How we pick funds for the Wealth 150
By Meera Patel | 11 Apr, 2008
We are often asked how we pick funds for the Wealth 150, our list of favoured funds in each sector. First and foremost we do not pick funds based solely on their performance. Past performance only tells you what has done well, but we want to help our clients choose what will do well over the longer term.
We have developed an analytical model which covers approximately 1300 funds and looks at fund managers and how they have added value over time. We follow the manager’s track record rather than the fund’s record because over time managers move on and tracking them across a range of backgrounds is more reflective of their capability.
We look at a number of factors to decipher whether a manager has delivered their performance through their style, or by being positioned in large, medium sized and smaller companies. Ultimately we also look at how good the fund manager is at picking stocks. If a manager can add value through their style and by being positioned in a certain size of company, that’s good, but if they can show us their performance is also attributed to their stock picking skills, that’s excellent. For overseas funds like an Asian fund for example, geographical allocation can also help enhance returns so we also look at this too.
We combine this research with face to face meetings with the fund managers to try and understand their process. It also gives us an insight into why over some periods a manager did well or poorly according to our analysis. We try and understand the fund manager’s decisions over time and other aspects including how they are incentivised. Clearly a fund manager who owns a share of a company is a good sign they are unlikely to jump ship. It is also worth noting that a concentrated portfolio versus a diversified portfolio, or an unconstrained approach by company or sectors, gives a broad indication of the fund’s risk.
We review each sector on a regular basis and occasionally the list as a whole to ensure funds on the Wealth 150 list still merit their place. Likewise if there are funds that could be worthy of inclusion we will look to add them to the list.
All in all, it is a combination of factors that we consider when choosing funds for the Wealth 150. It is not down to performance alone. Every fund will experience a period when it doesn’t perform well, but this doesn’t make them bad funds. As long as we have conviction in the manager to deliver superior long term returns we will stick by experienced and good quality managers. However, where we see no prospect of improvement in underperforming funds we will remove them from the Wealth 150 list.
