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31 January 2006
Fundology..... a guide to selecting actively managed funds
Over the year I have enjoyed a rather mixed relationship with managed funds. My first brush with the subject came in the early 1980s through the dreaded UK Personal Pension Plan. This I purchased from a chap I vaguely new from school, only to discover that carefully hidden charges imbedded into the funds were sufficient, metaphorically, to kill an elephant. So much for the skill of the fund managers and the much vaunted tax-efficiency! Warren Buffet himself could not have maneuvered what was left of my money out of that situation. Older and slightly wiser, I moved on vowing to never again to invest in a scheme that was less than 100% transparent.
My next dealings, in the late 80s and early 90’s were via various country funds, which I used to play such markets as Japan, Korea and emerging markets. My experience here was more mixed, and occasionally profitable, particularly when picking up heavily discounted closed-end (investment trust) funds on market turns. However, what I experienced more often than not was that the correlation between the performance of the fund, and the performance of the underlying market could be weak or non existent, taking the wind out of the sails of any planned market timing moves.
Better, however, was the introduction of retail-orientated tracker funds in the 1990s, with Richard Branson’s Virgin Group paving the way for these low cost and efficient vehicles with the introduction of an FT All-Share tracker. This was launched at the then unheard of fee of only 1% per annum, much to the consternation of the UK retail savings product industry, which at that time had a rather comfortable life. I found these to be the ideal vehicles for regular saving, using them to pound-cost-average into the rising market in the 1990 for many years with a monthly savings plan. This market has continued to expand and investors are now able to choose from a wide variety of tracking vehicles in UK and overseas markets (including ETFs). Openess and competition has served investors well and charges are now down below ½% per annum in many cases. 
On this note, John Chatfield Robert’s new book (Fundology, £16.99, Harriman House Publishing) on selecting funds comes at a good time for the industry, with transparency for these vehicles now good and a far cry from the chiseling seen a couple of decades ago. The choice of assets classes and investment approaches is wider than ever and the internet has, as with nearly all area of human activity, greatly empowered the private investor, enabling anyone with a computer to quickly research, rate and rank the hundreds of funds available.
The book starts by explaining the basic structure and operations of funds, highlighting the difference between unit trusts and OEICs and the techniques used to maintain a single dealing price in the latter. CR’s main focus is on the field of active management, and largely restricts the book to the study of unit trusts and OEICs rather than closed-end investment trusts. The author’s view on funds is perhaps less jaundiced than my own, and Fundology points out that many fund managers can, and do, consistently outperform the indices. The book aims to assist the reader in identifying and utilizing these funds, employing many of the selection criteria that CR uses in his role as head of external funds at Jupiter, a subject which is explored in depth in chapter nine, titled “Jupiter Merlin in action”. 
CR points out that fund management is a people business, and the book highlights several individual fund managers who have a long-term record of outperformance, including James Findlay of Findlay Park, Anthony Bolton of Fidelity, Phillip Gibb of Jupiter and Stephen Morant and Ian Wright of Morant Wright.
On the subject of index funds, CR is somewhat negative, pointing out that at very best, investors are doomed to marginal underperformance due to the charges, and that unlike managed funds, there is no possibility of an upside bonus.
Fundology is rounded off with some useful points to consider when selecting funds, and also has some informative appendices, complete with some damning relative performance charts of index-tracking funds, and some rather good looking charts of the constituents of Jupiter’s Merlin’s fund-of-funds. While this makes for an interesting read, this section could perhaps have been expanded to cover more funds to provide a more comprehensive view of the market. 
In summary, Fundology provides food for thought for cynics such as myself who believe that fund managers fail to add value, and CR’s performance as manager of the Jupiter Merlin Growth Portfolio provides proof to support the active approach. At £16.99, the book is perhaps a little expensive for what it provides, but I note that it is now available on the Investors Intelligence Bookshop for a more reasonable £14.44.
Finally, here’s a short check list of my own for buying funds:
Why are you buying the fund? Is it for the fund manager’s ability, or is it to invest in a specific sector or market?
Will the fund manager add value? For instance, if you want to track the FTSE100, you do not need to employ a highly-paid hedge fund trader to do it. Alternatively, can you do it yourself? If you want a government bond fund, why not simply buy 2-3 different maturities and reinvest coupons as they come in?
What are the charges? Are they reasonable?  Check, and check again. Look for the small print.
Size: Too small or too large? Very large funds are unwieldy, and likely to track or underperform market averages. Very small funds are likely to have a high cost to  expenses ratio.
Are you the “tail end Charlie”. New funds are typically launched to respond to investor demand. By the time that they are available to the general public, the trend may be over. Of course, a good bull market may run for many years, but before buying your fund, consider if you investing in a genuine trend, or fad.
Mark Glowrey, 31st January 2006

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