BAMBOS HAMBI's selection process is both an art and science, although the science is becoming increasingly sophisticated
The past few years, and the last 12 months in particular, have witnessed a dramatic upsurge in the number of companies announcing new multi-manager products.
The multi-manager concept is simple: no single investment manager can be the best in all areas and at all times.
It can, therefore, be a distinct advantage to have the flexibility of independent selection from the best funds available.
Greater client sophistication, a wider choice, new investment structures and increasingly complex regulation have made advising on portfolio management services more involved over the past five years.
The management of these portfolios has also become increasingly sophisticated.
Technology has helped to deliver an unprecedented level of information to portfolio managers and the key skill is now a focus on how to use the information.
The key area where we are able to add value remains the selection of the most suitable funds, so accurate analysis, and an in-depth understand-ing of the methodology and investment processes are vital to select tomorrow's strong performers rather than today's.
We have developed a unique selection process, summarised as the 'Five Ps.'
Stated simply, this is where we determine exactly what each fund is trying to achieve (and whether the stated aims are backed up by what is actually happening). This gives us a benchmark against which to judge the other elements and allows us to ensure we obtain the right balance of funds in the portfolio.
Here we determine how the fund is run, its investment process and the management style. This includes a detailed analysis of the portfolio and the way in which it is constructed, monitored and managed. We look to identify the strengths and weaknesses of the methodology and to determine how it will be affected by changing market conditions. This is an area that gains particularly from a quantitative analysis, providing, for example, a measurement of the style risk implicit in each portfolio, and detailed performance attribution. This offers a sound framework to analyse the fund and also provides information to question the manager in the interview.
A process is only as good as the people that run it and there is no substitute for meeting the fund managers face to face and understanding how the manager or team operates. These meetings have become more structured, more detailed and, consequently, more valuable as greater analysis an understanding of the fund in advance of the meeting enables us to have a more in-depth, efficient and constructive conversation. In an environment where managers move around rapidly and regularly (barely one-third of funds can claim to have been run by the same manager for more than three years) a detailed knowledge of the individuals involved in running the funds becomes increasingly important.
Although past performance isn't a reliable guide to future it can provide a good indication of the quality of a fund or team.
It is, however, vital to put any figures into context and to understand how they have been achieved, how consistent returns have been, what level of volatility has been involved and how the fund fares in differing market conditions.
This is more a feature of our particular product than part of the selection process. While you shouldn't make decisions based on price we do ensure that we use our bulk buying power to negotiate significant discounts from the fund management companies we invest with.
Putting it all together
The concept of risk reduction is often simply viewed at a fund level. But, while reducing fund-specific risk may be the most obvious benefit of investing in a spread of funds, the process does not end there. By introducing greater quantitative analysis ' for example, examining the portfolio of every fund held right down to a stock level on a regular basis ' it is possible to achieve better risk control and to manage the overall characteristics of the strategies more effectively.
Therefore, it is now possible to maintain accurate control of a portfolio's style characteristics (growth/value and the like) to avoid being overly exposed to any particular style. You can also use this to manage 'style tilts' to add value by identifying which area will outperform.
The benefit of getting style calls right is demonstrated by examining the returns from major world markets over the 10 years to 2001. The table shows whether value or growth stats fared better over each calendar year. Clearly, the ability to manage any style bias on an active basis can be a distinct advantage.
We also monitor the overall capitalisation biases, exposure to industry groupings, countries within regional portfolios and, in the case of fixed interest portfolios, credit analysis, duration and currency positions.
We define each fund as a core or satellite holding (depending on its relative risk ' principally measured by tracking error ' against the relevant benchmark).
In practice, this core/satellite mix will be managed to reduce risk further, emphasising core funds at times of market uncertainty and adding to satellite funds in conditions which are forecast to reward additional risk.
As important as the initial selection of funds is their ongoing monitoring. We keep a close eye on all of the funds we hold, reviewing them on a regular basis and meeting the managers to keep fully up to date with their views and progress. Information is cross referenced with qualitative information from data sources, such as Bloomberg, Reuters, Datastream and Style Research.
The aim is not to try to tell the fund managers how to run their funds (as I believe that, once we have selected the right fund for the job, then we should trust their judgement), but we do expect to know exactly what is going on and to be made aware straight away if a fund's process or philosophy changes.
This allows us to make an informed decision as to whether it alters the characteristics of the portfolio as a whole.
When reviewing a fund, we go through the same process as when we first bought it to re-test all of our opinions. In this process, the first four of the Five Ps serve as a strict sell discipline.
As well as the funds held within the service, we monitor a range of suitable alternatives so that we are in a position to replace a fund quickly if it becomes necessary.
Heightened levels of volatility in investment markets, constant developments at fund companies and the ever-increasing mobility of fund managers, make it vital to keep a close eye on investments. Being able to assimilate information quickly and act equally quickly where necessary can make all the difference.
The key to swift and efficient action is preparation and, in the current environment, there is no substitute for a clear, comprehensive, and effective investment process to ensure that opportunities are maximised and investment risk is reduced.
Bambos Hambi is head of multi-manager investing at Rothschild Asset Management
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till