Picking the winners 

Last year, for the first time, ValidPath helped its Members out with a little due-diligence on investment funds.  We published 'pre-screened' lists of funds (OEICs & Pensions) which fulfilled only one set of criteria - they had managed to exhibit average or better characteristics.  That's right.  We set the bar pretty low - there was no intention to highlight those individual funds which had somehow managed to distinguish themselves in some exemplary kind of way.

As it turned out, that decision was far from misplaced.  Invariably, the expectation of 'averageness' was too much for a majority of funds, and the resulting shortlists very often reduced from several hundred, to a mere handful.

In publishing a comprehensive library of 'fund audit' reports, we had two objectives in mind:  (1) to assist our Members with the kind of broad-brush due-diligence that they would ordinarily have to wrestle with, and (2) begin to highlight the sheer futility of advisory processes which depend heavily on picking the 'hot funds', or something like that.

This year, we've repeated the exercise, using exactly the same criteria.  It occurred to us to run a comparison of each year's results.  After all, if all we are expecting is a kind of neutral averageness, how much variation can there be, from year to year?  It turns out, that there's rather more variation than one might expect: the following table shows the percentage of funds which 'qualified' last year, appearing again (based upon the same criteria) this year:
OEIC Sector % Follow-Through ( July 2013-2014)
Absolute Return 33%
Asia Pacific ex Japan 55%
Asia Pacific incl Japan 100%
European Smaller Cos 50%
Europe ex UK 37%
Europe incl UK 0%
Global Emerging Markets 0%
Global Equity Income 25%
Global 86%
Global Bonds 14%
Japan Smaller Cos 0%
Japan 0%
Mixed 0-35% Equity 55%
Mixed 20-60% Equity 10%
Mixed 40-85% Equity 3%
North American 10%
North American Smaller Cos 0%
Property 25%
Specialist 0%
Technology 67%
UK All Companies 50%
UK Equity Income 50%
UK Equity & Bond Income 100%
UK Smaller Cos 40%
UK Corporate Bond 80%
UK Gilts 60%
UK Index-Linked 33%
UK Strategic Bond 80%
UK High Yield 50%

This seemed to us to actually be quite a useful exercise.  After all, if an IFA is managing some kind of 'stock-picking' process in order to select funds to use with clients, then one would assume that the more relaxed the selection criteria, the less turnover there would be within the portfolio when it comes to reviewing and rebalancing the whole thing.  

However, according to our data, even this relatively undemanding approach would still result in a substantial degree of annual turnover, if the IFA is intending to maintain his or her approach to the overall quality of the client's investment provision.  There are six sectors where all of the funds which qualified in 2013 have disappeared from the list in 2014.  And there are twenty sectors where 50% or less of the original qualifiers persist over a 12 month period.  (Caveat: this exercise is partially subverted by the usual ongoing re-jigging of IMA categories)

Of course, the fact that 50% or more of last year's qualifiers are no longer capable of qualifying doesn't mean that the old funds need to be jettisoned.  However, the data is wholly supportive of the view that even a low-stress, minimal requirement, due-diligence process is going to create a significant trading load on a portfolio over time, given that (most) Fund Managers are apparently incapable of maintaining the kind of basic, long-term consistency which would sustain their position.  How many of the original 2013 qualifiers will still be in the list in 2015?  Answers on the back of a postcard please!


All ValidPathers now have access to their own licence for DeFaqto Engage, to enable you to refine your due-diligence process.
ValidPathers can access our fund audits by visiting the following page.
If you are manually rebalancing your client's investments on a Wrap, and especially if you have adopted some kind of stockpicking approach, you should ensure that your processes and due-diligence are 100% up to scratch.
The criteria that you apply to the suitability of investment funds is part and parcel of your approach towards product selection.
Kevin Moss, 20/08/2014