8th August 2014
Darius McDermott, Managing Director
Fund managers have had a bit of a battering recently. Not a single weekend seems to go by without some report or another claiming that actively-managed funds are expensive, fund managers fail to deliver and offer no value for investors.
The latest, a study by the Cass Business School, declared that just one in a hundred fund managers consistently beat their benchmark. It suggested, as have other reports, that investors would be better off investing in passive index trackers, which charge lower fees.
Even some of my peers, who are advocates of active management, have declared that finding good fund managers has become increasingly difficult.
While I would agree that the majority of fund managers disappoint, I firmly dispute the fact that just 1% actually add value and I disagree that the good managers are hard to find – you just have to put the time and effort in to do so.
So, instead of harping on about funds that are so expensive they wipe out any gains made, or the number of closet trackers or index-huggers or whatever you want to call them (there are a lot), I'm going to dedicate this blog to telling you about what we are doing to help investors find those fund managers who have proven they can consistently stomp all over their respective indices.
Chelsea has done fund research for our customers for more than a decade now and our Core buy list, composed entirely of active funds, has easily beaten its index. We calculated the performance of this list over the past 10 years, taking into account when old funds left and new ones were added: it beat the IMA Flexible sector by 45%*, outperforming almost every year after all fees.
We've taken that research a step further now and, in partnership with Albemarle Street Partners, launched FundCalibre, a new fund ratings agency and research centre, freely available to all investors.
We know that choosing a fund from the some 3,000 available can be very daunting so we've done the hard work for investors. We research all the funds and analyse them thoroughly to identify those we believe to be 'Elite' – a short list of actively-managed funds we think can and will consistently beat their benchmarks over time.
Our research methodology:
First we use a unique, quantitative analysis tool, known as AlphaQuest. Fund performance is a result of two things: market movements and fund manager skill. AlphaQuest goes beyond conventional past performance analysis by striping out market movements and then analyses the volatility of the fund manger skill – basically to see if it is indeed skill or just luck.
By analysing returns over a minimum of three years we can assess the probability of a fund manager adding value. Only those managers who display skill, consistently over a minimum of those three years, and have more than a 60% probability of demonstrating this skill over the next 12 months, make it to the next stage of our process.
This next stage is a face to face meeting where we talk to the fund manager to truly understand how they have achieved that success. Only funds identified as having unusually and consistently skilful managers or teams will be awarded an Elite Fund Rating.
Why FundCalibre is different:
FundCalibre's research is freely available to all investors seeking validation and guidance on investment funds. It is different from many existing fund ratings agencies in a number of ways:
- It is designed for all types of investor: from those starting out with their first ISA to more experienced investors. Not only can DIY investors use the information, but brokers and IFAs too - it is freely available to anyone wanting to validate their fund choices.
- It is entirely independent. Investors can browse the website secure in the knowledge that there is no pay to play. Funds have been awarded an 'Elite Rating' as a result of their own merits, not because a company has deep pockets or because the fund charges are cheaper. FundCalibre is all about identifying Elite funds - investors can go wherever they like to actually invest.
- The fund analysis goes beyond conventional past performance analysis and allows us to strip away the impact of market movements, and identify and quantify the skill of the manager, differentiating between the genuinely skilful and the simply lucky. Additionally it allows us to quantify the probability of that manager repeating their skill over the next 12 months.
So have a look and see for yourself. Go to www.fundcalibre.com and browse our Elite Rated funds. You can also bookmark funds to review and compare in the future and build your own model portfolio to see how mixing different funds together can change your overall asset allocation, as well as use the knowledge centre to learn more about investments.
Don't believe those who tell you that active funds can't beat passive funds. There are many funds and managers which have proven that this isn't true over very long periods and FundCalibre should help identify them.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
*Source: FE Analytics 17/01/2014. Data from 30/09/2003 to 30/09/2013.