How do we manage our multi-manager funds?

Our investment process begins with rigorous mathematical analysis. We currently analyse over 2,000 funds investing throughout the world and we believe it is this analysis which sets us apart from other multi-manager funds.

Our aim is to 'look under the bonnet', understand what has really driven performance and distinguish the truly talented stock pickers.

For example, a manager's style - whether they favour smaller, medium sized or larger companies and whether they typically invest in value (high yielding) or higher growth shares - has a substantial effect on a fund's performance. For example, in the market falls of 2008, smaller companies were much harder hit than their larger counterparts, but smaller companies went on to significantly outperform in the recovery of 2009.

The graph below shows the difference in the performance of large/small companies and high-yielding/low-yielding companies in each year since 1991. It is only after adjusting for these biases that we can really tell whether a manager is adding value through their stock selection.

Our analysis allows us to establish how much of the fund is invested in growth, value and what size of companies it contains. By tracking the performance of each of these areas we can actually calculate the performance we would have expected the fund to deliver over a given period. If the fund just achieves what we would expect given the style and size mix then the fund manager has not added value with his stock selection. Even worse is the fund manager who has not even achieved our anticipated performance. We are trying to find the fund managers who regularly beat the investment areas they invest in through strong stock selection.

Our quantitative analysis allows us to shortlist the funds which warrant further consideration. Hargreaves Lansdown then conducts hundreds of face-to-face meetings with fund managers each year. This allows us to confirm our expectations for the size and style bias of a fund and also allows us to understand the investment process and calibre of the fund manager or team.

Our preferred funds tend to be managed by a close knit and highly experienced team of individuals who can interact well and come to decisions quickly. We have a particular aversion to managers who do not themselves conduct stock analysis and instead rely on a team of less experienced analysts to meet companies on their behalf. This tends to lessen the understanding of the manager of what they are investing in and reduces the speed of decision making.

We believe that there are relatively few fund managers who can consistently predict which style of company will deliver the best returns over the short term and make changes to their portfolio accordingly. Of course, we will not always get it right. However by focusing on these stock pickers and blending their funds together in line with the investment mandate of each fund we hope to deliver outperformance over the longer term.