Investing For Growth: With investment trusts, even the best track records don't last for ever
Wednesday 05 May 1999
Rothschild Asset Management's Five Arrows UK Major Companies unit trust, for example, is second in its sector over the past year to mid-April. But over the previous 12 months it falls to 77th out of 138. Govett Geared UK Index unit trust is bottom of the sector over the past year but first place over the previous year.
So, faced with the 4,000-plus unit trusts, investment trusts and offshore funds on offer in the UK, where do you start? Well you could stick that needle in the pages of the Financial Times and hope for the best. You could spend months pouring over past performance tables in the hope that you spot a trend which will continue into the future. Or you could go to an investment adviser to do the dirty work for you.
You could also respond to the flood of mailshots which drop through the letterbox. A handful of fund managers certainly dominate the market. Those companies with the strongest "branding" and the biggest advertising presence tend to pick up the lion's share of business. Understandably, investors feel more comfortable with names they know. But don't be fooled. Most investment groups offer a whole range of funds and rarely, if ever, does a single manager perform well in all investment areas.
"You need to do your homework to find out which in a company's range of funds have performed well and those to steer clear of," warns Graham Bates of Leeds independent financial adviser Bates Investment Services. "The track record of a fund manager will always be an important consideration, but it is worth remembering that a fund which tops the performance league tables today will almost certainly be unable to maintain that position indefinitely." A fund that can deliver consistently above-average performance will often be a far better investment, over the long term, than one which hits the number one spot today only to disappear into the lower ranks of the performance tables just a few years later.
In this regular column, I aim to help you in your search for just such a fund or selection of funds by giving you the inside track on those which have been screened and rated by one of the best regarded fund analysis groups in the business. Let me introduce Standard & Poor's Fund Research.
In 1916, Standard & Poor's assigned its first corporate debt rating and has since cultivated a position of being the world's leading credit rating agency. The group has a global presence with more than 750 analysts in 18 offices in 14 countries around the world. Fund Research was founded in 1990 and bought by Standard & Poor's in 1997. The company now rates more than 700 investment funds globally.
A Standard & Poor's Fund Research rating reflects the group's current opinion of a fund's ability to stick to a consistent investment process, combined with the level of risk-adjusted returns it achieves. Fund Research's philosophy is that fund managers who adhere to a disciplined investment process and show strong management are more likely to provide consistent, above-average, risk-adjusted returns, relative to other fund managers in the same sector. To qualify for a potential rating in the first place, a fund must have a minimum of two years' performance record.
The rating is based on an evaluation of two key factors. The first screen, and starting point for the rating process, is quantitative, where the fund is judged on its history, portfolio construction and its volatility - all factors which contribute to long-term performance.
It is based on performance data from a sister company, Standard & Poor's Micropal - a leading industry data supplier. Discrete performance comparisons are made, as opposed to cumulative returns, over a three-year period. Cumulative returns show the build-up of an investment over time but can be deceptive. A fund which had one spectacular year of outperformance five years ago could have been a poor performer ever since, but that single good year will skew the rolled-up, five-year performance record. Using discrete returns, over separate years, quarters or months, gives a clearer picture, and is a better measure of a fund's consistency. Fund Research measures both absolute returns and those adjusted according to the fund's volatility. This results in a cut-off point where only above-average-performing funds are considered, which captures, depending on the size of the sector, around the top 20 per cent of funds in each sector. The second screen is qualitative and is equally important. The Fund Research team looks at a fund's management, investment process and the group's culture, resources and risk controls. The fund manager and the team are also scrutinised. Their experience, management style, qualifications, flair, confidence and maturity are all taken into account.
Peter Jeffreys, managing director of Fund Research, says: "We carefully analyse a fund manager's attitude and awareness of risk. We look for self- confidence and a clear approach, well applied. Among the best fund managers are those who think independently even within a tightly controlled organisation. But we also look for humility and enthusiasm."
Other fund details, such as risk profile, structure, expansion or contraction in size and charges, will also count towards the final rating.
When the process is completed, the lead analysts present their findings to a committee which decides on a rating. This ranges from AAA at the top, to A for funds which show an extremely strong to a strong ability to adhere to consistent investment processes and provide above-average, risk-adjusted returns relative to similar funds.
Jeffreys says: "To keep abreast of fund performance and portfolio construction, we conduct on-going surveillance. Fund performance is monitored on a monthly basis, relative to other funds in its sector and a suitable benchmark such as a stock market index.
"Investors must remember that all funds which achieve a rating from us, have gone through a vigorous screening process. They are all the creme de la creme in their sector and are worth any investor's hard-earned cash."
But Jeffreys points out that a Standard & Poor's Fund Research rating is not a recommendation to buy, sell, or hold any interest in a fund. "While performance is one of many factors contributing to the ratings, in itself it is no indication of future results," he says. "Investors must consider their personal financial circumstances and seek sound advice from a professional."
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