How our Foundation Fundlist is selected

The number of investments on offer can be overwhelming for some people so we aim to help narrow the field.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Rob Morgan

With over 3,000 funds available and many hundreds of investment trusts, selecting investments for your portfolio can be daunting. To help narrow down the field to a more digestible number of ideas, our Collectives Research Team has created the Foundation Fundlist. This highlights what we consider to be good-quality options for new investment in each of the major sectors.

The team carries out comprehensive and continuous coverage of a wide range of funds, incorporating detailed analysis of returns, as well and hundreds of face to face meeting with managers each year. We seek to ensure chosen funds excel in our three "P's", People, Process and Performance, by examining key characteristics such as risk, style, sustainability and governance, charges, operations, inflows/outflows and capacity constraints.

The resultant list combines actively managed unit trusts and investment trusts, as well as a selection of passive funds or trackers – all of which have been chosen on merit rather than for any commercial reason. We have our customer’s best interest at heart, and our selection process is entirely independent. We will often make changes to the list if a major event occurs such as a fund manager leaving, or we may gain or lose conviction in a fund leading to new ideas or substitutions. Typically, we expect around five to ten changes to occur each year.

Going beyond past performance

The actively-managed funds and investment trusts on the Foundation Fundlist are all managed by individuals or teams who we believe have the ability to generate outperformance over the longer term. We look closely at the past performance record of a fund or trust, but that only tells you so much – and it is not a guide to the future. It is important to gain a full understanding of how it is managed, why it has performed the way it has and what conditions it will likely perform best in going forward.

For instance, the approach of some managers is more likely to outperform in rising markets. Others tend to protect capital better during less favourable market conditions. Considering this can help put performance into perspective. If the ‘style’ of the fund is conservative and contains predominantly solid, resilient businesses, it is likely to underperform in a market rally led by more economically-sensitive shares.

The finer detail

The finer detail of how a fund is constructed is also important in explaining performance with and certain sectors or regions outperforming others at different times. In addition, a ‘value’ approach that targets cheap but unfashionable companies tends to result in very different performance to a ‘growth’ philosophy of seeking faster-growing businesses that are usually more expensive.  It is important to compare apples with apples, especially in a broad sector such as the IA UK All Companies. As well as funds concentrating on the FTSE 100 this sector contains funds invested predominantly in smaller or medium-sized companies, which may perform very differently to the index of large firms.

By meeting with fund managers on a regular basis over a long period of time we gain an insight into their particular fund management style, and the types of environment they can be expected to fare well or poorly in. In this way we can gauge how good they are at picking stocks, aiming to sift out the skilled fund managers from the ones that have simply been lucky. We do not always get it right and funds on our Foundation Fundlist can and do have periods of underperformance.  This is to be expected as a broad range of styles and approaches is represented and the list is deliberately compiled in such a way that they can’t all outperform at the same time.

Differentiation and conviction

In our assessment, we also look at how different a fund is to its benchmark index – if it isn’t that different it is unlikely to outperform (or underperform) by a significant margin – see my recent article on ‘active share’ for more. For active funds, we generally like managers who follow their convictions to construct distinct portfolios that fully reflect their views. However, this must be balanced with the pragmatism to control risk sensibly and not to be ‘wedded’ to any particular company or sector.

Experience counts for a lot in fund management, and it usually only managers with track records of five years that we would consider for the list. However, we are also keen to investigate up-and-coming managers – the potential stars of the future – who are unproven but may have the advantage of being out of the spotlight or having a smaller, more nimble fund, which can better capitalise on their stock ideas. By tracking these managers at an early stage of their careers we hope to identify future candidates for the list.

Passives: An important part of the list

We understand that many investors wish to use passive funds in their portfolios for reasons of simplicity or cost. We are also mindful of that at times, and in certain asset classes, active management does not offer value for money versus passive funds. Therefore we include a range of these on the Foundation Fundlist. Covering the major investment areas they are chosen for their transparency and value for money.

Inclusion on the Foundation Fundlist does not imply a specific recommendation, but we believe the list can highlight options worth your attention and could be a good starting point for your own research. As always, the value of investments can fall as well as rise so you could get back less than you invest. If you are unsure on the suitability of the investment you should seek professional financial advice.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. Rob Morgan

    When should you consider consolidating your pensions?

    Date: 29th Oct 2019 12:39pm

    Over the years you may have collected a variety of pension schemes, especially if you...

  2. Rob Morgan

    What could the US Presidential race mean for investors?

    Date: 29th Oct 2019 12:39pm

    A US presidential victory for Joe Biden may thaw relations between the US and China o...

  3. Rob Morgan

    Open-ended property funds - update

    Date: 29th Oct 2019 12:39pm

    Some suspended property funds are set to re-open, however others could remain closed ...

Most read articles

  1. How our Foundation Fundlist is selected

    Open-ended property funds - update

    Date: 29th Oct 2019 12:39pm

    Some suspended property funds are set to re-open, however others could remain closed ...

  2. How our Foundation Fundlist is selected

    August’s top and bottom performing funds

    Date: 29th Oct 2019 12:39pm

    A round up of the notable market and fund sector trends in August as large technology...

  3. How our Foundation Fundlist is selected

    August's most widely bought and sold funds

    Date: 29th Oct 2019 12:39pm

    We reveal the funds most commonly bought and sold by customers using Charles Stanley ...

Investment involves risk. You may get back less than invested.