The best fund managers lose less to gain more

How do you find the best manager? As Jupiter’s John Chatfeild-Roberts pointed out at an event he hosted last week, finding fund managers is not a science, it’s an art form. But, according to John, the good ones all share similar traits: they have a resilient, repeatable and water-tight process; a cool temperament; a focus on absolute as well as relative returns; and a will to win. These are all things we too look for with Elite Rated fund managers.

Another point made by John, which resonated most with me, however, was that they have a bias towards managers whose funds are more resilient in tough times. I couldn’t agree more and, throughout my career in fund research, I’ve always gravitated towards, and favoured, this type of manager.

These aren’t the funds making the headlines when markets have bottomed and start to rally—indeed they often get criticised for lagging behind—but they are the ones that give you more restful sleep.

Investing for your future

The figures speak for themselves. If you lose 20% of your money, you need to gain 25% just to get back to where you started. So it’s not an accident that the best managers, who lose less to start with, come out on top in the end.

Take the last two sell-offs we’ve had in markets: August 2015 and January 2016.

In the case of Elite Rated Fundsmith Equity, for example, managed by Terry Smith (who was a guest speaker at the event):

The fund lost 6.38%1 last August, compared with a loss of 10.51%1 for the global index
It lost 3.13%2 at the start of the year, while the global market fell 9.32%*2.

When the market has subsequently rallied, his fund has lagged but the cumulative affect is a positive one: from August to today his fund is up 17.41%3 while the market is up 6%3.

Neil Woodford was another guest speaker and his Elite Rated Woodford Equity Income fund shows a similar story: losing 4% and 1% less than the UK market in August and January respectively, bouncing back to a lesser extent, but still outperforming the FTSE All Share by 2% over the period.

The same is true for the Elite Rated funds of Stewart Investors Asia Pacific Leaders, Threadneedle European Select, Evenlode Income, Fidelity Enhanced Income… I could go on.

These are all funds with managers who pay close attention to what we call ‘downside risk’, or in other words, how much they will lose if they are wrong. They are managers who never forget they are investing money for someone’s future, not just playing with the petty cash.

Look at performance after fees, not just fees

So when you’re choosing a fund and constructing a portfolio, the funds that are shooting the lights out in a rising market aren’t necessarily the ones that will make you money in the long run.

Often at these inflection points there is ‘dash for trash’ as everything moves up all at once. But what you really want are the good quality companies that produce the most consistent returns in all market environments.

A final comment: the cost of actively managed funds is a hot topic in the financial pages of the press. Unless companies have gone to rock bottom they are deemed to be bad. My personal view is that good fund management is worth paying for and it’s performance after fees that is the most important consideration. While passive funds are cheap, it is impossible for them to outperform the market.

There are some people who obsess about charges and, while we think they are important, sometimes, if you want quality, you have to pay for it.

 

1Source: FE Analytics, total returns in GBP, 5 August 2015 – 24 August 2015

21st Jan-11th February 2016

3Source: 5th August 2015- 19th April 2016, using FTSE World and FTSE All-Share.

4Source: FE Analytics, total returns in GBP September 2008 to March 2009.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.