Dec 2008-Jan 2009

FUND SELECTION: an ongoing discussion

Fund selectors must focus more on the operational risk of their providers, due mainly to recent events, writes Niklas Tell...

 After running the Past Performance column in Funds Europe since October 2005 we have developed a new format that will focus on fund selection. Fund selectors are more important to investors now than ever before.

Together with a blog related to this column (see below) we hope to draw fund selection practitioners and other knowledgeable individuals into a stimulating and ongoing discussion.

In this inaugural blog/column, apart from setting the scene for upcoming columns, I want to also share some insights gained from discussions and from a survey I have been working on. When I go back and flick through my notebook from the European Fund Manager Selection conference, which was held in London in early October, and when I listen to the tapes from interviews with fund selection teams at Thames River Capital and Jupiter two things stand out.

First, fund selectors must focus more on the operational risk of their providers, due mainly to recent events. This means they will have to spend at least as much time understanding fund companies’ operational aspects as they do on money management processes.

Second, market turbulence will most likely result in weak fund companies falling by the wayside and a lot of others will be affected by corporate activity. Together this will mean more fund manager turnover.

Both trends are good news for professional fund selectors and multi-managers – or, at least it should be for those with the resources to deal with new challenges.

A survey I have done of fund selectors in the Nordic region has also found some interesting things. Here is a sample:

Q: Fund research is about understanding and gaining correct expectations of a single fund/manager. How many of the funds you have selected have handled the crisis in a manner you expected and has performance been as expected?
A: Three out of five say 75% of managers behaved according to expectations and two out of five say only 50% of managers behaved as expected. One survey participant explains: “Manager skill is easier to identify over a cycle and so-called turning points are always more critical for the research process.”

Q: It is in times of stress like at present when the analysis process is really tested. Have you learned anything that prompts you to make adjustments to how you analyse funds/managers?
A: Three out of five say yes and one develops his thoughts further by saying: “You must of course continuously develop your research process. Even if risk management always has been important we have all learned more about what can happen in times such as these.” Another says: “We focus more on back-up plans because the risk that a manager may disappear has increased.”

Q: Some fund companies (and their owners) are under pressure – has the analysis of fund companies become more important in these turbulent times?
A: Four out of five say yes, and echo the sentiment made in the two points above.

Now, please keep us updated ([email protected]) to make sure we indeed do cover what is most relevant in the fund and manager selection space and make sure to visit www.fundselection.org/blog and participate in what we hope will be the most relevant discussions on this increasingly important area of asset management.

• Niklas Tell is a partner at Tell Media Group AB

©2008 Funds Europe