COMMENT
Looking For Fund Winners

By Ed Bowsher (TMFArkle)
February 14, 2006

John Chatfeild-Roberts is one of the best fund of funds managers in the UK. His Jupiter Merlin Growth Portfolio Fund has risen 123% over the last three years. He's recently written a book outlining his fund-picking strategy, called "Fundology." I'm not aware of any other UK books on selecting funds, so I was keen to read what Chatfeild-Roberts had to say.

Given that Chatfeild-Roberts makes his living by selecting actively managed funds, it's no surprise that he's not a fan of trackers. His first reason is that not all tracker funds have low charges. He's right on that, but the answer is to make sure you pick an inexpensive fund. For example, the total expense ratio for the Fidelity MoneyBuilder UK Index fund is just 0.3%.

Chatfeild-Roberts' second argument is stronger. He cites the example of the stock market boom during 1999 and 2000 when some grossly over-valued technology companies entered the FTSE-100. Tracker funds were obliged to buy these shares when they entered the Footsie, which meant that the companies' share prices rose still further. Then when the bubble burst, tracker funds took a hit. A well-managed fund might have avoided the bloodbath by not buying over-valued shares in the first place.

But how can you know which funds will beat the index in the next few years?

Chatfeild-Roberts cites some statistics which, to my surprise, suggest that past performance can help you pick future winners. He looked at 96 UK unit trusts which have been available for the last 20 years. These funds are in the UK All Companies and UK Income sectors. If you include dividends and deduct the annual charge, 39% of these funds beat the total return FTSE All-Share index over the last 20 years.

And here's the really interesting bit: Of the funds that beat the index over the first ten years, 72% of them repeated the feat, beating the index over the subsequent ten years.

Chatfeild-Roberts also places great emphasis on looking at a fund's manager. He prefers to back an experienced manager who has seen booms and busts.

Sector rotation is another important issue. Chatfeild-Roberts likes to invest in fund sectors that have "the wind behind them." Right now, he's bearish on the UK market. So in the UK he's backing managers who agree with him and are investing in companies that have substantial international businesses.

Outside the UK, Chatfeild-Roberts thinks the Japanese markets are attractive. Here, he likes the JPM Japan fund. He also reckons that the resource shares have further to go. One of his favourite funds in this sector is M&G Global Basics.

So have I been converted to the cause of active funds?

Not completely. I accept that past performance data is more useful than I had previously thought. But I still think it's tough to pick winning funds. Don't forget that Chatfeild-Roberts is able to trade in and out of funds as trends change. Many Fools want a long-term "buy and forget" investment, and I still believe that trackers offer the best way to achieve that.

Actively managed funds are probably most useful if you wish to invest in smaller companies or in markets outside the US and UK. The less efficient the market, the easier it is for an active fund manager to beat the market.

There's plenty more interesting stuff in the book, so if you're the slightest bit interested in actively-managed funds, "Fundology" is certainly worth reading.

You can buy Fundology at the Motley Fool bookshop.