Why the best fund managers will bounce back strongest

The best fund managers will emerge from the current global financial turmoil in better shape than their peers, according to one of Australia’s leading fund analysts. The challenge is to identify now which fund managers have the right combination of skill and good people to weather the storm and bounce back strongest.

Standard and Poor’s Fund Awards 2011, presented in association with Professional Planner, named Schroder Investment Management as Australia’s best fund manager, at an industry function held on October 14.

Details of the S&P awards methodology and comprehensive coverage of all 2011 group and sector award winners is in the November edition of Professional Planner, out now.

Schroders won the Fund Manager of the Year award, ahead of a high-calibre shortlist of winners made up of BlackRock, Colonial First State Global Asset Management, PIMCO Australia and Winton (part of the Macquarie Professional Series manager line-up).

“Markets will come back to fundamentals at some point, and quality fund managers that stick to their tried-and-true processes are usually the ones that are rewarded”

Leanne Milton, head of research for Standard & Poor’s Fund Services, says high quality people implementing robust investment processes will almost always produce the best long-term results for investors. It’s managers with those characteristics that S&P’s research methodology aims to identify.

“Our rating process focuses upon the strength of the team, the investment process and risk management, with the aim of finding managers that on a risk-adjusted basis will outperform their peers and objectives,” Milton says.

“What we’ve found is that particularly experienced investment professionals, with proven investment and risk-management processes that provide a framework for identifying future winners while concentrating on minimising mistakes – particularly during volatile and uncertain conditions – [will] demonstrate resilience.”

Milton says the best fund managers “have conviction in the stocks or securities that they’re holding and are less likely to panic and sell prematurely” when markets turn against them. In addition, “a quality manager will have the discipline and experience to know, also, when the appropriate time is to cut a position or adjust the overall strategy of the portfolio”, Milton says.

“They’re not always going to get all their calls right, but they know whether to hold on or whether to cut their losses – that the story they thought was there, or the thesis about a particular stock or security, may not be working,” she says.

“We also think that particularly through the current period, good fund managers have a good grasp on macro issues, and a heightened awareness of what is transpiring in the market, regardless of whether their process is focused on bottom-up research or not.”

Milton says success in funds management relies on the correct interaction of people and process. Good people on their own won’t consistently succeed; they need a framework within which to operate. And a god process on its own won’t succeed consistently if it’s implemented by idiots.

“It’s definitely both people and process, and the quality and cohesiveness of the team tends to ultimately determine the level of long-term investment success,” Milton says.

“We seek managers with the ability for provide true skill or flair in their approach, and it’s a combination of this superior skill, experience and market awareness, combined with their robust process on which to make decisions.

“These factors contribute to a manager having an identifiable edge that enables them to exploit inefficiencies in a market more consistently over time, with less dependence on favourable market conditions, relying on external research that’s generally available, or luck.”

A manager’s mettle is truly tested when they’re dealing with issues that are genuinely beyond their control and beyond their ability to forecast. The situation is made even more intense when there are several major factors at play at the some time, as has been the base in the past 12 months.

“It’s been a very tumultuous period,” Milton says.

“We’ve had natural disasters, such as the Japanese tsunami; we’ve had the sovereign debt crisis in Europe, which is still playing out; markets generally led by fear and sentiment rather than fundamentals; and also the fears of Europe’s recovery slipping again.

“The real overhanging part of everything that’s been going on in the last six to 12 months has been worrying about the debt crisis in Europe, and that global growth is going to be very, very slow and very low – much slower than we have seen in a long time.”

But there’s consistency in how good quality managers react.

“The conditions are a little bit different, but how they react to them is similar,” Milton says.

“Every market cycle has got issues when we go through the lower part of the cycle; there’s something going on.

“But generally, markets will come back to fundamentals at some point, and quality fund managers that stick to their tried-and-true processes are usually the ones that are rewarded.

“Fund managers that really have that overall macro-economic view, real understanding of what’s going on in the market, but also stick to their knitting, so they’ve got a more global perspective but also apply that in their investment process, are the ones that will come through in the end.”