Our fund manager Sheridan shares what considerations the investment team have as they manage our funds.
What attracts you to a manager?
We tend to look for managers who run simple strategies and seek high returns on the capital within the companies they invest in. We have a preference for managers that are focused on fundamentals rather than being driven by events and economics.
Since 2018 we have been adjusting our expectations on what we believe are deteriorating and challenging market conditions but conditions we believe we can still deliver good returns in. For this reason, and where possible, we have been consciously adopting a quality bias in our portfolios. On the equity side we have focused more of our attention on managers with a quality bias and on the bond side, moving from an average high non-investment grade (high risk) exposure to an investment grade (lower risk) exposure.
We remain focused on identifying fund managers with a specific and clearly visible style of management. Those attributes include seeking companies with strong management, robust balance sheets, good cash flow and offer competitive and unique products or services. In addition, the businesses will be diversified by geography, products, business mix and have good access to markets.
What are the lessons that you have learnt in your career running the MM portfolios?
It’s imperative to steer clear of the noise and focus on fundamentals. It often takes time for the market to recognise what the fundamentals are indicating often drowned out by the noise, creating a distortion of valuations for a considerable length of time. We manage the funds’ assets to a medium to long term perspective, which we believe reduces the ever-increasing effect of market noise and should help them outperform more short term momentum-orientated managers over the long term. This may mean the funds underperform their sector peers in some years. We prefer not to chase markets we believe are in overvalued situations, but instead look for assets or sectors which we as being undervalued and have strong potential for delivering low risk higher returns over time.
Have you found diversification difficult over the last few years?
We’re always trying to achieve a balance between correlation and diversification. In other words we are seeking to construct portfolios that have a varied selection of investments which when combined doesn’t share such similarities. The aim is to achieve a portfolio of underlying investments that don’t all move in the same direction and to the same extent as the market.
The distortion of ultra-loose monetary policy has made achieving this outcome incredibly hard. We run a lot of correlation and risk analysis within the portfolio and for a long time we have struggled to differentiate parts of the portfolio sufficiently to our standard. A lot of time is spent seeking out assets or managers we believe will help provide more diversification. This has, at times, resulted in taking some controversial positions but some of these have driven some of our more notable successes.
What are the misconceptions about Multi-manager funds and is cost a consideration for you?
I think there is a view, among a few, that Multi-Manager portfolios are a reasonably thoughtless construction process, that at the basic level the best performing managers are screened and then included into the portfolio.
To give some background to the investment process of the TC Share Centre Multi-Manager funds, the manager engages with c.200 fund managers a year to make sure we have the best managers looking after investor’s money. At The Share Centre we have analysts studying different regions, sectors and asset types as well as global economic conditions to better understand the market risks and steer our funds through a maze of challenges.
It doesn’t stop there, we then look at which instrument, an Investment Trust and Exchange Traded Fund or a traditional fund will provide the best risk adjusted return in the asset type under consideration. We also run a lot of economic analysis, which is used to help determine how much weight is sufficient to balance the risks verses reward when combined in the overall portfolio of investments.
Cost is a consideration, currently there is a race to the bottom of being the cheapest cost provider out there. We run active and passive strategies within our portfolios to try and keep costs down. Additionally our portfolios are quite concentrated, typically 15 funds are held in each Multi-Manager fund, in an attempt to not hold the whole market and to focus us on only taking positions in our strongest ideas. The reason we invest in both active and passive investment opportunities is they can have significant advantage over each other at various points in the economic cycle, to avoid size bias and mitigate some inherent risks.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.