When it comes to good fund management, size does matter
Being a good fund manager isn’t that hard, says Merryn Somerset Webb. Have the courage of your convictions, stick to them – and work for a smaller firm.
I have written before about what makes a good fund manager. The answer is much more simple than you might think. It comes down to having the courage of your convictions and sticking to them.
This shows itself in two things: first, a high active share (a portfolio that is very different to the index and hence to everyone else's); and second, a long holding period the lower a fund's turnover the better it does.
There have been various studies that have confirmed both parts of this argument separately. But now we have one that has looked at them together.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Today's FT refers to new research from Professor Cremer of Notre-Dame University and Ankur Pareek of Rutgers Business School. It's conclusion as expected is that "highly active funds with long holding periods which do not trade much tend to outperform".
You could make the argument that long holding periods are a function of luck (a stock does well, so the managers hold it), but to me it seems to be a measure of conviction as well as understanding that trading costs are the greatest performance killer there is.
There is, however, one more thing to take into account when you are looking for a fund the size of the management company.
John Authers also points to one more bit of research that shows that investment "boutiques" firms that do nothing but investment management, those with less than £100bn under management, and those run by managers with big positions in their own funds tend to be better than others. They outperform by about half a percentage point a year. That's real money.
Our old friend Tim Price is in the process of launching a fund of funds that only buys into this kind of investment. More on this in a few weeks.
-
Lifetime ISA reform: Retirement option could be scrapped in overhaulA consultation on a product replacing the Lifetime ISA is set to be launched this year, and the option to use it to save for retirement is expected to be axed in the shake-up
-
HMRC stamp duty crackdown sees probes of property deals jump 88% – what to watch out forFrom bogus stamp duty refund claims to misleading the taxman about who owns a property, HMRC is increasing its scrutiny of stamp duty land tax reporting. Here’s how.
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
-
This isn’t the stagflationary 1970s – but neither is it the low-rate world of the 2010sOpinion With soaring energy prices and high inflation, it might seem like we’re on a fast track back to the 1970s. We’re not, says Merryn Somerset Webb. But we’re not going back to the 2010s either.
