Unbiased approach to performers

There are numerous ways to run a fund of funds, but many fund managers agree that a quantitative filter is a good starting point in reducing the bewildering array of funds on offer.

At Brown Shipley, home to the Solus range of funds, the team uses such a system to select holdings for its MultiManager Growth, MultiManager Balanced and MultiManager International funds, launched in January 2003. But the starting point is the Brown Shipley investment policy committee, which sets asset allocation for all the Solus-managed funds.

Chief investment officer Kevin Doran is manager of the multi-manager funds as well as being a member of the policy committee. He says the Growth and Balanced funds are designed as total portfolio solutions for investors, while the International fund is a one-stop shop for asset allocators seeking overseas exposure.

“The typical investor in the Growth and Balanced funds is someone who is looking for a single product to meet their wealth management needs and who has decided which strategy is most applicable. The international portfolio is designed specifically for asset managers who typically have an affinity with UK equities – it allows them to outsource their overseas equity exposure.”

On both counts the investors are likely to come through Brown Shipley, a private bank with £2.4bn under management, although some clients do come direct or via other intermediaries. In the case of the International fund the buyers tend to be Brown Shipley’s wealth managers, buying on behalf of clients whose British investment needs are met with direct equity portfolios.

Brown Shipley’s investment policy committee reaches further than simply the multi-manager funds. Doran says: “The committee is subdivided into global asset allocation, equity and third-party funds subcommittees. The asset allocation for all Solus products is determined by the asset allocation committee. We start with a strategic asset allocation and then tactically deviate from that strategy, according to where we see the best value.”

The MultiManager Growth fund, which sits in the Active Managed sector, is currently about 59% invested in British equities, with a further 12% in American equities and 9% in UK bonds. There are also allocations to Europe, Japan, the Far East and emerging markets. There are no Solus funds among its 21 holdings, although this is a function of the fund’s quantitative screen rather than a deliberate policy of independence.

Doran says: “We set out on a completely unbiased fund selection process: we de-brand each fund and assign codes to them, and only when we have filtered that universe quantitatively do we re-brand the funds to see which ones we have selected. A couple of our funds have met the quantitative criteria but there are others in the market that exceed those criteria, so we tend to prefer them. For instance, we chose New Star Sterling Bond over Solus Sterling Bond.” The New Star fund is the 10th-largest holding, at 2.8% of the portfolio.

The fund has quite a high cash weighting, at more than 8%, which Doran says is in part the result of recent inflows to the fund, but is mostly because of a negative stance on fixed interest. He explains: “We have felt for some time that British interest rates have not peaked. We expect at least another two base rate rises this year. Now that the market is coming round to our way of thinking, you might see that cash balance reduce, but not until we see 10-year gilt yields above 5%. That might not take too long, as they have gone from 4.3% to 4.8% in the past month.”

The only recent change to the portfolio came at the start of February, when Doran swapped his holding in Gartmore Emerging Markets Opportunities for a stake in Aberdeen Emerging Markets. The emerging markets weighting in the fund is just 1.5% of the £24m portfolio, yet Doran says it is not so small as to be insignificant. “It’s about trying to manage risks. We have an allocation to emerging markets, albeit a small one, and we are underweight that. We have 1.5% of the Growth Portfolio in emerging markets, and for that we have selected the two funds that we think are the best. Our weighting is split equally between Jupiter Emerging European Opportunities and Aberdeen Emerging Markets.”

However, although it is virtually unchanged so far this year, the portfolio underwent a radical overhaul towards the end of 2004. “In November, we turned over 95% of the portfolio,” says Doran. “This was part of a wholesale review aimed to ensure our funds were populated with funds that consistently outperform their benchmarks. The changes were the culmination of six months of due diligence, trying to ensure we had funds in place with a process we understood and that could continue to outperform in the future.”

Performance on the fund is currently below average for funds of funds in the Active Managed sector, with a return of 8.5% over one year compared with the sector average (funds of funds only) of 11.9%. It may well be that the effects of choosing “consistent outperformers” for the portfolio have yet to show through following the overhaul in November. But the fact that Solus’s black box has selected none of its own funds for inclusion could provide fuel for the independently minded in the fettered versus unfettered funds debate.