With thousands of mutual fund offerings within the actively-managed fund space, how does Multnomah Group successfully identify attractive funds within each asset class? The process begins with an initial screening to narrow the universe to a manageable list of strategies that have previously demonstrated consistency in performance and execution based on various metrics. From there, the hard work begins.
We spend the majority of our time reviewing qualitative aspects of mutual funds including the philosophy and process of each fund that screens well within its asset class. So, what exactly are we looking for in philosophy and process to cause us to recommend a fund?
Our firm believes mutual funds must have well thought out and clearly defined investment philosophies and processes. The process must be repeatable. As my colleague, Caryn Sanchez, stated in Multnomah Group’s last blog post in this series, if the Portfolio Manager (PM) is committed to the process and avoids wandering between styles based on market movements, this is the best way to ensure that returns are repeatable. For our firm to have conviction in a fund’s philosophy and process, we must also feel strongly about the entire investment team and its parent organization. We look for successful and tenured PM teams with strong research efforts drawing on resources from dedicated and/or centralized analyst teams, and astute traders. We prefer that teams have fewer administrative distractions, so they are able to stay focused on their respective fund’s success and are willing to learn from past mistakes.
Every investment manager believes they have a differentiated approach that helps them stand above their peers. At Multnomah Group, we seek to understand each investment manager’s unique philosophy. Some managers pursue unique characteristics inherent in the asset class they cover, such as a large value manager who concentrates on dividend-paying companies because the PM believes dividends are a signal of fiscal discipline and dampen portfolio volatility over the long term.
Each fund we analyze possesses its own unique investment process since there are many ways to achieve success. Areas within the investment process that funds and their teams can differ include: (a) how ideas are generated by the team, (b) the evaluation process, (c) how the team works together to get a new idea into the portfolio, (d) industry biases inherent within the fund, (e) the PM’s sell discipline strategy. Our goal is to understand these nuances and determine if the process is attractive and sound.
To arrive at this decision, we review quarterly presentation decks, fund commentary and attribution, and other documents from the investment manager. We also read independent fund research from third party providers to ascertain their perspective (even though we may disagree with their viewpoint). We then complete a due diligence meeting or conference call with the manager if the fund appears interesting and meets our standards. The purpose of the due diligence interview is to determine the manager’s depth, discipline, passion, and skill level. We drill management on the key points of the investment process mentioned above to determine how sound their methodology is. We inquire about their holdings to ensure that they align with the fund’s investment philosophy. By digging deeper, we seek to identify funds that can successfully combine the strong fundamental due diligence of its team with strong stock picking instincts of its PMs, while staying within the boundaries of individual fund’s investment guidelines. We acknowledge that investment styles can temporarily go out of favor, thus we must be patient with funds that go through a slump.
Keep an eye out for upcoming posts in our miniseries on Investment Manager Selection as we cover additional areas of due diligence including portfolio construction, risk controls, and team structure. Our blog post miniseries will conclude with an in-depth white paper delving into the heart of Multnomah Group’s investment manager selection.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.