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Red flags: what warning signs send you running from a fund?

by Robert St George on Jul 09, 2014 at 13:54

Red flags: what warning signs send you running from a fund?

Whether they like to admit it or not, many investors make the fatal error of backing a fund at the wrong time.

Style drift, manager turnover and poor performance versus the peer group are common challenges for fund selectors. As investment firms centralise processes, bulk up internal research teams and make their due diligence processes even more comprehensive, it is hoped that these scenarios can be identified quickly and avoided.

So what are the danger signals that deter discretionary managers from buying in?

Andrew Wilson, head of investment at Towry, focuses first on a fund’s building blocks. ‘It is important to differentiate vetting a fund manager’s performance from operational due diligence.’

He demands ‘best in class’ administration from asset managers, particularly for fund pricing.

Wilson (pictured) then wants to see suitable controls over those processes. ‘We look for an independent risk team reporting into the chief operating officer, say, rather than the fund manager.’

He is aware the latter have a tendency to react to such teams with a ‘Yeah, noted – now bugger off!’

Wilson seeks compliance officers with ‘teeth’ who can interrogate fund managers beyond their monthly disclosures. ‘It is important as an investor that you have an extra pair of eyes on the fund at all times,’ he said.

‘The only way they are going to get an investment from us is to have an independent risk team. It does not guarantee any extra return, but it does help you sleep a little better at night.’

Similarly Ben Gutteridge, head of fund research at Brewin Dolphin, always checks every link in a fund’s chain, including counterparties, custodians and other providers.

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