We look at the question of how experienced they need to be
Thursday 06 Dec 2018 Author: Holly Black

It almost goes without saying that if you entrust your money to a fund manager, it’s because you believe that he or she knows what they are doing.

We let fund managers invest on our behalf because we believe that they can do better job than we would be able to do ourselves. And that’s particularly true of fund managers investing in specialist or niche areas.

A fund manager investing in biotech, one might presume, has particular expertise in that field and that is why they have ended up running a fund which focuses on that area.

DO YOU HAVE TO BE AN EXPERT?

But does a fund manager really need specific qualifications to invest in such an area? For example, should your industrial fund manager be an ex-engineer, your special situations investor a trained management consultant, and your Japan fund manager fluent in the language – or is investing a case of being able to spot a good business, regardless of the industry or region it is focused on?

Tom Becket, chief investment officer at Psigma Asset Management, says: ‘I think you can be a successful investor as a generalist except in a few specific areas. We invest in thematic funds, in energy, mining, biotech and pharma for example, and typically prefer those run by an experts.’

He thinks niche industries and early stage companies require expertise and investors with a greater understanding of these sectors will be better able to spot both opportunities and risks.

Calum Bruce, manager of the Ediston Property (EPIC) investment company, has a degree in Estate Management, is a member of the Royal Institute of Chartered Surveyors (Rics) and has previously worked as an agent for property consultants King Sturge.

He believes having team members with experience and local knowledge of the areas in which the fund invests is vital. Getting the right tenants into the right buildings or understand how best to repurpose a building so it can benefit from changing market conditions are areas where having experience pays off.

He says: ‘The requirements of tenants changes and so do conditions in the local and national property market. Our experience allows us to keep ahead of these changes and gives us a considerable competitive edge.’

Daniel Mahoney, manager of Polar Capital Biotechnology (B42P0H7), has a degree in biochemistry and a PhD and worked as a research scientist for seven years.

It’s perhaps no surprise that he ended up running a biotech fund. He says specialist knowledge and experience is ‘essential’ to invest in the healthcare sector. ‘If you have never looked at abiotechnology or medical technology company before, there are all sorts of risks that are unique to this sector that may not be obvious to a generalist investor,’ he adds.

UNDERSTANDING WHAT CAN GO WRONG

Mahoney cites having an insight into all of the things which can go wrong in the clinical trial process, knowing what the regulator is looking for when deciding whether to approve a drug, and the ability to understand technical jargon as some examples of how having expertise can help an investor in the industry.

He says: ‘We don’t have all of the answers but we have the experience to ask the right questions and we know who to ask.’ The fund has a returned 186.8% over five years, compared to an average return of 26.9% in the Specialist sector.

QUALIFICATIONS DON’T ALWAYS EQUAL POSITIVE RETURNS 

But not all investors are convinced that a background in a particular field will make you the right person to manage a fund. Steve Bates, chief investment officer at GuardCap Asset Management, says qualifications aren’t everything: ‘I have seen very highly qualified people trip over their own cleverness. Technically they might have been right about something but the price [of an asset] has not behaved as they expected.’

While technical expertise can help in binary situations – whether a drug or a piece of software will or won’t work, for example – he says life experience is crucial; it can help an investor judge a fashion trend, or the quality and ambition of a management team.

INVESTING SUCCESSFULLY WITHOUT A DOCTORATE

Andy Ho, chief investment officer at VinaCapital Vietnam Opportunity (VOF) fund, adds: ‘I believe history has shown that there are many successful investors who do not have a PhD.’ However, he also agrees there are exceptions where having specialist expertise may be particularly useful, such as in biotech and technology.

Bates at GuardCap adds: ‘We find that a diverse team of different ages, genders, nationalities and education brings insights which increase the likelihood of successful decision-making.

‘The old way of just recruiting a bunch of like-minded men from Oxbridge is going to give you very little depth of understanding of the complexity that is embedded in markets.’

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