How do we select our Funds List?

What you’ll learn:

• Why manager selection is important
• Our process for funds selection
• What is the Barclays Funds List?

The benefits of having a professional and rigorous process for selecting fund managers can be invaluable.

You may be worried about some of your investments on the back of recent media coverage, and the questions raised about how funds lists are created. So we'd like to outline the process we use to select the 34 funds that are currently on the Barclays Funds List, for those who have already invested in a fund on our list or are considering doing so.

Selecting an active fund – one that aims to outperform the market compared to a specific benchmark such as the FTSE 100 – involves making a judgment on the investment manager responsible for the investments in that fund. Here at Barclays, we have a defined process for manager selection. This process underpins the Barclays Funds List – a list of funds selected by Barclays investment specialists we believe may have the potential to generate consistent returns over the medium to long term (five years or more).

The funds aren’t personal recommendations but aim to help you make an investment decision by narrowing down the options. We believe that selecting the funds is both a science and an art, and our team of investment analysts have developed a process that encompasses both. They seek to identify funds they believe have a strong chance of producing good investment returns over the medium to long term – although that obviously can’t be guaranteed as there is always a risk with investing that you could lose money. There may also be other funds, not on the list, that perform as well or better.

We believe our approach is both objective and robust, and this article explains how it works and how we apply it.

Our process

A manager’s historical performance record is not a reliable indicator of future performance, yet a scientist wouldn’t ignore the results of past experiments, so looking back at what’s gone before is of relevance when researching investment funds in respect to risk and style characteristics for example.

Like science, our process is formal, structured and repeatable to create comparable data points across institutions and fund managers. But, like art, our process is also informed by a philosophy that guides our collective judgement on a manager.

Our manager due diligence process can be divided into two distinct steps: investment due diligence, and operational due diligence.

Investment due diligence uses what we call our ‘5P’ research framework whereby five key areas, each starting with the letter P, are assessed and scored. A good score in each of these five areas is critical to the likelihood of future success. The ‘5P’s are: Parent, People, Philosophy, Process and Performance.

Parent refers to the organisational structure of the fund management firm and includes a look at the assets under management, the strategy and compensation practices, amongst other things.

Investment talent is key and we therefore assess the team dynamic and experience under People.

Philosophy refers to the market inefficiency a manager is trying to exploit – why does it exist and will it persist? For example, one manager might look for companies where the share price seems cheap even though the company has a robust balance sheet. Another manager might look for companies that are growing quickly. Both are valid, and potentially complementary, approaches that could add value over time.

How the People apply the Philosophy day-to-day is addressed under Process. Here, we assess idea generation, portfolio construction, risk management, etc.

Finally, we look at Performance. Our research approach is not about simply extrapolating past performance which is why this is just one of the five areas. However, it is of relevance because we want to identify funds where the team managing them has a proven track record of being able to deliver strong returns based on the investment style they are following. This doesn’t guarantee that they’ll continue doing so in the future but if the investment approach remains the same and there have been no major changes in the people running the fund this would be seen as a positive when compared with a fund where there has been significant change, or returns have been poor or inconsistent over time.

Operational due diligence aims to assess and mitigate business and operational risks. By this we mean the business resources and processes needed to support the investment activities and operational know-how needed for the manager to execute and sustain the investment strategy. It is of paramount importance to remember that when you take on more investment risk, you would expect to get a greater investment return in reply. But when you take on greater operational risk, you just don’t benefit at all. Therefore, operational due diligence is a critical part of the process and is key in avoiding unintended risks.

Importantly, our due diligence process is not a one-off or ad hoc exercise. We are constantly monitoring funds and meet with the managers of the funds on our Funds List at least every six months. We also receive formal reporting at least quarterly. And, if our view of the outlook for a fund changes, we will remove it from the Funds List. This might happen if a key individual on the management team leaves for example, or there’s a negative change in a firm’s ownership structure. Both our investment due diligence and operational due diligence explicitly capture the liquidity profile of funds on a regular formal basis to determine how long it would take to liquidate the portfolio, for example.

Conclusion

Our research philosophy and process has a distinct view on the types of organisations that are likely to create environments for long-term investment success, and we actively seek investment managers that fit this.

At the same time, we believe that it’s not a case of one size fits all, and there are multiple investment approaches that can provide sustainably strong performance. Our investment process review is designed to be as flexible as possible to identify a range of investment firms that we hope can provide our clients with good long-term results.

What’s the Barclays Funds List?

The Barclays Funds List is one filtering option we offer to help you narrow down the wide range of funds available for you to invest in.

We believe these funds offer the potential to produce good long-term returns, but the list isn’t exhaustive and it’s up to you to decide if any of them are right for you. There are other funds that could also generate strong returns and which you may feel are more suitable for your portfolio.

We don’t offer investment advice based on your personal circumstances. It’s important to fully understand what you’re investing in, so if you’re not sure about anything, please seek professional advice.

You should only be thinking about holding these investments for at least five years as they’re designed for the long term. The manager will provide more information in the Key Investor Information Document about the specific risks of the fund, as well as the recommended holding period.

All of these investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.