Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by John Husselbee, Head of Multi-Asset for Liontrust.
Hi, John.
John Husselbee: Hello there.
Wall: So, we wanted to talk about the fund management industry and you wanted to share some tricks of the trade on how investors should go about approaching fund selection because it's a great time for the fund management industry. There have been a lot of fund launches which suggests that we're in an economic growth period, but choosing between these funds could be pretty tricky for retail investors.
Husselbee: Most definitely. I mean, as being a professional fund picker we're at an advantage, the advantage being we can pick up the phone and go and have a face-to-face meeting with the fund manager. So, there is a lot of work to be done when you are looking at funds. First of all, you should start with the numbers of course. It gives you some idea of the history of the fund, the way the fund has acted and behaved, how it's performed of course, but perhaps more importantly, how it's performed in certain conditions.
The ability of a professional investor is the ability to go off and interview that fund manager, if you like, spar with the fund manager, test out and exercise them in terms of their theories and their approach. It doesn't mean to say that the private investor can't do the same thing. There's plenty of availability of information on the internet, so a lot of reading is required.
Wall: Of course, past performance is no indicator of future returns, but as you say, it can help illustrate the certain style and approach. And without past performance I think you are on the back foot you say. A newly launched fund will not have this information available?
Husselbee: No, typically it won't. If it's a new fund in a new area and a new asset class, then yeah, you're a little bit stuck. Where do you start from? How do you start to compare the past to the future; not only that, compared to other funds perhaps in the peer group as well? So, yes, you are at a bit of a disadvantage at a new fund. However, if that fund manager has been running money in the past elsewhere then perhaps you can start using that track record.
Wall: And we have got a couple of examples of fund launches in recent years where that's been the case. Richard Pease going from Henderson to Crux, of course, took his fund with him. Neil Woodford launched a very, very similar fund with Woodford Funds and he had been managing Invesco Perpetual. Putting those to one side, if we're talking about a brand new fund, what's the kind of magic number that we are looking for, the track record where you think that helps to illustrate how a fund manager invests?
Husselbee: Well, the industry seems, I think, it's three years. And I would say perhaps it's at least three years. But I think you got to start looking at a market cycle. Now, what's the definition of a market cycle? It might be five years, it might be seven years, it might be 10 years. So, we really are looking for a track record which is at least five, seven years old for a brand new manager. As I said, if that manager has previous experience then there is no two-ways about it, you can tag on the end his previous experience to that fund and start analysing it. But typically speaking, you got to wait more than three years.
Wall: Because of course there are a lot of bond managers around now who have only ever invested when bond prices are going up because the bond rally lasted for so long. Now people who may already have three years' experience but are completely unprepared for what's to come?
Husselbee: Yes, that's right. That goes back to the market cycle and that's what a cycle is. It is a boom and a bust and to think that we don't live in boom/bust times is not true, of course we do and you do look for managers who have that experience and that consistency of approach. They talk about the 10,000 hour rule. Well, that's about five years I suppose in terms of fund management time and I think that's not a bad rule to start looking at fund managers.
Typically, when we are looking for fund managers, our starting point is a tenure of around about 10 years. So, we want to see 10 years' experience in fund management in actually constructing portfolios and being responsible for portfolios. That's our starting point. And with 5,000 funds plus out there, they are quite easy to find.
Wall: John, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
