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If fund managers aren't paid right, forget it
Lee Gardhouse and Roger Clark of Hargreaves Lansdown explain why they won't invest in a fund if the manager running it isn't incentivised properly.
by Chris Marshall on Jul 10, 2013 at 09:46Follow @cmarshallCW
How to pick an investment fund: make your selection based on the fund manager, rather than the fund itself. And if they’re not incentivised properly to do their job well, don’t go near them.
Two strong trends in their HL Multi-Manager Special Situations Trust (a unit trust rather than investment trust) prove their adherence to this system: an inclination to invest in funds provided by small, ‘boutique’ investment management companies often at least partly owned by the fund managers and a large exposure to the UK (39%).
‘We’re manager-focused rather than taking a particular asset allocation view. The UK weighting reflects the number of exceptional managers in that market,’ says Clark, in an interview with Citywire. Neil Woodford’s Invesco Perpetual High Income fund and Majedie UK Equity count among the fund’s top UK holdings.
They recognise too that the UK market comprises companies facing outwards into faster-growing parts of the world.
‘The starting point is the fund manager rather than fund. We think it’s the person pulling the trigger that is most important,’ he adds, explaining that the region targeted by the fund is secondary to fund manager choice too.
By that logic, did they invest in Anthony Bolton’s unsuccessful Fidelity China fund after the fund manager’s tremendous performance investing in the UK? No, ‘that would have been a leap too far’.
The pair first crunch the numbers using a tool they have developed with colleagues at Bristol-based Hargreaves Lansdown, the popular fund supermarket and stockbroker that also runs some of its own funds. ‘That allows us to whittle down choices to value adding managers’, says Clark. They then meet fund managers to ‘understand their philosophy, their temperament, how they’re incentivized’.
Gardhouse (pictured) expands on the importance of fund manager incentivisation. ‘We’re trying to invest with fund management groups where there is a direct relationship between the manager doing well and being rewarded…a share of profits, or they have to hit specific targets’.
An extreme example is the GLG Japan CoreAlpha – an 8% holding in the HL Multi-Manager Special Situations Trust – whose managers are paid entirely according to their performance.
Many funds don’t make the cut, normally those run by large asset managers. ‘Lots of companies’ set-ups aren’t conducive to good performance because the incentives aren’t there,’ says Gardhouse. ‘There are tens of [asset management] groups where we’re never going to buy any funds because we don’t believe they are set up to do a good job for investors.
‘They tend to be asset gathering rather than delivering decent performance.’
In addition to better incentivisation structures, funds run by boutiques ‘normally have free reign, are not index restrained’, he adds.
The latter fund’s weak performance so far this year doesn’t faze Gardhouse and Clark who have held the fund since launch and say their money has been multiplied by seven during that time.
Fund manager Martin Taylor is reason enough to hold on. ‘We wouldn’t have that much in east Europe if weren’t for him,’ they say.
The Hargreaves pair count Taylor alongside the teams running the Marlbrorough UK Micro Cap Growth and Old Mutual UK funds (they hold both the Old Mutual UK Select Smaller Companies and UK Dynamic Equity fund ) as the best in the business.
After all, says Clark, ‘it’s the person pulling the trigger that’s most important’.
The HL Multi-Manager Special Situations Trust has returned 45% over three years, making it the best performing multi-manager fund in the global equities fund sector, according to Citywire data.
More about this:
Look up the funds
- HL Multi-Manager Special Situations Trust Acc
- Invesco Perpetual High Income Inc
- Majedie UK Equity A Acc
- GLG Japan CoreAlpha A
- Findlay Park American GBP
- Eastern European Equity Fund;A
- Marlborough UK Micro Cap Growth
- Old Mutual UK Dynamic Equity A GBP Inc
- Old Mutual UK Smaller Companies A Acc
Look up the fund managers
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