How to do your own research?

aroominyork

When looking at selecting funds the more experienced posters rightly say to do your own research (DYOR) or due diligence. That is of course sensible - you need to know that you are investing in funds which meet your objectives. I'm starting this thread on how you do that research: what is the information to look for, where do you find it, how do you analyse it?

Here's an example. There is one part of my portfolio that I am considering changing. Up until last summer I owned Jupiter European but, when the manager Alexander Darwell left, I switched to Barings Europe Select which is a conservatively managed mid cap fund that prioritises protecting the downside. It makes up just over 40% of my European holdings (most of the rest being in a global index fund, Smithson and Fundsmith, in that order) but I wouldn't mind being less mid cap focused.

So I am looking at Miton European Opportunities which is truly multi cap and, since its launch four years ago, has shot the lights out. Of course my first thought is that I've missed its rise and I'd be a fool to invest at the top, but then I look at how well it held up in autumn 2018 and think this fund also has some downside protection.

Then I read what the managers say. They invest in companies that are protected from the wider economic environment, and I think surely that's impossible and just marketing guff. They invest a fair bit in Nordic countries, and I like that because maybe they are researching areas that other managers overlook. I look at the annual report and statements and it just gives me a list of holdings and more marketing guff.

So how do I research this fund? I have no idea how to research the individual holdings and no interest in learning how to work through 50 companies' accounts. So how exactly do I do my own research?

Linton

Most of my fund investment research comes from 3 sources:


Morningstar is the best source of data on funds' underlying investments. Its portfolio Xray facility is core to my investment approach. Also Trustnet is very useful as it is easier to use than Morningstar if you want to scan and sort funds in a sector. The charting tool is excellent enabling you to draw and compare fund performances for the past 30 years. Th8is is particulalrly helpful if you wish to see how funds performed during the .com boom/bust and the 2008/9 crash, the latter now having disappeared from the 10-year performance data. Trustnet does have info on the underlying holdings but it is less comprehensive than Morningstar.


Finally the documents published by the fund itself. They may give information not published elsewhere and the manager's statement of objectives is helpful, particularly in setting up a shortlist of funds to be considered.

A_T

I always find Google a good place to start

aroominyork

Linton wrote: »

Morningstar is the best source of data on funds' underlying investments. Its portfolio Xray facility is core to my investment approach. Also Trustnet is very useful as it is easier to use than Morningstar if you want to scan and sort funds in a sector. The charting tool is excellent enabling you to draw and compare fund performances for the past 30 years. Th8is is particulalrly helpful if you wish to see how funds performed during the .com boom/bust and the 2008/9 crash, the latter now having disappeared from the 10-year performance data. Trustnet does have info on the underlying holdings but it is less comprehensive than Morningstar.

So people say "past performance is no guide to future returns" and we reply "but it's the best we have to go on". Next question: how far should you choose funds based on past performance and how should you analyse past performance?

Linton

aroominyork wrote: »

So people say "past performance is no guide to future returns" and we reply "but it's the best we have to go on". Next question: how far should you choose funds based on past performance and how should you analyse past performance?

Past performance is the last thing to be checked. More important is what the fund invests in and how this would fit in with my high level allocations and the other investments. Only if these criteria were satisfied would I bother with performance



Checking of past performance is for two purposes.


Due diligence: One may not be able to pick a high probability winner, but it is easier to spot a likely loser. Most sectors contain a large number of mediocre funds that apprear to exist purely because the fund management company think they should be represented in that market.


For Wealth Preservation it is reassuring to know that the candidate fund performed well during the two most recent major crashes. For Income funds it is worth checking how consistent the income has been and that the yield is less than the total return. More generally it can be useful to look at the performance for individual years in case, for example, high 5 year returns are really based on one year's stunning results which may never be repeated. I value consistency over maximum return.


Tie breaker: if there are two or more funds that all meet the criteria equally well then the one with the higher past performance wins.

Thrugelmir

Outside of the normal channels of media. "Research" unfortunately costs money these days. Since the introduction of Mifid ii free handouts have diminished to a trickle. A side consequence of the cheaper fee regimes that some people laud.

Aminatidi

Things I look for are:

• Fund managers with "skin in the game" so their interests are broadly aligned with mine
• A good website that's updated in a reasonably timely manner
• A set of holdings that, as an investment novice, make some degree of sense
• Good track record, OK not always possible and the future is not the past but if a fund has lost 50% over the past three years whilst everything else in its sector has gained 50% that might be a clue something isn't right
• Peer feedback

sebtomato

For active funds, I am pretty much checking cumulative past performance, because that's basically the only information available to compare to other similar funds.

I am sure people will say past performance cannot be used to predict the future, but the track record of a fund manager compared to another or an index can give some indications. If a fund manager has consistently delivered positive cumulative performance over the last 5 years, then he/she must know how to manage a fund properly and make the right decisions...

I also believe in drip-feeding investments, which is really the best way to smooth out some market variations, regardless of the funds being selected, and get some positive returns regardless.

Alexland

sebtomato wrote: »

If a fund manager has consistently delivered positive cumulative performance over the last 5 years, then he/she must know how to manage a fund properly and make the right decisions...

..or maybe their strategy happened by chance to be in a sweet spot for certain prolonged market conditions during an economic cycle? With so many active managers it is inevitable that some will have done well for 5 years.

I grow tired of the endless stream of second rate marketing guff fund managers pump out to try and justify their higher fees.

Alex

sebtomato

Alexland wrote: »

..or maybe their strategy happened by chance to be in a sweet spot for certain prolonged market conditions during an economic cycle? With so many active managers it is inevitable that some will have done well for 5 years.

I grow tired of the endless stream of second rate marketing guff fund managers pump out to try and justify their higher fees.

Alex

I think chance could indeed account for 6 months or one year, but not for 3 or 5 years. If I have been good at my job for the last 5 years, chances are that I will continue being quite good over the next few years (with some exceptions, life events etc.). On an active fund, we can only extrapolate past data, not much else to base a judgment on

aroominyork

Alexland wrote: »

..or maybe their strategy happened by chance to be in a sweet spot for certain prolonged market conditions during an economic cycle? With so many active managers it is inevitable that some will have done well for 5 years.

Exactly. One good thing about HL's Wealth 50 (the only good thing?) is that they chart performance of the funds' managers in funds they previously managed. As an example, Nick Williams started managing the Barings fund (mentioned in my opening post) in 2004 but the chart shows his benchmarked performance between 1994 and 2004 on a Singer & Friedlander fund. For the Miton fund which opened four years ago I can find no data on the managers' previous funds except that some of them closed.