Demystifying fund management - how those clever men and women make money

How do fund managers make money for their investors? With a bewildering array of providers offering thousands of unit trusts, how do those clever people at the helm decide where to put their investors' cash?

Many books have been written on the techniques fund managers use but you don't necessarily require a maths degree to understand their basic strategies. Above and beyond the number-crunching there are several approaches most managers favour depending on the type and objective of their funds.

Rensburg Fund Management's Colin Morton runs the UK Equity Income Trust and the UK Blue Chip Growth Trust. He describes his approach as "top-down": he will examine what is happening in the UK and what the outlook is for the country as well as the global situation where larger companies have more exposure.

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He believes that in a "benign environment the macro view is not that important". But these days it has rather more currency.

Apart from the bigger picture, Morton appraises each company on its merits, "bottom-up". One way is by assessing cash flows to determine how much is available for a company to reinvest or distribute as dividends.

Morton calls himself a "value fund manager" who will avoid companies where there is "a lot of noise" but little substance. "What I like to do is buy companies that I can understand, I can see how they make their money, they're not expensive to buy. I can understand how it operates and how it works."

Morton uses data from analysts, particularly when it comes to amassing information on the "large caps" - the bigger companies who make up the FTSE 100. He believes face to face visits are more helpful for the "mid caps" - the medium-sized companies. Morton meets the management from three or four mid caps a week as a means of evaluating the companies' potential and getting to know what's out there.

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He says these smaller companies are lesser known and less scrutinised, so they offer a "good opportunity to add value".

The benefits of good research are appreciated by investment specialist Mark Pearce from Threadneedle. He believes that in the current credit-crunch crisis the most important aspect of the investment process is not the technical picture but company fundamentals; a company with strong roots, a good business, solid management, and a robust balance sheet will tend to outperform its rivals.

Pearce says Threadneedle is committed to carrying out thorough company research and won't consider an investment unless this has been done.

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Jane Ladds
08 May 2008 © Moneyextra.com

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