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View the article online at http://citywire.co.uk/wealth-manager/article/a760075

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

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

‘We do not have any advantage in knowing what the best systems are, but we will certainly raise those questions,’ with Brewin Dolphin also taking independent advice on the robustness of such systems.

A lack of disclosure is a red flag related to weak systems. Gutteridge insists on transparency for anything going on his buy list. ‘If we can’t compare a fund on a like-for-like basis, we can’t add it to our buy list.’

James Klempster, a fund of funds manager at Momentum Global Investment Management, said: ‘You do not want to be surprised by these things – that is why you do so much due diligence.’

He characterises such work as an extension of his fiduciary duty. At Momentum, the operational due diligence team has power of veto over investments, which helps the firm to push the fund groups they invest with to tighten their procedures.

In the past, for example, Klempster has persuaded funds to change their auditors. ‘You’ve grown as a small company with a certain provider, but maybe they’re not enough to satisfy the due-diligence team.’

Klempster uses a proprietary program to monitor portfolios, which includes tracking not only trades but also the prices at which they are struck. ‘What makes our software powerful is the data we receive from the manager,’ he said. ‘So right from the outset we want to see trading activities.’

This also feeds into a more qualitative assessment of a fund’s dealings. ‘While you cannot rely on past performance for a guide, we do look for past activities as a guide to future activities,’ he said.

Jonathan Webster-Smith, head of the managed portfolio service at Brooks Macdonald, relays that he recently declined to invest in a strategy because of ‘a lack of clarity on a short book within the fund’.

A third requirement is reliable access to fund managers. Wilson negotiates the terms of manager access in advance, and sells funds if they renege. He recalls selling out of a fund run by a large US firm when it failed to adhere to an access agreement.

Gutteridge acknowledges that top managers cannot always be by their phones, but still looks for timely communication from their team. ‘We are not ignorant to the commercial demands of fund managers running large amounts of money. We know Bill Gross won’t come back to us, but we would expect to speak to someone senior at Pimco on the day.’

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