Putting funds to the traffic light test

Dean Cheeseman, the manager of F&C Multi Manager Growth, seeks out the best managers and subjects their funds to rigorous analysis. Only those that pass on five criteria get the green light.

There are about 7,000 registered funds for sale in Britain, with the stakes ever higher as turbulent markets magnify the gap between the good, the bad and the ugly. So for those picking funds, creating and maintaining a well-balanced portfolio has become increasingly challenging.

Dean Cheeseman, the manager of the F&C Multi Manager Growth fund, aims to identify “the best of breed managers” and blend their funds into a diverse portfolio capable of delivering consistently good returns to investors.

Active management, Cheeseman says, is key. He and his team work to ensure that the port­folio is best placed in the prevailing market conditions and are constantly monitoring its progress to ensure a balance between risk and reward.
The £114.55m fund invests predominantly in equities, with typically about half in British shares. The rest is invested on the international stockmarkets.

When Cheeseman took over in April 2008 he “changed everything”. Last year he carried out a “root and branch review” of the fund across all sectors.

A combination of qualitative and quantitative analysis set against the team’s views on the macro­economic backdrop led to changes in several asset classes.

Cheeseman bought Arte­mis Income, Cazenove European and BlackRock UK. He sold Cazenove UK Growth & Income, JPM UK Dynamic, New Star European and Investec UK Smaller Companies. He said back then it was unusual to make so many changes in such a short time but it was essential because of the unusual market conditions. Changes were wider-ranging than just in the fund itself. Cheeseman says: “There’s a new team, a new structure and a new process. We now have a far more rigorous method of selecting funds.”

For stock selection Cheeseman uses “a combination of a top-down macro framework and a bottom-up manager selection to select his holdings and blend his portfolio”.

Part of this process is the “traffic-light” analysis, a proprietary fund-screening tool unique to the multi-manager team’s investment process that allows swift analysis of more than 5,000 funds over a range of periods. It targets funds that show consistency across five key criteria and generates an overall score for each fund, narrowing them down to about 500 funds.

The traffic light analysis screens performance and compares a fund’s total returns to its peer group. It also measures alpha – the value a manager is adding to his fund through his investment decisions.

The information ratio, ano­ther key factor, demonstrates the excess return over benchmark for each unit of active risk and considers how much risk the manager is taking to generate outperformance.

A further criterion is the momen­tum/mean revision, which monitors short-term momentum to show changes in the fund’s behaviour.

Funds with an overall score in the top decile are given the green light.

The screen is also used to monitor current holdings: if they fall outside the top quartile, they become subject to review.

Top 10 holdings

Assets allocation (%)

Top 10 Balanced Managed funds of funds over one and three years