With this in mind, the worst thing a fund manager can do when pitching their fund to the team is state their target to be above average or top quartile three years in a row.
Says Burdett: “You can’t aim for something that is an amalgamation of, say, 400 funds in the IA UK All Companies sector whose portfolios you don’t know. You don’t know what you are aiming for, so how can you aim for it? We hear that so often, but it is just marketing led.”
Faith management
With each member of the team individually meeting around 200 managers per year, it is evident that the focus is on manager selection rather than asset allocation. This is something they believe differentiates the offering from other funds-of-funds, particularly those labelled as ‘multi-asset’.
While never neutral to asset allocation models, the team prides itself on buying the right managers at the right time. The belief is that many multi-manager and multi-asset funds have come and gone because the majority of their returns have been in macro, and when it has gone wrong, investors have lost faith.
Burdett says: “Over the 10,000 or so meetings we estimate we have had with equity managers, the number that we have met who have told us they get all of their returns from asset allocation is about zero, and the number who say they get all their returns from just stock selection we would estimate at about 10%.
“Most say it is a mix of both, but they would be biased towards the more granular research into things that are individually more ring fenced.
“People can get macro right for a period of time, but when it goes wrong it goes very wrong, and if that’s your only tool it’s very hard to be consistent. Consistency is what we are aiming for and on paper we have a lot of advantages with fund selection in terms of nine bodies, systems that we have bought and built, privileged access to managers and privileged terms to invest.
“We are checking the pulse of these at the performance level every day, at the portfolio level every month and face-to-face every six months. That is a big advantage against your average fund buyer, whereas in terms of the macro we are just one of millions around the world trying to get it right. We estimate about a quarter of our risk budget is on macro.”
Potter makes it clear that equities are still the place to be, despite being seven years into the current bull market. Indeed, he believes that even a small rate rise this year in the US could lead to further big inflows into risk assets.
“Suddenly, there might be a transition back into equities because the herd-like mentality of people buying defensive assets might flip, and that could be one of our single biggest opportunities.”
He adds: “I can foresee an environment by the end of this year when we are talking about the possibility of some inflation, bond markets reacting and equities doing well again. I could see this happening for no other reason than mean reversion. You could get quite a buoyant period for markets. I think the doomsters out there are unhelpful.”
While the pursuit of unloved assets has arguably grown harder, an area Potter believes is under-appreciated and under-owned is Asian equities, which now makes up 70%-plus of the emerging markets universe.
“We are overweight Asia already, but I think Asian equities will be the star performer for the next five to seven years because of the region’s growing wealth and the growing population,” he says.
Favoured managers include BlackRock’s Andrew Swan and Hermes’ Jonathan Pines, while they also have money with Prusik Asian Income, Schroder Asian Income Maximiser and Macquarie Asian All Stars Fund.
Independent thinking
With a selection of managers in each asset class, the team are open to the inevitability that those running the money can hold very different views to their peers and the fund pickers themselves.
Potter says: “It does not matter so much if a manager has a different view on, say, commodities to ours. We might be wrong. For example, what we don’t do is say: we love the outlook for US housing so we must buy a fund that matches our macro view, such as [Legg Mason’s] Bill Miller. Instead, we are trying to find the quality guys independent of our own views.”
Part of the fund manager research process involves questionnaires. Individuals are asked to write down what they may not choose to mention in face-to-face meetings.
Burdett says: “We ask them to manage our expectations as a potential investor. We ask how are they are likely to perform in different market conditions. There are some managers that are absolutely clear about that, while for others it is the first time they have even thought about it.”
The domestic market in particular is home to a very diverse range of views, as well as a movement of money as investors react to the departure of key managers. For example, so far this summer we have seen announcements on the retirement of Columbia Threadneedle’s head of equities Leigh Harrison and the move of Miton’s George Godber and Georgina Hamilton to Polar Capital.
