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.
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.
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.
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.
The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investments in overseas markets, changes in currency exchange rates may affect the value of an investment. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuer’s ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. Investments in small and emerging markets can be more volatile than other more developed markets. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0819/24700/SSO/NA