The Analyst: What makes a good fund manager?

I am often asked what I look for in a fund management company. I usually focus on individuals more than companies, but there is no denying that some groups excel at getting the best out of their managers. How? Perhaps the best way I can explain is by using an example, and I can't think of one better than Artemis.

Artemis has three key attributes. Firstly, the fund managers own the business. This directly aligns their interests with those of their investors: if the funds perform well the company will be a success too. The managers therefore have an added incentive to perform.

The second attribute is short lines of communication. While some people favour firms with huge teams of analysts I think there is a danger of that muddying the waters. I generally prefer smaller teams where talented individuals are able to take quick and decisive action.

Finally, I think the importance of a good working environment is often overlooked. A company that frees its managers from bureaucracy and lets them focus purely on investment is putting itself on an excellent footing.

When Artemis was founded in 1997 the managers embedded this philosophy into the culture of the firm. That environment, and a great deal of talent and hard work, have built it into one of the most admired investment houses in the UK. John Dodd, one of the founders, has managed the Artemis UK Smaller Companies Fund since it launched in April 1998.

The fund has one of the best track records in this highly competitive sector. It has risen a remarkable 784 per cent since its launch in April 1998, compared to an average of 142 per cent for its peer group over the same period. Over five years, the fund has grown more than 150 per cent, compared to an average of 122 per cent amongst his competitors.

The fund's performance in 2006 was unusually disappointing, but it has come back strongly during the current year.

John Dodd has maintained a heavy weighting towards the mining, oil and gas sectors. He favours this area because he predicts a long-term trend of high demand, particularly from China, and a lack of supply. Approximately 34 per cent of the portfolio is currently invested in these sectors.

The largest holding in the portfolio is Lamprell, a leading company in the servicing of submersibles and rigs. Another company Mr Dodd likes is Expro, which is based in Aberdeen and specialises in what is called "rigless intervention". This involves submerging tools beneath an oil rig so that maintenance can be performed on site, without the expense of transporting the entire rig. This technology is in demand worldwide as oil companies search for oil in ever more remote locations and deeper water.

Another trend can be seen in Mr Dodd's investment in a company called Climate Exchange. This is a holding company whose subsidiaries own and operate exchanges for instruments such as carbon credits. This turns emissions into a tradable commodity and creates a direct financial incentive for businesses to reduce their carbon emissions. Climate Exchange floated over three years ago and has been a huge success so far.

Not all the ideas come from Mr Dodd – since Artemis has such a superb team upon which he can call. For example, Lindsay Whitelaw, who runs the under-rated Artemis New Enterprises fund, advises on technology stocks, while Derek Stuart (manager of the Artemis UK Special Situations fund) provides a sounding board on smaller companies in general.

The smaller company index is continually refreshed as some businesses outgrow it and others float for the first time.

This gives an advantage to the talented specialist managers because they have the time and expertise to research companies in depth and spot opportunities that others have missed.

In my opinion John Dodd is able to add significant long-term value for his investors, and I'm pleased to say I am one myself.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent