Over the past two decades, the investment industry has gone through many changes. Regulation, in particular, has driven businesses to adapt and, where needed, change their processes. But that’s just one cog in the wheel. There are many others, and the one I want to focus on here is fund research.
The way we look at funds and carry out research has evolved significantly. It’s something that can get overlooked but it plays an important part in the process for businesses like ours.
When it comes to building portfolios, there might be emphasis on asset allocation or portfolio construction, but it’s the underlying funds that form the backbone of any multi-asset portfolio. It’s these funds that deliver the returns to investors, and without a detailed research process, we can’t have confidence in the delivery of those returns.
Simplicity is not always the best
In the past, most fund research was fairly basic. There was a time when I recall trawling through fund factsheets to try and sum up a fund just from its top ten holdings and its sector and country positioning. A glance at the charges and fund size may have offered additional information. Looking back, it was a naïve approach, but at a time when the internet was in its infancy and the tools available were scarce, we had to make the best of the situation.
As the pitfalls of a basic approach became more and more obvious, demands to meet with fund managers and form stronger relationships with sales teams grew. As time passed, more data became available and more tools were at our disposal. Still, many of us were starting from a blank sheet and there wasn’t much sophistication in the analysis. It often focused on past performance, but clearly that was no guide to the future. Even the lines of questioning to fund managers was simpler – light on challenge or probing. Information on investment processes was being built into reports, but it lacked the detail we’ve come to expect.
The devil’s in the detail
Today, we have a wealth of information at our disposal, and the demand for better quality research from investors and fund research analysts continues to grow.
We want detail on every aspect of a fund. Learning about the person in charge of a fund is not enough. We want to know about the teams that support the fund, those that contribute towards the stock ideas, the diversity of the teams, the people responsible for risk and oversight and, importantly, their willingness to challenge their own fund managers.
We want to know about performance and why a fund has performed in a particular way – an overweight here or underweight there is not enough. We want specifics. We want to know about the charging structures and challenge managers on their fees. Investment processes need to have detail on what managers look for – is it balance sheet strength, is it return on equity, is it dividends that’s important? What style does the manager favour – is it value, growth or small caps? How do managers look at risk and what risk controls are in place? The list goes on, but it’s the detail that helps us understand the type of fund it is before we would consider it for our portfolios.
It would be remiss not to mention ESG. Twenty years ago, few people knew or understood the term. The list of ESG questions can be long but equally important. The mandate of a portfolio will dictate how detailed a fund analyst needs to be, but as a rule of thumb, knowing how ESG is integrated into a fund is just the basics. We will always delve deeper.
Evolve with the times
There’s no perfect method when it comes to fund research. Firms that have this capability will have their own processes and being willing to adapt to change is important. At Parmenion, the wealth of information we gather on funds is immense and the fund reports we write are full of detail. It’s a time-consuming process, but a rewarding one. Understanding the intricacies of our funds means that when some go through a tough patch, it’s not a signal to sell, but an opportunity to understand the reasons why. Ultimately, we want to deliver the best outcomes for investors, and this can only be done through a disciplined process that evolves with the ever-changing world.
The quality of fund research has improved over the years and can surely only get better and better with time.
This article was first published in Portfolio Adviser on 26th January 2024.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.