Mark Richmond-Watson is part of our fund selection team and a specialist in UK equities. A keen amateur jockey who has raced at Ascot in front of the Prince of Wales, here he explains what makes a good fund manager and why choosing funds is like picking a winning racehorse.
A distinctive feature of James Hambro & Partners is that it builds a large proportion of its portfolios with individual stocks. When would you use a fund?
Funds have a central role in our client portfolios. They are selected based on their ability to complement the individual equity positions chosen by our team. Individual equities are there to meet a particular purpose and provide focus, but we’re the first to recognise that there are some really good funds and fund management teams out there and we want our clients to have the best. As an example, funds would be used to gain exposure to certain regions, such as the emerging markets, where we think others have the right specialism and research resources.
Another reason is diversification. We like portfolios to be focused but there are some parts of the market, like technology, where we’re wary of stock-specific risk. Technology companies have driven this bull market, but this is an area where the outcomes can be binary. The technology fund we use has three managers in the team and one of them is based in the US. They spend most of their time looking at small and mid-size technology companies around the world and are able to build a much more diversified portfolio of stocks. They’ll have broadly 60 underlying holdings, and a number of these companies are bought out each year, often at a premium.
Beyond technology, what other funds are you using?
We hold a healthcare fund. This is a complex sector – there are so many technologies and drugs going through trials to earn regulatory approval and, at the other end of the pipeline, successful historic drugs that are coming to the end of their patent protection. We’re happy to outsource the investment expertise of this to an experienced fund management team.
We’ve also just introduced an emerging market fund into the mix for the first time in five years. If the dollar weakens, emerging markets are likely to benefit. The team we’ve chosen is not well known but they’re in a business with a good pedigree and are hungry for success. They have a similar approach to stock selection as us – they look to buy and hold a focused portfolio of strong, stable businesses that have competitive advantage. It’s a smaller fund, which means they can be more nimble and flexible.
What do you look for in a fund manager?
It’s not dissimilar to picking a winning racehorse. You’re looking for a good stable, an excellent jockey, the right horse for the right conditions.
There are some fund houses that we think have the right approach. We always want to meet the managers. We will do some deep analysis to understand the characteristics of the fund to ensure it complements what we are doing ourselves in portfolios and that it offers something different and useful. We’ll study form to see what’s driven past success to ensure the fund has the appropriate strengths for today’s markets. And we keep a close eye on costs, which can be a real drag on performance.
When you meet the manager what are you looking for?
You can do all the quantitative research you like but nothing beats sitting with the manager face to face. Do you trust him or her? Are they enthusiastic? Are they going about things the right way? Are they fairly incentivised to succeed? Do they have a clear process and objectives? There are a handful we meet who look good on paper but when you’ve pressed them you get the impression that they don’t really understand the risk within their portfolio. You worry that their success has been down to luck and that if the tide turns their performance could be disappointing. Others come across really strongly but then you worry about issues like key man risk, especially in small organisations.
What got you into this business?
I did a Business degree at Leeds University Business School – a great place to study. The Library – a pub – was always open, and beers were only a pound a pint! I was just fascinated by what makes businesses tick, how the economy works and how our lives are shaped by modern marketing. Why do we spend double to have an iPhone when we have an old Nokia that still works?
One of the things I love is that the market’s always changing. You can’t have a view on a company and rest. Management might change, regulation might change. We are constantly seeing industries disrupted by technology.
I also like the fact that I can be viewing these companies alongside someone twice my age with five times as much experience but at the point you are choosing a stock or fund neither of you can be certain whether you are right or wrong. Only time will tell. That said, I do like the fact that there are so many experienced managers here to learn from.
Outside of work, how did you get involved in riding?
I’ve ridden all my life. I grew up with horses and have followed horse racing as long as I can remember. My family have been involved with the Jockey Club for many years and are breeders and owners. It’s in the blood!
Posted on 11 June 2019
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