I have written before about what makes a good fund manager. The answer is much more simple than you might think. It comes down to having the courage of your convictions and sticking to them.
This shows itself in two things: first, a high active share (a portfolio that is very different to the index and hence to everyone else’s); and second, a long holding period – the lower a fund’s turnover the better it does.
There have been various studies that have confirmed both parts of this argument separately. But now we have one that has looked at them together.
Today’s FT refers to new research from Professor Cremer of Notre-Dame University and Ankur Pareek of Rutgers Business School. It’s conclusion –as expected – is that “highly active funds with long holding periods which do not trade much tend to outperform”.
You could make the argument that long holding periods are a function of luck (a stock does well, so the managers hold it), but to me it seems to be a measure of conviction as well as understanding that trading costs are the greatest performance killer there is.
There is, however, one more thing to take into account when you are looking for a fund – the size of the management company.
John Authers also points to one more bit of research that shows that investment “boutiques” – firms that do nothing but investment management, those with less than £100bn under management, and those run by managers with big positions in their own funds – tend to be better than others. They outperform by about half a percentage point a year. That’s real money.
Our old friend Tim Price is in the process of launching a fund of funds that only buys into this kind of investment. More on this in a few weeks.