There are a plethora of boutique and specialist funds vying for the investor dollar, complete with glossy marketing materials, up-trending graphs, Warren Buffet quotes and conflicting claims to fame.
There are long-only funds, long/short funds, credit funds and private equity funds. However, as the fine print invariably says, past performance is no guarantee of future results.
How, then, to assess the merits of competing funds? Here are 10 factors to consider.
1. Who owns the fund?
We like to see funds where the employees have substantial ‘skin in the game’ in two ways: ownership of the management firm and personal investments in the fund. Both focus the mind when it comes to the value of capital preservation rather than the sole pursuit of growth, no matter the risk. It also is likely to promote independence, which we highly value.
2. What is their special sauce?
Fund managers should be able to articulate just what sets them apart in the way they select investments. Do they collect information others don’t? Do they analyse that information using a different approach? Do they have a particular research technique to isolate important information from ‘noise’? How does their fee structure compare? How are they incentivised?
3. What is the staff turnover?
Unlike the major funds, boutique outfits tend to rely heavily on the expertise of a small group of key people and, if one or more of them has recently left the building, that can have a detrimental impact on results. LinkedIn can be a valuable tool in assessing the current and former staff.
4. What have they got to hide?
Funds should be happy to tell you their history, operations and business structure, and to respond to requests for information promptly with clear no-bull responses. If a fund is not transparent, that is a danger signal. Audited financial statements are also a must.
5. How long would it take to head for the exits?
How liquid is the fund? If the manager needed to rotate out of a large part of the portfolio, how long would it take for them to do so – days, weeks, or months?
6. Who is calling the shots?
Is it clear who in the fund makes decisions on buying and selling, what their decision-making process is and how long it takes? Funds with trading-based strategies need to be more nimble than those in private equity.
7. About that track record?
Yes, it is true that studies have shown little correlation between past and future performance, but that doesn’t mean ignoring track record altogether. Managers should be able to articulate how their process has generated returns to date, and why it can be expected to continue or change. We also analyse a raft of factors against similar strategies and benchmarks.
8. How do they manage risk?
Most fund managers have internal rules around their investment process regarding asset screening, investment size, diversification and circumstances that would prompt a sale. It is worth trying to assess not only what the guidelines are, but how well they have stuck to their own rules.
9. What is the bigger picture?
How does this particular fund fit with others we’ve invested in? Does it fill an area previously empty or provide a better solution than a competitor we’ve invested in? How well are current market conditions suited to this particular fund’s strategy?
10. How will they keep us informed if we commit funds?
Successful investment is not only about an initial decision, but about being kept ‘in the loop’ with regular updates on news both good and bad. Ongoing communication is key. We place our preferred managers directly in front our investors to capture full transparency and therefore, enhance the investment experience.
Anthony Murphy is the CEO of Lucerne Investment Partners, which offers retail and wholesale investors access to ‘funds of funds’ designed to deliver strong returns regardless of market conditions. The information in this article does not consider the unique circumstances of any investor.