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Choosing a Fund Manager: The Nedgroup Investments’ Best of Breed™ Philosophy
The investment world has become increasingly complex. Investors looking into unit trusts face over 1 500 options to choose from. With so much choice, finding the right ‘fit’ can be a daunting task.
Building an investment portfolio is a bit like baking a cake – a combination of science and a little finesse. The science is understanding the mechanics and processes that will produce an outcome in line with expectations. Meanwhile, the finesse is understanding how these elements will perform in different market conditions and practicing the patience to let the science do its job, even when things feel a little tough.
At Nedgroup Investments, we believe that no single fund manager holds all the cards when it comes to investing. It’s very difficult to be an expert at everything. So, in 2003, we took a view to outsource the investment management of our funds to different, expert fund managers, so our investors can benefit from a wide and diverse set of skills. Our fund managers are selected and assessed by means of our Best of Breed™ investment approach –- an intensive and rigorous process that enables us to cut through all the noise and identify the top fund managers locally and abroad.
In choosing manager partners there are some criteria that we think are important factors to consider:
When clients entrust a manager with their money, they are relying on that manager to protect and grow their hard-earned cash. This is a responsibility we take incredibly seriously. That’s why we prefer to partner with managers who are independently owned and retain the autonomy to make decisions in the best interests of end investors. This way our managers not only have the nimbleness to make effective decisions, but they can also fully focus on delivering on the strategies they are experts at.
Our range features a wide array of boutique managers who tend to own all or part of their businesses. This way, their success is directly linked to the success of their investors. The business only does well if they are achieving results for their investors and this ensures a very important alignment of interests.
The ability and willingness to think differently
In the digital age there is a plethora of information readily available to everyone, but it takes a certain skill to take that information and turn it into meaningful and sustainable wealth creating opportunities. The willingness to think and do things differently, interwoven with solid investment principles and an element of humility, tends to lead to superior performance over appropriate investment horizons.
Track record and consistency
Investment strategies are varied and thus perform differently in different parts of the market cycle. Past performance, while not indicative of future returns, can give insight into how consistently a manger has applied their strategy and provide context for return cycles.
We like to partner with our managers for the long-term, so it’s important to understand periods of underperformance. This means assessing the manager’s actions over time and whether they have applied the strategy consistently. If so, we must decide if the performance of the fund makes sense in this context. Helping investors understand this can assist them to stay the course and avoid making common behavioural mistakes, like switching at inopportune times, which often proves costly. Investors will find it easier to remain invested during periods of weaker returns by understanding the rationale and will then benefit from the long-term objectives of the strategy.
Fees and active versus passive investing
Fees remain a ‘hot’ topic for the financial services industry. There has been, and will continue to be, pricing pressure on active managers due to increasing popularity of passive strategies. However, we think that fees charged will ultimately settle based on the value provided by the manager. Managers that perform below par or deliver performance in line with the overall market, are likely to be more susceptible to the transition of investors to passive investments.
We believe a focus on the combination of elements that lead to sustained outperformance, should be able to command a higher fee than that of their passive peers. If a manager can demonstrate value-add (Alpha) after fees, then support for their strategies will be more enduring. When looking at appointing a manger, it’s important to consider value-add after fees and, where performance fees are charged, whether those fees are constructed in a way that aligns the interests of the fund manager with those of their investors.
When looking at active versus passive investing, the argument for active management will benefit from a period where the market is not driven upward by the largest index constituents or, conversely, is damaged by such concentration – as we have seen very recently.
Boutique Investment Management Firms
Nedgroup Investments Managing Director, Nic Andrew, was recently interviewed on his views of the future of boutique managers. As mentioned previously, Nedgroup Investments tend to favour those managers that are considered ‘boutique’, in that they own all or part of their business which creates an important alignment of interests. Another advantage is that smaller managers can build positions in attractive opportunities to a meaningful proportion of the fund, thus affording investors the best prospects for benefitting from the opportunity.
Likewise, should the tide change, they are able to respond to changing market conditions timeously. The caveat here, is that one would still like to partner with those businesses that are small enough to remain nimble but large enough to remain financially viable through different market conditions. There will probably be some consolidation amongst boutiques with smaller assets under management, simply due to the price discussion raised above.
However, irrespective of size, and as smaller boutiques grow to more meaningful sizes as in the case of ABAX and Foord, one can still maintain a boutique structure and culture, which continues to provide the coveted alignment of interests with the end client.
For a comprehensive discussion on this point you can access the interview with Nic Andrew here.
The Best of Breed™ edge
One can imagine that keeping track of all these variables can be onerous and time consuming. At Nedgroup Investments we have a dedicated team of experienced investment professionals whose main responsibility is to monitor our Best of Breed™ managers based on the above and other criteria, thereby ensuring that our investors best interests are served through our partnerships. We are a large business with direct access to portfolio managers, both locally and abroad which allows us first- hand and real time feedback on markets and industries around the world.
An advantage of this is that if anything important materially changes, or a manager falls short of expectations, we are able to replace the manager with a more suitable alternative. These alternatives can be found in areas that many may not have access to or be aware of – and we are not limited by our borders. We look for managers all over the world. A good example of this would be in the global arena.
Choosing the best asset manager as an investor
There are many different ways of baking a cake. Similarly, there are many different ways of managing money. A good starting point is choosing your desired outcome and identifying a strategy which will help you achieve your objective. Do your research and look for the managers that have a proven track record of delivering on this mandate based on the consistent application of their philosophy and process. And finally, continue to hold your manager accountable but avoid making emotional decisions based on short term performance. Have patience that all your chosen ingredients will deliver on your objectives, given the right time.
In 2020, we hosted an In the Room webinar during which Nedgroup Investment’s Head of Investments – Best of Breed™, Robin Johnson, chatted to host Stephen Backhouse about how Nedgroup Investments selects investment managers using their Best of Breed investment approach. Follow this link to watch.
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