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Leigh Harrison: how to pick the right fund manager

Writing an exclusive series for Citywire on funds investing, retired star manager Leigh Harrison tackles one of the first and trickiest decisions.

Leigh Harrison: how to pick the right fund manager

In many ways choosing a fund manager is one of the trickiest decisions any investor has to make. It’s no less of a challenge when you work in the industry and are having to hire fund managers. Trying to get behind the marketing facade and understand the true qualities of what you are 'buying' can still be hard to achieve.

The starting point from an investor’s perspective, once you know the area you want to invest in, is to define the qualities of the fund and fund manager that you would like to own.

Probably the most common starting point is to look at recent investment performance. But while this is a helpful starting point, a deeper understanding can be gained by also assessing performance over longer time periods and looking at returns in discrete years. This can tell you which funds typically do well in rising markets and which are better in soft markets and, nirvana, if any fund consistently does both!

Break down performance

Breaking down performance into discrete years will also show if good five- or 10-year performance has been produced by one or two outstanding years and many indifferent years or by a whole series of small incremental positives giving some insight into what one might expect for the future.

Understanding the fund structure is also helpful when analysing performance. Has the fund performed well because of a significant exposure to small and mid-size companies in a rising market/growing economy? Are returns being generated through a rigorous stock picking approach or is fund performance generated primarily through big thematic or sectoral bets?

Combining these drivers of performance with the headline numbers is an opportunity to consider how likely they are to be repeated. Owners of the hedge fund heroes in the technology bubble of 1999 would have been more likely to avoid the 70% loss in value they suffered in the ensuing bear market if they had been more focused on the fact that the high returns on the way up arose because the funds were typically leveraged, or borrowing money to invest, volatile, and likely to be carried out in any sell-off.

What drives the fund manager?

Beyond understanding headline performance one needs to research the fund manager and the investment approach. In most (but not all) firms there is a named fund manager who is the controlling influence on the shape of the fund and its investments. Whilst a team based approach is common, sharing resources across a number of strategies and working together on research and strategy, the named fund manager is generally considered to have the ultimate responsibility for the portfolio.

How long have they managed this, or similar funds, at this firm or elsewhere? What is their investment style and approach? Do they look for structural or thematic opportunities, have a small capitalisation bias, focus on larger capitalisation stocks with  undiscovered growth potential, turn round situations or value/contrarian opportunities?

Is it a team based or individual approach? How have they reacted in the past to periods of good/poor performance and is fund turnover low or high?

As well as understanding how past performance has been generated, understanding how a fund manager aims to generate future performance is crucial to the buying decision. It's a bit like buying a car: you have to choose the colour and the extras to suit yourself.

It is no coincidence that some of the most successful funds combine good performance with a clearly articulated and consistent approach where investors know what they are buying and understand what will drive performance (think Nick Train or Neil Woodford).

This alignment of 'interest' is particularly helpful when performance is weak but the investment approach remains unchanged. It is noticeable that many of the most successful mangers do not change roles very often, they are focused on fund performance and growing and developing their franchise and track record.

Have they got too much on their plate?

Finally one needs to have an appreciation of the environment that the manager is working in. What are their responsibilities? Are there any additional responsibilities beyond managing this fund? Too many different funds or involvement in managing the business as well as funds means the fund manager can be at risk of losing the focus that is crucial to maintaining the performance of a fund.

Thankfully, in general, fund houses recognise that the value of maintaining fund performance is far greater than the value gained from taking a talented fund manager and spreading him/her too thinly across too many roles.

Beyond individual responsibilities the ideal scenario is a stability in ownership structure, investment process and colleagues. Anything that alters this is a potential risk. Mergers of fund management companies always create uncertainty, reorganisations can change the cultural and working environments and disturb the investment process and unsettle employees. 

Any fund managed by a company that consistently loses fund management talent must always be considered higher risk than a firm where the staff turnover is low and fund manager tenure typically long. Similarly, funds managed by firms that have a reputation for keeping talent or being owned by their fund managers are likely to be seen as lower risk.

My check list

Before purchasing it is worth listing out the things that would worry you once you owned the fund. They may be manager change, corporate change, change in the economic or market environment.

So, below is my check list and key questions:

  • Fund performance. Is it good? When? What drives it?
  • Fund manager.  How long on this fund or strategy and at this firm? Is there a clear and consistent investment approach? Do they have any other responsibilities?
  • Corporate background. Is it stable? Are there the right sorts of compensation and lock-ins?
  • Watch list. What would worry me or make me sell?

Leigh Harrison enjoyed a 32-year career in investment, stepping down as head of equities, Europe at Columbia Threadneedle in 2016. He retired on an AAA Citywire rating, having been rated for 47 consecutive months for his performance on funds including the now £4 billion Threadneedle UK Equity Income fund and £750 million UK Equity Alpha Income

3 comments so far. Why not have your say?


Apr 10, 2018 at 18:01

Mr Harrison can you please tell us some good managers in different sectors, Thanks.

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Apr 10, 2018 at 19:39

so the right fund manager is neil woodford

any other right fund managers

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Apr 14, 2018 at 22:19

I usually gaze into a crystal ball then buy an ETF, much simpler and usually cheaper in the long run.

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