Mark Harris, head of investment at Edinburgh Portfolio, says it's important to look beyond past performance and the presentation skills of individual fund managers when assessing whether or not a fund is worth the risk
Edinburgh Portfolio (EP) is a business going through plenty of change, most recently with the arrival of Mark Harris as head of investment management.
Previously at HSBC, Harris is based in London with a small team of analysts, responsible for some £400m of assets in fund of funds. Most of the other functions of the business are carried out from parent company Edinburgh Fund Managers'(EFM) headquarters in Edinburgh.
Harris talks to MultiManager about his reasons for joining EP, his influence on the investment process and his plans for developing the business going forward.
What was the catalyst for leaving HSBC and moving to EP?
I felt HSBC was perhaps a little process bound, and this was constraining performance. It had some good disciplines but also some frustrations.
Around the same time I was contacted by EP which offered me a more investment-orientated role. I felt I could bring the process up a notch by introducing more advanced analytical processes including risk management. We have a small, collegiate team here, with the support of EFM, but we are an autonomous business entity and don't feel obliged to use its funds ' in fact soon after I started we dispensed with two EFM funds.
What resources did you have at HSBC? How does this compare with EP?
At HSBC we had four main UK analysts, four in the US and two in Hong Kong. Here at EP we have three people doing full-time analysis, and are considering taking on one more.
I have found that in the office at EP I am much more able to focus on one thing and there are few casual interruptions.
I had a much wider range of clients and responsibilities at HSBC. Here I can focus on investment management, while Paul Talbot, EP's managing director, handles contact with external groups such as IFAs and the press.
What is the relationship between EP and EFM's private client service, run by Harry Morgan?
The private client service takes all its fund research from EP, so we work closely with it. Harry is also on the investment committee. It offers a very tailored service and also invests directly in equities for some clients rather than use funds of funds, so there is justification in it being a separate service from EP.
How easy is it to run the business with some staff based in Edinburgh and others in London?
Our sales and marketing teams are in Edinburgh, and all our dealing is done there but this is not a problem for us. Every two weeks Harry Morgan and every month David McCraw, head of global and specialist funds, participate in our investment committee meetings, usually via a conference call. We also have regular visits from the compliance team, which is based in Edinburgh.
Tell us more about the investment committee and your relationship with IMS
The investment committee has been running for three years and is really useful for going through checks and balances and ensuring common sense has been applied. It is important to formalise our thoughts and bring the right conclusions to bear. We still see the investment committee as our unique selling point.
As for IMS, we intend to continue to use them as consultants, although the degree to which we use them has reduced. They provide good quality research, and we see no reason to change the relationship.
What are the implications of so many fund managers moving jobs?
It is an interesting reflection on the current environment. We are not of the 'star culture' mind. We are heavily research intensive and do a lot of thinking about the people, processes, structural dynamics and style of a portfolio, over and above the individual fund manager. I also look at risk ' tracking error provides a very good indication of fund returns.
If we are concerned that the fund manager in question has a high-risk, eclectic style which can't be replicated, we would walk away from them, as we did with Rathbone Special Situations when Patrick Evershed left. However, if you look at Merrills' UK Dynamic fund, the process is within the team and we are confident they could keep it running.
What criteria do you use for judging a manager?
When I joined we had a long think about what we wanted to do and how we wanted to do it. The result is our investment process. This looks at performance, via risk adjusted returns, and we also try to pick up inflection points, when there is likely to be some momentum, which is more difficult. We use statistical screening to reduce the number of funds under consideration to a manageable level. I do agree to some extent with the FSA's view in its Past Imperfect? paper, that past performance should be viewed with caution.
How much attention do you pay to what is in a manager's portfolio?
We get the portfolio from the manager and use Style Research's risk analysis software, Sira, to calculate tracking error, whether there is equity or sector risk, which stocks are contributing the most.
I also spend a lot of time interviewing fund managers. We don't have a tickbox mentality, but listen to what they say. I also like to sit in, for example, on investment meetings in order to assess their skill. It is important not to mistake presentation skills for fund manager skills, the two are not the same.
We try to get the highest levels of confidence in the managers we buy, and to evidence everything. Fund managers often lay claim to things but we want to see the evidence to support these claims. It is also our policy to always write research reports, which helps to clarify our thoughts.
Are there any plans to change your client base?
We are 99.9% IFA driven, and have up to now been focused on retail customers but it looks like there are going to be opportunities to be involved in the institutional side. We expect to be at the forefront of funds of funds for institutional investors. We will also obviously need to be flexible on charges and commissions.
Are you planning to introduce different share classes to your Oeic structure?
We introduced our Oeic structure in January this year. We already have A and B shares but we may have to introduce a C class for institutional investors.
Do you have any new ideas for fund themes?
We have a good set of funds of funds, and at the moment want to concentrate on what we've got. We will probably be reducing the number of funds ' we plan to merge the Managed Recovery fund with the UK Growth fund as Managed Recovery now only has around £700,000 under management.
The market tends to see fund of fund managers in global terms rather than country specific, but we still believe that a single country fund of funds gives a good spread of manager risk without compromising potential returns.
Are you planning to offer a multi-manager service in addition to fund of funds?
There is a temptation to do so, yes. The fund of funds is the most efficient solution with the greatest spread of risk. It is tax efficient and the benefits compensate for double charging. If we take on institutional investors some sort of multi-manager product will be required. We are looking at creating something at the moment that will be different and may also be viable in the retail market.
Have you looked at having funds of hedge funds?
I have but I still believe that a fund of hedge funds can be a dangerous vehicle in the retail market. I found Hendersons Harp fund interesting but I'm not sure the retail market is ready yet, or that there would be any great commercial benefit.
I would also question whether we currently have the level of analytical abilities to assess hedge funds. However, we are progressive and will always look at different options. I already have some ideas but we are not ready to go into fund of hedge funds right now.
Do you have any plans to change your distribution network, for example by linking your fund of funds to a life office bond?
We are talking to people about this at the moment as we believe that fund of fund links could be the next big thing. One of the advantages of depolarisation is that depolarised groups want a fund of funds offering. We think we are seen as being more independent than many and we are in ongoing discussions with life companies. We already have our property fund offered by Old Mutual in Guernsey, and Canada Life also has a link to it.
How can you compete against your large competitor companies?
We don't look to compete with companies like Frank Russell. Our combination of good quality people has given us the ability to outperform. It is in our interest for everyone to succeed in the fund of funds arena.
Edinburgh Portfolio's investment committee takes input from Edinburgh's private client division and from consultants IMS.
The group is now looking to develop its capacity in the institutional market.
Harris believes now is not the right time to launch funds of hedge funds.
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