexers

With the rise of passive investments, buying the index is cheap and straightforward today. With that in mind, if you are employing an active manager, be sure they aren't simply piggy-backing on the index, as there are cheaper ways to get this exposure. High active share doesn't necessarily mean the manager is doing a good job, however, but it is one of a number of measures to monitor over time to see if a fund is being managed in line with expectations.

Experience matters – but fund manager tenure is only part of the story

Some funds are run by 'star' fund managers, whose previous success might have earned them a reputation for investment skill. But we do not look at 'star' managers any differently. In addition to our analysis of quantitative factors, we also seek to understand how the lead portfolio manager engages with the broader research team, as well as support functions, such as risk management and compliance.

Don't overlook operational risk

We have a dedicated operational due diligence team focused on assessment of the third-party managers' firm-wide policies and processes, ensuring that we are partnering with reliable managers. Importantly, our portfolio managers and manager research analysts have no influence over their process, and they report into the Chief Operating Officer of the multi asset team.

Continuous monitoring and engagement

Our job does not end after allocating capital to a manager. We view our relationship with underlying managers as a business relationship, not simply a vehicle to access an area of the market. On an ongoing basis we monitor performance and meet face-to-face with management teams to ensure we are confident in continuing our relationship.

For more information please visit professionals.fidelity.co.uk or contact us on 0800 368 1732

About the Fidelity Multi Asset team

Fidelity’s Multi Asset team is made up of over 90 investment professionals located across London, Paris, Hong Kong and Tokyo, with assets under management of approximately £32 billion.*

What differentiates Fidelity is the quality and depth of the research team that help to support the portfolio managers. Fidelity has a large and experienced team with diverse skills and backgrounds and these teams are dedicated to delivering insight and help the portfolio managers make the best decisions for clients. 

*Source: Fidelity International, March 2019

Important Information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. 

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