The subjective analysis

This is the second stage, where we identify the best of the funds from the short lists, the TopFunds.

This requires us to bring to bear our experience gained over many years. Among other things, this enables us to look through the purely statistical analysis to see if there is a factor which that analysis didn’t take into account, but which could negatively impact on future performance.

For example:

the pedigree of the fund management group, taking into account their other funds e.g. if the group only has one decent fund, it doesn’t suggest strength in depth.
the stability of the fund management team is significant e.g. is there a takeover that might cause instability?
the fund manager style is also important, where the usual battle is between “value” and “growth” styles. Neither style will do consistently well throughout the stockmarket cycle, and each can have multi-year periods of poor performance.
portfolio breakdown – some apparently mainstream funds may have more in higher risk areas, such as smaller companies, than you would expect.
we exclude funds from our analysis that have a value under £50m - our experience is that these tend to carry too much inherent risk.

Style. More needs to be said about fund manager “style”. For years our monthly analysis has highlighted the attractions of the “value” funds that dominate the UK Equity Income sector. These sorts of funds tend to buy undervalued shares of companies that have real profits and dividends (unlike “growth” funds, often with a technology or telecom emphasis). Over long periods these funds do very well compared to the index. We expect this trend to continue.

Index trackers, “stars”, and new launches. Our analysis is of active funds, this necessarily excludes index trackers where there is nothing for us to analyse. Nor are we particularly interested in funds that only have a very recent improving trend (this is the claim of most fund managers most of the time). Nor will we recommend new fund launches – why bother when we have identified highly successful existing funds? The same applies to funds with less than three year track records.

Fund manager changes. In contrast to many, we will not recommend selling a clearly good fund just because the fund manager has changed. Our experience is that the natural comings and goings of fund managers are not something of great significance for good funds within strong fund management groups – a good fund does not become a bad fund overnight because one manager leaves.

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