The Rayner Spencer Mills Rated Funds Service provides an independent "badge of quality" to help investors select funds for their investment portfolios. Their process is as follows:
1. Initial Fund Screening
The initial fund screening takes the each IMA sector and applies a range of measures to reduce it to a short list of funds which display acceptable risk and performance characteristics.
Both quantitative and qualitative measures are used in order to ensure that the fund performed within acceptable risk / reward parameters, has a robust fund management processes in place, and a strong fund management team. These factors combine to give us some indication of how the fund will perform in the future.
2. Research Process
The research process uses fund analysis tools which we combine to evaluate the data. For the quantitative screening we primarily use FE Analytics which is combined with other external data checks and our own proprietary filtering system.
The second part of the process combines a detailed fund questionnaire, which is completed for every fund that we consider adding to the recommended list. Our questionnaire covers all the main areas that we feel require detailed investigation with any additional information sourced directly from the management groups.
Some of the areas we consider are:
- Fund technical data – objective, sector and asset allocation, charges etc
- Range of investable assets
- Team structures and CVs
- Manager incentives
- Macro and Micro influences
- Decision making processes
- Buy and sell disciplines
- Company visits
- Attribution analysis l Risk monitoring
- Fund Style
- Fund differentiators
- Research tools
2. Part 1 - Quantitative ScreeningThe quantitative screening comprises the following measures:
Fund performance is a good indicator of the ability of the fund manager, particularly if you look over a range of different market conditions. By assessing performance on a discrete yearly basis, we gain a good understanding of how the fund has performed, and therefore the strength of the fund management team in different investment conditions.
The discrete period analysis provides us with an opportunity to isolate performance and investigate performance anomalies. It also allows us to understand how the fund is likely to perform under certain market conditions which is important when combining funds for portfolios. We are now also able to identify manager performance across different roles as well as in the current position which helps to give us a longer term overview.
We measure performance over a number of time periods on both a discrete basis and a cumulative basis. Longer term performance is relevant if we can identify that the current manager/team is responsible otherwise we focus on the more recent data as we believe this is more appropriate. Performance is compared against the average for the sector, its own benchmark and other comparable funds with those funds out of line with expectation being eliminated from the lists, subject to the qualitative overlay. Further filtering takes place when we mix in the qualitative information.
Volatility is one of a number of statistical measures that we look at to further understand the funds and how they operate. We consider the funds in relation to their benchmark and sector and also in relation to their objectives.Specifically we consider Sharpe ratios, information ratios, value at risk and maximum loss and measure each fund against its peers in order to find the funds performing in line with expectations.
Volatility measures are used in particular to assess risk in terms of relative positioning as well as in absolute terms. This allows us to judge the extremes of positions that fund may take which is important in building a balanced list of funds as well as when combining them in portfolios.
Again, we compare the funds against the average for the sector, but we also consider these measures in the context of the fund’s investment aims and objectives. This may mean that funds that fail these measures may still be used if we feel this is understandable given the focus of the fund.
The charges taken by the fund manager can impact substantially on the fund returns, particularly in flatter markets. We use the total expense ratio as our preferred measurement of the charges and look for mainstream funds to have a TER of under 2%.
Fund size is considered, as we want to ensure that the funds we are suggesting have sufficient ‘buying power’. For example, in the Corporate Bond market, some companies will only offer their Corporate Bonds to the key fund managers.
The minimum fund size depends on the sector, for established funds in the mainstream sectors (such as the Mixed Investment sectors, Corporate Bond, UK Equity Income, Europe, UK All Companies, Global) we would generally look for a minimum size of £50m, however this would be reduced to £30m for sector funds (for example Specialist, Asia ex Japan, Japan, Global Emerging Markets, North America). We are not restricted by this policy and will consider funds (new launches for example) that fail this criteria if they fulfil a majority of other requirements.
Conversely, a fund can become too big, and too cumbersome to deliver strong returns against its initial objective, this is also something we would consider when recommending a fund.
2. Part 2 - Qualitative Screening
The qualitative screen allows us to look in more detail at how the fund actually operates.
Fund Manager Background
We need to ensure that the fund management team has sufficient expertise in the area in which it is operating. This involves making a judgement on the relevant experience of the team and also the roles and responsibilities within the team. It is also important to understand these roles and responsibilities so that, if a fund manager leaves, we can make a reasonable assessment of how this will affect the fund by knowing who will take over and their relevant skills and experience.
This helps us to place the fund relative to their peers in terms of how the fund is managed in broad terms and what scope the managers have to deviate from the principles set. For example a fund with a more flexible philosophy may complement one with a relatively strict process. We would need to understand how each would operate in extreme market conditions. It also helps us to understand the general stance of the group as well as the individual funds characteristics.
Fund management processes
Much of our qualitative research is around how the fund operates, and how robust the fund management process is. This involves gaining a full understanding of how the fund is managed, what would trigger the manager to buy or sell a particular stock, what they are looking for in the stocks that they hold etc. Equally important is how they monitor the fund holdings on an ongoing basis and how buy and sell decisions on the fund are made. We therefore consider the process used in monitoring existing holdings – what would trigger a review of a stock, or a sell, and how are such decisions reached.
The risk controls that are in place are also considered. It is essential that risk is managed according to a robust process and in line with any published risk tolerances.
The resources that the fund manager has available to them can be important in the success of the fund. We therefore look at what research capabilities there are within the fund management team (clearly important in finding new investment opportunities) and also at whether or not any research is bought in (this can be good as it can provide an alternative view, however in some cases it can indicate a lack of resource within the team). We also look at the fund managers other responsibilities. For example if the fund manager has to input heavily into other funds, then this can mean a lack of focus on the core fund, which may also affect future performance.
3. Monitoring Process
Selecting the funds is of course only part of the process – the ongoing monitoring of the portfolios and fund lists and the procedure for making changes is equally important.
The sectors and funds are monitored on an ongoing basis and reviewed formally on a rolling 3 month basis.
Fund Under Review
If we have concerns regarding a fund, perhaps because of underperformance or a fund manager leaving, then we need to make a decision as to whether the fund retains its rating. This can involve obtaining more information from the fund management group or meeting with the fund manager which inevitably takes time. This means that there can be funds included on the list where we have concerns, and the user would not be aware of this. To avoid this situation, we have introduced an ‘under review’ status for the period between us being notified of a change and making a decision regarding the rating. This will enable us to highlight very quickly where there may be an issue with a fund, so that the fund can be avoided until the situation becomes clearer, whilst also allowing us the time to make an informed decision on the rating rather than having to act without all the relevant information.
A fund could be put under review at any time, as we would want to act quickly following the announcement of any change. Generally a fund would be taken off review (either by regaining its rated status, or having it removed) towards the end of a calendar month when we issue any changes to the rated fund list, however there would be no time limit for this process as that would depend on the individual circumstances.
- Partners of rplan
- My Account
- Costs and Charges
- General Information
- How to select funds
- Buy Process