THE GATEKEEPERS STUDYUnlocking the Secrets of Fund Research

Bella Caridade-FerreiraCEO

Fund Forum International 2016, Berlin, 8th June 2016

Gatekeeper

/ˈɡeɪtkiːpə/1. an attendant employed to control who goes

through a gate

2. A person or thing that controls access to something

3. An orange and brown European butterfly

Assets

• 2015: €1trn

• 2010: €706bn

• 2008: €379bn

• 10-year growth: +29%

Net sales

• 2015: €22bn

• Last five years: €62bn

• Last 10 years: €249bn

THE UK FUND INDUSTRY

Source: Broadridge Financial Solutions

The changing face of UK

distribution…

Pre-RDR:Fund manager

Post-RDR:Intermediary

DISTRIBUTION MODEL

Source: Fundscape

THE NEW GATEKEEPERS

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2010 2011 2012 2013 2014 YTD 2015

FOFs Pref fund deals MPs & CIPs Total platform sales

Source: Fundscape

8

ADVISER RISK

• Assessing suitability

• Risk assessment and discussion

• Design the portfolio to match

• Asset allocation process

• Manager selection

• Monitoring and analysis

• Reporting

9

ADVISER RISK

• Assessing suitability

• Risk assessment and discussion

• Design the portfolio to match

• Asset allocation process

• Manager selection

• Monitoring and analysis

• Reporting

OUTSOURCING IS NOT EASY

WHO ARE THEY?

RATINGS AGENCIES

D2C BUY-LISTS

ADVISER BUY-LISTS

OFF-PLATFORM LISTS

HOW DO YOU RATE THE RATERS?

• What characteristics explain fund selection?

• Do recommendations lead to better investor outcomes?

METHODOLOGY

• Assumptions

• Total IA universe plus FCA-authorised funds

• Two cohorts: listed and unlisted

• Metrics

• Alpha and beta v sector

• Volatility

• OCF

• AUM, PTR, Fund life, manager tenure

• Sales Performance Balance ratioTM

METHODOLOGY

Testing conventional wisdom

• Do listed funds demonstrate superior past performance as a cohort?

• Is there any evidence that alpha is delivered ex-post research?

• Does independent ‘pure’ research give better results than distributors’ research?

• Do D2C lists exhibit bias on price?

• Is any rating worth having?

METHODOLOGY

• Comparing cohorts

• Fund size

• Fund age

• Manager tenure

• What does it invest in?

THE FUNDS

• Total IA universe of 3,595 funds

• Of which 1,024 are listed

• And 2,571 are unlisted

• Total listed funds are 1,060

• 1,024 from IA universe

• 34 from FCA-authorised foreign funds

APPEARANCES

ASSETS

FUND LIFESPAN

55TH E FUN D UN I VERSE

or less – versus less than 40% of listed funds. Given that £250m is considered a

successful fund (see page 38), then there is an enormous number of unsuccessful

fund launches. Normally market forces would weed out the weak products and

demand would gravitate towards stronger brands, but this process does not seem

to operate in retail fund management . If so many advisers are using external

researchers, how does money find its way to these less than beneficial funds? The

answer would seem to be that they are seeded at launch, have an initial marketing

drive, and then are left to fend for themselves. Inertia eventually takes over and

investors are not moved out.

Fund size is of course affected by the nature of the underlying investments and the

associated liquidity. Smaller Companies funds tend to have lower AUM than their

larger-cap cousins because they are less liquid and would normally occupy a sub-

set of a portfolio rather than being a major constituent. However, across the range

of sectors, funds with assets of between £200m and £800m are much more likely in

the listed cohort (and again over £1bn) than would be the case in the unlisted group.

Performance attracts assets, and performing funds generally tend to find their way

onto lists. While it may not be a general rule, larger funds tend to be so because they

are a) relevant rather than fashionable b) performing and most importantly c) sold

well institutionally.

Fund age

Fig 6.2: Distribution of funds by launch year as % of each cohort

Of the funds that survive in August 2015, almost 16% of funds that are listed are more

than 25 years old. That ratio is twice that of unlisted funds. At the other end of the

scale, a listed fund is as likely to be a year old as it is to be 20 years old. Unlisted funds

Source: Fundscape. Launch year is August to August.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

Listed Unlisted Poly. (Listed)

Poly. (Listed) Poly. (Unlisted)

MANAGER TENURE

The SPB Ratio TM

• Analyses a fund’s asset growth for perfect balance between sales and performance

• Funds close to balance of 50/50 more likely to be listed

• Funds with strong performance bias more likely to be listed

TOP FIVE BY 10-YEAR RETURNS

1. Bestinvest Best of Breed

2. Citywire Star Picks

3. HL Wealth 150

4. Morningstar Star Rating

5. Fund Calibre

SELECTION FACTORS TO GET YOU NOTICED

HOW TO IMPROVE YOUR SELECTION CHANCES

1. Fund(s) should be at least 5 years old

2. Fund manager tenure of > 4 years

3. Assets of >£200m

4. Positive alpha in the previous 3 years and current year

5. Positive net sales

6. Sustainable asset growth

7. Popular sectors / high investor demand8. UK domicile9. Price10. To be selected… be selective

FUNDSCAPE FACTORS

TOP FIVE BY FUNDSCAPE FACTORS

1. HL Wealth 150 Plus

2. Bestinvest – Best of Breed

3. ISA Ltd – Growth Portfolio

4. Fund Calibre – Elite Rated

5. Bestinvest – Premier

FUNDSCAPE FRONTIER FUNDS

• Distillation of all the data

• Applied Data Envelopment Analysis (DEA) to all the data

• DEA score of 1

• More than £200m

• Manager tenure more than 4 years

• SPB ratio of between -1 and 1

• Currently there are 99 funds worthy of attention…

Five key conclusions

• Blah blah

CONCLUSIONS

HOW TO IMPROVE YOUR SELECTION CHANCES

1. Play to your strengths

2. Do the lists dovetail with your current business strategy?

3. Is your fund a good fit?

4. Does your fund offer more than similar funds on the list?

5. Prioritise lists with fewer funds and bigger captive audiences

HOW WE CAN HELP

• Financial advisers– Ongoing review of fund selectors and their performance– Help structure and articulate a robust fund selection process

• Fund groups– Ongoing review of fund selectors and their performance– Assessment of fund range against common criteria and

competitors

• Fund selectors– Competitor insight– Independent assessment of lists

THANK YOU

fundscape.co.uk