Sunday, September 16, 2007

Fund Managers and Fund Management - 1

1.Sandeep Kothari, Fidelity, 2007

Sandeep Kothari completed his CA in late 1993, and worked with several broking houses like B and K James Capel, before moving to Fidelity in 2002.

He has been managing money since 2005 and now is a fund manager for Fidelity Equity Fund and Fidelity Tax Advantage Fund.

Here are the excerpts from an interview about his learning experiences and Fidelity's investments.

What was your initial role at Fidelity?

My role, when I joined Fidelity, was that of a regional analyst. The focus was India plus other regions. The philosophy of Fidelity is to put an analyst into various sectors and I was fortunate to go through 4-5 of them on a regional basis. So I have done regional steel, metals and mining and healthcare.

While being a regional analyst, you are also given the responsibility to run a pilot fund, which is Fidelity's own money. It's a small sum of money, which grooms you up to structure a portfolio and manage it before you get bigger amounts of money. I was also managing a pilot fund.

Subsequently, I managed some of the offshore funds investing into India. And as of July last year, I took over two domestic funds -- Fidelity Equity Fund and Fidelity Tax Advantage Fund.

In your career in stock markets, which one has been the difficult phase?

In 2002 when I joined Fidelity, we had seen the worst of the bear markets. I remember we had a large investment in Infosys and it fell 25-30 per cent. At that point in time, we had to take a step back, think about what the fundamentals are and what the long-term holds for the company. Fortunately for us we held on and invested more, and that paid off extremely well. Those were great learning experiences.

Apart from that, my experience with the steel industry was a great learning. I was initially given the responsibility of the steel sector on the regional basis and it was a sector which had gone through a slump for a decade. There was no hope for it, and the mindsets were "how can you invest in the steel industry?" But if you look in the hindsight of the last 4-5 years now, that was the start of a bull run in the steel industry. It was a very good learning, just to see how the cycle for the entire industry changed. You just can't write anything off.

There have been huge expectations from your fund and you have met them reasonably well. What's your sense about all of this?

I try to see that the process is right. I just try to keep it simple and focus on what needs to be done. If you start worrying too much about the outcomes -- what happens tomorrow, what happens next month, then you miss on the basic process which you have to follow. I believe that if the process is right and if you follow the basic principles right, your convictions are right, and if you have done your homework well, hopefully the outcomes should be there.

Brief us about the things that you emphasise upon and on things which you don't?

You need to have a valuation framework for each industry. We work within those frameworks, while keeping the markets and the economic cycle in mind.

We look for risk-adjusted returns and try to achieve consistency in performance. We take a reasonable, calculated risk and back it up with lot of good systems, processes and research. We try to know as much about an investment as possible to build convictions.

This conviction bit, how do you do that with hundreds of them? There have been hundred stocks in your portfolio on occasions.

Since the time that I have taken over the portfolio, it will be between 60 and 75 stocks. I would like to keep it that way. But again, I don't get guided by how many of stocks are there. What I believe is that if you don't take reasonable position in a stock, then it doesn't make too much of a difference to the portfolio. So if a stock is falling and I can't buy it, I usually tend to get out of that stock, because that means I don't have enough conviction in it.

'Reasonable position' means?

You need to have at least 50 basis point (0.5 per cent) of your portfolio invested in a stock. But again, this cannot be a rule. (important point)

Sometimes you are trying to build conviction, trying to learn about a company you like. Or sometimes you just don't get stocks at the price you want to buy. So there are a lot of factors which can drive your allocations. As a principle, 60 to 75 stocks give you enough diversification. Then the trick is which area to focus on of 5,000-odd companies.

That's where our research process and our research team come in handy. We tend to focus on high-quality businesses, like the ones which have higher return on equity, ROEs, huge scalability and which can become long-term value creators. It's a mix of both, the bottom-up and top-down, but a large focus is on bottom-up stock selection.

How much input do you get from the people closely tracking these companies?

We tend to meet every company we invest in. Meeting the managements is very important. We have modelled 280-300 companies. We have six research analysts. We have support from the Delhi facility, which helps us with model building, initial company facts, etc. Portfolio managers do the company meetings, and like this, it is a library which gets created.

Were you comfortable with most of your portfolio when you took charge? Were you uncomfortable with the number of stocks?

See, every portfolio manager has his or her own style. There were about 85 stocks in the portfolio at the time I took it over, and it went down to 60. It was to do with the fact that some of the positions were small and there were some of the businesses I would have taken time to understand. So what I did was that I gravitated to what I understood well.

Subsequently, the positions did go up. You don't buy or sell because you want 'x' number of stocks in your portfolio. It is not about the number of stocks, but what percentage of your portfolio you are comfortable to risk in that stock.


2. We have strong risk management systems to prevent unwarranted risks: Nilesh Shah, CIO, ICICI Prudential MF

While performance is the single most important criterion why one should choose a particular mutual fund, it is very useful to know the process that led to superior returns. Fund management is not an exact science. Just as in cricket, the saying `form is transitory but class is permanent` applies in this discipline as well. Nilesh Shah, CIO of ICICI Prudential Mutual Fund, tells us what goes behind the scenes.

Quite a few funds from your fund house lead their pack. Can you broadly outline the investment philosophy?

Our investment philosophy is based on offering risk adjusted returns. Our approach is mix of top down and bottoms up. Following a bottoms up strategy, we focus on companies and their business models and compare valuations to arrive at stock picks. Stock selection is important for generating performance. Parallely we undertake top down approach and do our analysis of economy, global trends and arrive at sectors which will provide growth opportunities. However we never go overboard on a stock or sector from a risk management perspective.

We have clearly defined the objectives and mapped the positioning & characteristics for each of our funds on both, the equity and debt side. Due to the clear positioning, our respective fund managers have a clear operating framework, which they adhere to very diligently.

On the equity side, we have a robust risk management process whereby we control the liquidity risk and concentration risk and concentrate on generating positive alpha by doing in-depth fundamental research. On the debt side, we seek to optimize returns to the investors on a risk-adjusted basis by striking the right balance of liquidity risk, credit risk and interest risk, depending upon the objectives of the scheme.

Coming to stocks, what are the key attributes that you hold dear in a company that you invest?

We follow a commonsensical approach while investing. We ask ourselves two simple questions. First, will the company/stock be in existence after 10 years? Second, will it make more money than the other options in the market today? As simplistic as this may sound, historic track record has proven that this is an excellent approach to investing in equities. During 1995, this approach worked wonderfully when equity fund managers had to choose between Tisco, Rajinder Steel and Lloyd Steel or between HDFC Bank, Apple Finance and Anagram Finance. As a team, we take well-informed investment decisions while stock picking after meeting the company managements and undertaking painstaking bottoms up company research with a view to tap opportunities for our investors and investing ahead of the market. Our handwork, coupled with our integrity and honest approach, has worked well as is evident from our fund performance.

When you enter a stock what kind of investment horizon do you usually have in mind? Do you set target returns? How do you typically arrive at a decision to sell a stock?

The investment horizon for a stock would differ from scheme to scheme. While our Fusion and Tax plan, which are long term products, are oriented towards long term unlocking of value in stocks, our growth and dynamic plan would also seek to exploit opportunities in the market during the shorter term.

Decision to sell a stock is dependent upon factors like its reaching target price, change in internal/external environment of the company and availability of other market opportunities.

What would be your average portfolio `churn`? Do you work with any benchmarks or constraints when it comes to churn?

Our average portfolio churn is published in our fact sheet on a monthly basis. We do not work with any predetermined rate in terms of churn. Our decisions to buy or sell are based on in-depth research on the fundamentals of companies and their valuations.

What are the usual `factors of safety` you keep in mind while picking stocks? What is your philosophy towards managing portfolio risk?

Strong fundamentals, promising prospects, good management and vision and endurance to adverse market conditions are some factors that we look for in stocks to ensure good stock picking.

As mentioned before, we follow an elaborate risk management process whereby we control the liquidity risk and concentration risk and concentrate on generating positive alpha by doing in-depth fundamental research. Our approach to risk management has been very proactive in this regard and it differs from scheme to scheme based on its individual objectives.

For example, under the tax plan, we have the following risk management practices -Inclusion of a few defensive stocks, which we believe, could be absolute return stocks
-Diversified portfolio across stocks and sectors
-No holdings of over 10%
-Large cap holdings where appropriate

What really goes into nurturing a successful and consistent stock picking team in your fund house?

PruICICI has a unique culture of openness within the organization. This culture permits people the opportunity to be heard and make them effectively contribute towards the company`s goals. In the investment department, we hold daily meetings with the fund managers. On the equity side, each of our fund managers doubles up as an analyst for select sectors and shares his view with the team on those select sectors. This increases the specialization within the team and also encourages team work. Hence the scheme performances reflect the collaborative contribution of each member of the investment team. The work culture and the strong sense of team binding are important factors that go into nurturing of a successful and consistent stock picking team.

What is your view on exposure to the F&O market in your portfolio?

For a mutual fund, the biggest advantage of using derivatives is the opportunity to limit the down side by hedging. In a market that turns bearish, this can be a very effective tool. At our fund house, we effectively use derivatives for hedging our portfolios, whenever we deem it appropriate. We also have a specialized product, i.e. the Prudential ICICI Blended Plan, which employs a spot-future arbitrage strategy so as to generate returns for the investor through the cost of carry. We are also looking to launch a new product that will employ a dynamic derivatives strategy.

We have put in place a robust process so as to make effective use of derivatives in fund management. We have a specialist trader, who is adept in the area of derivative trading. With a view to ensure that compliance monitoring takes place on a pre-trade basis and so as to ensure that all derivative positions taken have an underlying of the same magnitude, we have put in place a robust, state-of-the art trading and compliance monitoring system called Charles River Investment Management System (CRIMS).
Coming to fixed income, how would you define your overall approach in managing interest rate and credit rate risks in an income fund?

We have strong risk management systems to prevent unwarranted risks that may otherwise arise in pursuit of returns. Non justifiable credit risk, interest rate risk and liquidity risk are three parameters that our fund just won`t compromise on for better returns. We believe in generating optimum returns without exposing the portfolio to undue interest rate risks and liquidity risks, as the income fund investors are looking for steady returns at relatively low risk across medium to long term horizon.

How does your team approach forecasting interest rate movements?

Our view on interest rate movements is dependent upon various micro and macro call like inflation, money supply, credit demand, government borrowings, foreign exchange market, RBI policy and market sentiment. We also closely monitor the shape and movement of the yield curve to arrive at our view.

What is your approach in picking corporate paper? How much do you rely on external credit ratings?

We believe in being with the best. We depend upon internal ratings for the same.



3. Compliance rules for asset managers in UK

Asset managers are responsible not only for the professional and responsible investment of their clients funds, but also for the correct and accurate reporting of transactions carried out, fund valuation and performance. They must also ensure the safekeeping of the clients’ assets, generally by making arrangements with a custodian bank specializing in generally by making arrangements with a custodian bank specializing in this type of service. Although the requirements of compliance with UK investment regulations are onerous, the tight regulation of the general investment business is a cornerstone of the continuing success of the general asset management industry.

The regulations that apply to asset managers are summarized below. All staff responsible for the management of clients funds are required to know and understand these rules. Trainee fund managers are required to pass the investment management certificate, a large part of which focuses on compliance rules, before being allowed formally to make and or implement investment decisions on a client’s behalf. This qualification is run by the Society of Investment professionals on behalf of the regulatory bodies.

The asset management companies are regulated by the financial services authority which is a legal body with statutory powers granted under the Financial Services and Markets Act 2000. The FSA is a company limited by guarantee, where this guarantee is made by HM treasury. The regulatory regime is designed to protect the interests on the private investor by imposing stringent regulations upon companies engaging in asset management. It is a criminal offence to provide asset management services without the FSA’s. Authorization punishable by upto 2 years imprisonment plus an unlimited fine.

There are a few guidelines which relates to the conduct of the business which specifically applies to the asset managers. They are listed below. These are designed in an organization specifically to ensure that the asset management firms and their staffs / workers / managers are fit and eligible to manage the investor’s money. These are known as the Financial Service Authority’s ‘principle of business’ and are summarized below

- Integrity of the company– making profits fairly.
- Relationship with all the regulators – adopting an open and cooperative approach.
- Safeguarding Assets of Customers – Adequate arrangements must be made for the safekeeping of clients’ assets.
- Communications with the customer – Clients informational needs must be met as far as possible.
- Effectiveness and Efficiency – work must be carried out to a high standard.
- Varied interests of Customers - firms must always act with their clients’ best interests at heart.
- Market standards and adherence – firms must adhere to proper standards of behavior.
- Backup and risk control systems – e.g. having adequate risk control systems.
- Financial backup and adequacy – having adequate resources to meet clients’ requirements.
- Customer / Consumer: Trust establishment – ensuring that products offered to clients are appropriate to their needs.
- Varied Opinions – must be handled fairly by firms.

In addition to these client specific rules, asset management firms are obliged to play their part in ensuring that illegal activities such as insider dealing and money laundering do not occur. If the FSA feels that firms are in breach of these guidelines they have the ultimate sanction of withdrawing a firm’s authorization thereby making it illegal for them to continue to trade.

Compliance Rule Summary

Most of the rules that asset managers must abide by are common sense. The rules revolve around acting in the clients’ best interests, putting your clients’ interests before your own as well as ensuring that the firms action do not break any laws.

Disclosure of Major Share Interests:

In order to ensure that the stock market is fair to all investors, any situation where a single investor (or a group of investors acting together – this being known as a consent party) can exert undue influence over a public company through the size of its shareholding must be reported. The Companies Act requires that any investor, or group of investors acting together, owning 3% or more of the issued share capital of a company must declare their holding. Further any change to holdings falling into this category of 1% or more must also be reported.

Conflict of Interest:

Owning own corporation’s shares:

These days most asset managers are part of larger banking groups. There is a clear potential conflict of interest in investing clients’ money in shares of your own company.

Own Account Trading:

Since fund managers are controlling large amounts of capital, they can clearly influence share prices through the purchase of sale of large quantities of a particular security. For this reason they are required to declare any positions that are holding, either within a company’s own book or within the fund managers’ own personal position. Fund managers are obliged to report these positions to their firm’s compliance department, who will also monitor the company’s own book. They are also required to execute any client trades before they deal on their own behalf, except where it would clearly be in the client’s interest for trading to be carried out after own account trading.

Acting in the Client’s Best interests:

Inducements: Both individual fund managers and asset management firms as a whole are restricted in the types of inducements that they are allowed to accept from brokers looking for the fund manager to place orders for securities through them. In general, brokers fal into two categories: that providing background research into securities that fund managers may wish to buy and those not providing this research, but instead paying an amount of soft commission. Under the regulations, this soft commission can only be spent by the fund management organization on data and systems which assist in the making of investment decisions. Thus, fund managers can use this money to pay for research systems such as DataStream and Bloomberg, but may not use it to buy general accounting or personnel system software.

Gifts from brokers to fund manager also need to be kept under control. Any substantial gift must be reported to the asset management company’s compliance department, who will decide whether the gift can be accepted.

Churning the Account:

This particularly applies to fund managers who earn all or part of the fees based on the volume of market trades carried out on the client’s account. Fund managers are not allowed to generate an excessive number of transactions even if the trades are in the client’s interests.

Best execution

An asset management company is obliged to obtain for his clients the best price in the market when carrying out trades on a fund’s behalf. Thus, the executive carrying out any trade has to get a series of quotes from different brokers and is obliged to hit the lowest quote if buying, and the highest quote if selling.

4. Due Diligence, Disclosure and Fund Managers

by Hannah Terhune, JD LLM (Taxation, New York University)

As published on

Fund managers should be prepared for the proverbial "check under the hood" when it comes to attracting new investors. Prospects not infrequently seek due diligence information beyond that provided in the fund's offering documents. When dealing with potential investors ("prospects"), it may be helpful for fund managers to understand the due diligence process in order to be better prepared for all contingencies.

Prospects may seek meetings with the officers of the fund and other persons significantly involved in the issuer's business to gain a basic understanding of the terms of the offering and its purposes; the nature of the issuer's business, including its management, workforce, creditors, major suppliers, customers, assets, liabilities, revenues, competition, and other business risks; and the regulatory schemes applicable to the enterprise. The following are areas of inquiry likely to be investigated by a prospect (or his legal counsel) before committing to an investment in your fund.

• size, history and structure of the Fund and fund manager
• ownership of the fund manager, including employee ownership
• registrations and regulation of the fund and/or fund manager (including copies of Part II of Form ADV, if applicable)
• number of employees, including descriptions and biographies of portfolio managers
• compensation and incentive arrangements for key employees
• fund manager's total assets under management
• fund manager's level of investment in the fund
• performance history
• fees
• maximum size of the fund
• largest withdrawals from the fund since inception
• types of clients and investors in the fund (e.g., institutional, high net worth, etc.)
• lock-up and withdrawal periods
• investment process ( i.e., the fund manager's approach to selecting investments)
• portfolio characteristics (e.g., typical number of long and short positions, breakdown of industries held long and short, average holding period, turnover, volatility, etc.)
• concentration of exposures and any exposure limits (e.g., a possible limit might be no more than five percent (5%) in any particular holding and no more than ten percent (10%) in any particular industry)
• average holding period for investments
• use of derivatives
• leverage information for the fund and aggregate leverage limitations
• manager's risk management processes
• contingency and business continuity plans
• prime brokerage arrangements
• manager's front and back office operations
• trade entry and trade processing procedures, as well as personnel authorized to place orders
• description of trade allocation process
• method for valuing portfolio holdings, including illiquid holdings
• fund's accountants, lawyers and other professional advisors (including references)
• litigation and/or regulatory proceedings involving the fund or fund manager
• fund's most recent PPM (or similar offering document)
• fund's audited and unaudited financial statements (e.g., balance sheet, cash flow statements, statement of operations)
• monthly net asset values
• frequency and detail of information given to investors
• copies of the fund's recent correspondence to investors (e.g., quarterly letters)

Prospects may submit a due diligence checklist to the issuer's management, requesting extensive information covering every major aspect of the issuer's organization, business, and management. They may review the documents submitted to ensure satisfactory compliance with the request and to determine what additional information is required for the initial draft of the disclosure document.

In addition, prospects may prepare and distribute questionnaires to directors, officers, and principal shareholders asking for their background and experience, including any involvement in bankruptcy, criminal, civil, or administrative proceedings; ownership of the fund's securities; business transactions with the fund; and other information related to their knowledge and participation in the issuer's business.

Although the SEC has expanded the scope and reliability of exemptions from registration, fund managers nevertheless can be liable for fraud if they fail to disclose material information. To minimize disclosure problems, fund managers should be aware of the kind of questions and concerns prospects are likely to raise. The well-prepared prospect may be working with something like the following

checklist: "What the astute fund investor should ask, and why."

Organizational Documents
• What is the fund's mailing address? physical address? If there are multiple addresses for the fund or if the fund shares an address or office space with another fund or another business or company, require an explanation and obtain document (written contract) that enables sharing or colocation. Look for soft dollar arrangements.
• Is the fund registered with the SEC? the State? Request a copy of Form D, as filed with SEC and relevant states. Verify the Form D or state regulatory equivalent filings in all states.
• What state is the fund organized in? Most domestic funds are organized in Delaware, although some are organized in Nevada, and, occasionally, in another state.
• What is the form of organization? Domestic funds are typically organized either as a limited partnership (in which the manager is the general partner and the investors are limited partners) or as a limited liability company (in which the manager is the managing member and the investors are non-managing members).

Obtain fund formation documents (e.g., Articles of Organization or Articles of Association).

• Request State Certificate of Good Standing from fund. This can be obtained from the state of formation. Contact state to verify certificate status or request that certificate be mailed directly to you.
• Is the fund domestic or offshore? If offshore, determine whether manager and/or fund are regulated by any regulator, and, if so, obtain regulatory filings. Ask about prime broker or other custodian, and administrator. Are they reputable? Where are the funds and securities custodied? If the answer is not New York, London, or some other major financial center, this is a warning sign. Inquire about the lawyers and the accountants: there is a limited universe of professionals in each offshore jurisdiction, and use of professionals who are not well known raises concerns.
• What is the management fee?
• What is the performance fee?
• Does the manager have the right to more than 20% of the profits? If so, think twice about investing.
• Does the manager's right to profits require that it first exceed a stated return to the investors (termed a hurdle rate)? If not, think twice about investing.
• Does the agreement have a "high water mark" (where an investor has had profits, and the manager taken a share of profits, manager can only take profits in a later year if the losses are made up first). If not, it is probably inadvisable to invest, since this indicates unfairness on the part of the manager.
• Is it a fund of funds? If the fund is a fund of funds, there are special considerations, the most important of which concerns fees and compensation to the two levels of managers. The costs should be kept to only slightly more than investment in a stand-alone fund entails.
• Obtain Investment Advisory Agreement between the fund and the investment advisor. Verify that it conforms to stated relationship in the fund's Offering Memorandum.
• What are the Withdrawal Terms? Does the agreement permit an investor to withdraw all or part of its capital? If so, on what conditions–°must the investor give written notice (such as 90 days or 180 days) and how often in each year can an investor withdraw? Industry standards vary. In some cases, withdrawal four times a year is permitted, in other cases, only on December 31, after giving notice 90 days in advance. If the agreement contains very restrictive withdrawal rights, think twice about investing.
• Does the fund have an Engagement Letter with an attorney on file? Obtain a copy and contact attorney to verify the client relationship.
• Does the fund have an Engagement Letter with an auditor on file? Obtain a copy and verify the client relationship

Financial Statements

• Obtain copies of the last three years audited financial statements directly from the auditor. Do not accept copies provided by fund. Review them to see whether they agree with what the manager has represented to be the fund's results.
• Obtain copies of filed tax returns for last two years directly from the fund's accounting firm. Do not accept copies provided by the fund. Tax returns should include schedules and statements (except Schedule K-1, which discloses each investor's position in the fund). Compare results to audited financials, and reconcile tax results with financials (through unrealized gain/loss). Determine whether for tax purposes the fund is treated as a trader in securities (favorable treatment) or as an investor (unfavorable treatment).
• If the fund is a fund of funds, when does the manager issue its financials and tax returns–°are they timely, or are there extensions (it takes longer, and more work, for the fund and its accountants to issue the results in the case of a fund of funds)? What are the strategies employed by each of the sub-managers in the investee funds, and are they sufficiently diversified to spread risk?
• Obtain Performance Reports for the past 5 years. If PPM gives statistical history, review this and compare to audited financials. If manager supplies historical results, ask if these results are presented in compliance with GIPS (CFA Institute industry association standard – formerly AIMR-PPS) guidelines for presentation of results.
• Does the fund report far superior results to other funds in its investment strategy group? If so, ask for an explanation since there have been a number of frauds involving purportedly excellent results that ran counter to prevailing trends. Offering Memorandum
• Review the fund's Offering Memorandum. If there is a Form ADV (there will be if the manager is a Registered Investment Advisers), compare the Form ADV to the PPM (search for Form ADV Part I at and ask manager for Form ADV Part II).
• What is the fund's brokerage firm(s)?
• Who are the prime brokers or other custodians for the fund? It is common for a hedge fund to have one or more prime brokers, who track the investments and custody the funds. Use of a prime broker is a positive indication. However, if the fund invests in commodities, that part of the investing cannot be done through a prime broker. Also, very large funds ($500 million and up) do not use a prime broker because it is not cost efficient.

Investment Manager

• Is the investment manager registered as an investment adviser with SEC? If yes, review Form ADV. Review entire form and, in particular, look for number of personnel employed, number of clients, and funds under management. Also look for whether any advisee clients are SEC registered investment companies or non-registered funds, and whether the adviser has had problems with regulators, has other business activities, etc.
• Is the investment manager registered with any state regulatory authority as an investment adviser? If so, review forms. If not registered as investment adviser with SEC, or state level, higher level of scrutiny required.
• Examine investment manager's Articles of Organization and Certificates of Formation for form of entity, jurisdiction of organization, location of office, and EIN letter from the IRS. Note that it is very rare for the investment manager of an onshore fund to be organized in a foreign jurisdiction
• Examine the Operating Agreement of the investment manager.
• What licenses do individuals employed at the investment manager possess? Many management personnel possess a securities license, such as Series 7 (registered representative of a broker-dealer) because the manager is itself registered with the SEC as a broker-dealer. If individuals are investment advisers, they will be required to have the Series 65 or equivalent.
• What are the educational and professional credentials of the personnel? Verify credentials listed. What institutions of higher learning did they attend? Do they have a graduate degree in business or economics; sometimes, engineering, or mathematics, medicine, can be relevant? Are they a CFA (Certified Financial Analyst), which is the standard industry credential for professional investment managers?
• What are the employment histories of the personnel? Were they employed at other hedge funds? If so, verify employment and review the history of those funds. Were they employed at major financial institutions, and, if so, in what capacity?
• Examine the investment manager's past performance (if applicable).
• Obtain photo identification from the manager (driver's license, passport, etc.).
• Perform background checks on the manager and the principals of the manager. Useful places to look are Dun & Bradstreet report (credit check) and (background check with information on bankruptcies, liens, lawsuits, judgments, and UCC's). Be sure to obtain permission from each individual to run a background check.
• Check on court decisions against the manager and its principals. Get state and federal filings on the manager -- such as state doing business certificates. Run check on FACTIVA (Dow Jones news retrieval service) or similar service to obtain media articles about the manager and its principals.
• Get at least three references from the manager: inquire as to who the references are and conduct due diligence.

Author: Hannah M. Terhune, JD, LLM (, is
Partner and Chief Attorney of Capital Management Law Group, PLLC, an
international law firm ( Ms. Terhune specializes in
hedge funds, international and domestic tax, shareholder litigation, and business law.


5. Fund Management Industry Responds Positively to Client Demand for Unconstrained Mandates, says Hewitt Associates

02 October 2006
LONDON - Hewitt Associates, a global human resources services company, has revealed that the number of fund managers it recommends to clients wishing to invest using an ‘unconstrained’ approach has doubled over the last two years. Hewitt has actively encouraged investment houses to open new funds which allow fund managers the freedom to back their own judgement while still working to specific objectives.

Hewitt has identified 17 fund managers which have the skills and flexibility to operate to an unconstrained mandate. When measured over three years to the end of June 2006, these managers have, on average, outperformed global and UK stock market indices by 4.7% pa. During this time period, the single highest performing manager for global unconstrained mandates outperformed the benchmark FTSE World Index by 11.4% pa.

Ian Peart, head of Manager Research, at Hewitt said:

“At the time of our last update in July 2005, we were somewhat concerned by the industry’s ability to absorb the demand from clients for fund managers able to run funds in an unconstrained way.

“However, the fund management industry’s reaction to increasing client interest in backing best ideas is promising and several more institutions have come forward with good products or adjustments to existing product offerings to plug this gap. Their commitment is paying off, not only in terms of investment performance, but also with regards to picking up available investment mandates.”

Over the last 18 months, Hewitt has advised on the appointment of nearly 70 unconstrained investment mandates.

The latest figures come just three years after Hewitt first publicly expressed its concerns over the fund management industry’s reliance on traditional index benchmarks and advocated the removal of these constraints from fund manager’s investment selections.

Andrew Tunningley, Head of UK Investment Consulting at Hewitt, added:

“Back in 2003 we voiced our concern that by trying to manage assets tightly against benchmarks, fund managers were not effectively managing risks and were not putting their best ideas into portfolios. These latest figures show that our concerns were justified and investment returns are being affected by blind adherence to benchmark constraints. Our clients want fund managers to have the ability to back their investment judgement and are increasingly opting for those managers with the flexibility to do so.”

The principle underlying a shift to an unconstrained approach to investment is that forcing fund managers to think about risk purely in terms of deviation from the index, restricts managers’ ability to back their own judgement, as well as increasing the concentration of risk in just a handful of companies.


‘Fund managers matter more in themes’
Sandeep Singh
Posted online: Tuesday , April 17, 2007 at 1447 IST
One of the issues facing fund houses is people. Fund managers, the all-important set of people who are a big reason for your investment to lead or lag, are few in number. With the number of fund houses and schemes growing by the day, fund managers moves are becoming more frequent. Recently, for instance, Sundaram BNP Paribas Mutual Fund lost the services of Anoop Bhaskar, who was an important reason for the fund house’s strong equities showing. Sundaram managing director T.P. Raman promises continuity, but also admits that individuality plays a greater role in specialised funds. In an interview to our correspondent, Raman touches on the touchy issue of fund manager churn and more.
Fund managers come and go. Recently, you lost Anoop Bhaskar, your driver on the equities side. Will it affect performance of your equity funds?
We are a process-driven and institutionalised fund house, and we don’t promote a star culture. Having said that, a fund manager’s perspective is important. His views are important, as they are unique to him. He takes a view on the amount of risk to take from situation to situation. Still, I would say, more than individuals, systems and processes are important, as they work in the long term.

How much weightage you would give to a fund manager?
It is difficult to assign weights, as there are many cheques and balances we follow while managing people’s money. What I can say is that a fund manager is more crucial in some kinds of funds than others. His perspective and views are more important in specialised funds like small-cap funds, where there is a smaller universe, compared to a large-cap fund. Even in sector funds, if the fund manager has knowledge of the sector, it works to the fund’s advantage, as he can then take better calls.

Coming to the performance of your schemes, they have done well over three-year and five-year periods, but they have lagged over the past year.
It depends on the style of the scheme and the state of the market. For instance, large caps have been doing well. But our mid-cap fund can’t take an exposure to large caps, as it would mean changing the style of the fund. But don’t look at one-year performance — it’s a short-term perspective. We do work to protect our downside. We aim to be consistent, and we have been so. On a year-on-year basis, the average return has been 9-10 per cent, and a couple of our funds are there.

But there are also some funds like India Leadership and S.M.I.L.E. that have given negative returns.
We need to give these funds some time, as they are theme-based. Themes might not show results in the short term, but they should work in the long term. I can say that themes like infrastructure will work, though how much is difficult to quantify.

But didn’t you anticipate that volatility and act on it?
We were focussed on the downside, but we don’t want to move away from our designated themes. We can’t always keep changing the fund’s long-term objectives with short-term volatility or market movements. It’s tough to predict factors like oil, politics and interest rates. Hence, we try to stick to the theme of the fund, and manage risk by increasing our cash holding.

Sundaram has been quite active in promoting themes. How do you narrow in on a particular theme?
A certain amount of thought and planning goes into it. The government’s policy announcements and strategic intent are critical inputs. For example, we know that the power story will happen, but will it happen one year or three years from now is difficult to say.


7. Broad responsibilities of chief and senior directors in a Fund management company - UK

- Chief Executive Officer : Responsible for the over all management and direction of the company , particularly in terms of building an effective and cohesive team to manage the business
- Chief Investment Officer : Takes responsibility for the delivery of fund performance and , in particularly, endeavors to consistently outperform the company it is the CIO’s responsibility to promote a team approach ( rather than a star fund manager culture)
- Chief Financial Officer : Essentially the finance director, but also usually responsible for general administration
- Chief operating Officers: Overseer of the company’s operations, particularly in the area of ensuring that transaction carried out on behalf of client is properly processed. Importantly must ensure that the systems are in place to ensure compliance with regulations, and that all client and regulatory reporting is carried out to the satisfaction of trustees and regulators
- IT Directors : This role is becoming increasingly important as more and more reliance is placed on, inter alia, the electronics sourcing of market and other data, the automation of assets management process (e.g. the drive towards STP ) and the electronics marketing of products over the internet
- Marketing Directors: This function is absolutely essential to modern day asset management. The asset management company needs to sell itself to all of the different segment of the market, pension funds, life funds and retail (generally unitized vehicles sold via Independent Financial devisers (IFAs)) . There is an increasing trend in the use if e-commerce to market assets management products, particularly unitized vehicles as market open up across Europe.
- Strategy director: Has asset allocation responsibility, ie makes the highest level decisions with regards to allocation of funds between equities, bonds, property and cash. May also make decisions regarding allocation between equity markets. Usually responsible for ensuring strategy implementation in a timely and consistent fashion. Economics ih his team will analysis fundamental data and trends to forecast future market conditions.
- Compliance Officer: Responsible for ensuring that the asset management firm operates with in the parameters required by regulators such as the FSA and clients.

Fund Management

The fund management takes over all responsibility for the fund from an investment perspective, i.e. its performance, risk profile and dealing on the client’s behalf .Day to day contact (e.g. Provide valuation of portfolios and other information) is generally carried out by a separate client services team. Fund managers are responsible for ‘beating’ (i.e. achieving a higher return than) their bench mark (e.g. the Morgan Staley capital international world equity index, JP Morgan Salomon Brothers etc.) The fund manager will also often be responsible for ensuring that the fund has cash available when required to meet obligations (usually called the liability stream) of the fund (eg to pay pension entitlements, insurance claims etc.)

Fund management responsibility is usually carried out by senior investment staff with other , often related , roles, Generally the larger the client, the more senior the fund manger (who may also be know as the investment Director); thus the CIO may take on the investment director’s role for a large pension fund mandate . Whereas a UK equity desk energy specialist might also take on fund management responsibility for a UK Equity OEIC.

House Policy on markets and stocks is reviewed at each investment department’s morning meeting. This meeting is used to share information with regard to economics and market conditions, as well as trading and other activities planned for the day. In additions to their role as market and security, fund managers also take responsibility that orders are executed accurately, ie that the correct line of stock has been ordered, that sufficient cash will be available for settlement and sold responsible for stock certificates0 fund managers are also responsible for ensuring that all clients receive equal treatment, ie, stock are to be bought simultaneously across all similar funds.

Equity Management:

The global equity market is generally divided I to regions of the world, each region having a dedicated ‘desk’ and with specialization occurring in emerging markets. For example : French and German markets would be handled by the mainstream European desk, where as eastern European markets might b separately handled by an Emerging European Specialist . Each desk’s resources are roughly determined by the value of the funds for which they are responsible. For most UK based fund mangers, the UK Equity desk is usually the largest given the (unexplained by modern portfolio theory) large allocations made to the domestic market. UK equity desks can usually afford, in terms of resource, to have industry specialists (e.g. Finance, consumer goods etc) where as overseas desks, e.g. the European desk, may have country specialists.

Security research involves collating data from the vast quality of broker research provided, preparing house earning estimates and modeling the impact of changes on earning forecasts of economics news and changes in market consensus.

Stock Leading:

A valuable source of income can be obtained by lending securities owned by funds to other financial institution that needs to deliver a security that they do not own. This need can arise through errors being made when selling out of a position, or by speculators in the market deliberately selling short security that they do not own in the hope that the value of the security will fall, there generating a profit.

Information technology:

This department is responsible for all systems and data used by assets managers. Data includes real – time data and news, supplied by such vendors as Bloomberg and Reuters, and historic data. Systems include back office investment accounting (which is the prime record for the assets manager’s holdings) orders management and dealing systems and fund analysis decision support systems.

8. Managing the asset manager
Talent is critically important to the success of firms that invest other people's money. So asset-management firms must excel at recruiting, developing, rewarding, and retaining talented people, right? Wrong, according to those very people. The message on talent from asset-management staff to the bosses is an overwhelming "could do better," a survey of these employees shows.

The take-away
What to do? Top executives in asset-management firms could manage talent better by using more nonfinancial measures and competitive compensation.


9. How Mutual Fund Managers Exploit Opportunities to Maximize Fees ... - 1:06amFund managers, they say, cannot properly serve fund investors when they must also serve their own bosses, the management companies' owners, ...

10. Job Opportunities in Fund Management Companies

Fund managers invest money on behalf of their clients – which include pension funds, institutional investors, insurance companies, unit trusts and others – with a view to making it grow.

There are two basic kinds of fund:

• Passive funds: also called 'index trackers'. Fund managers select a portfolio of assets whose value will track that of a financial index. A fund that tracks the FTSE 100 index, for example, will aim to follow the value of the UK's 100 biggest companies. The investment decisions of passive funds are typically made using computers, meaning fund managers working on them have a relatively easy life.

• Active funds: active fund managers buy and sell financial products in an attempt to outperform the rest of the market. Active fund managers are what most people's ideas of what fund management is: they invest in products they hope will rise in price, to sell at a profit.

Fund managers invest in everything from shares, bonds or real estate to commodities such as oil, wheat or aluminium. Some funds offer fast growth and high risks; others offer slower growth and smaller risks.


2006 was a good year for Europe's money managers; strong markets saw assets under management rise for the third year running.Headline figures alone disguise the fact that the market is evolving, however. Scratch the surface, and the asset management market starts to look very different to the way it did only a few years ago.

One of the biggest issues has been a shift out of traditional investment houses into more specialist funds, such as hedge funds, quantitative funds and emerging markets funds. Between 2003 and 2005, research by the European Social Investment Forum (SIF) found that investment in socially responsible funds increased by 36% to £706bn.

Bond funds, however, look set to have a tough time in 2007 as rising interest rates and inflation help depress bond prices, creating a danger that bond investors will lose money. However, uncertainty surrounding the US economy means equities may also be on the way down.

Key players

Europe's top fund managers include Swiss-based UBS, the UK's BGI and Allianz of Germany. Some big US fund managers, such as Fidelity Investments or State Street Global, are also active in Europe.

Roles and career paths

Working as a fund manager used to involve everything from analysing and investing in products to persuading new clients to put money into the fund. Today, however, fund managers focus on managing money, while other people are employed to do the rest.

If you don't fancy being a fund manager, you could work as a marketer, research analyst or operations expert. Fund management marketers wine and dine potential clients; they also manage relationships with existing clients, meet investment consultants and play a role in developing new products.

Analysts working in fund management help steer fund managers in the right direction when it comes to choosing assets to invest in. They scrutinise companies' results and meet with management to discuss strategy. They then write lengthy reports detailing their conclusions.

Operations staff working for fund managers do everything from working in IT to settling and reporting trades, project management and customer services. However, many funds have outsourced the administrative aspects of their operations to global custodians.


Traditional fund managers don't make quite as much as traders working in investment banks, but they don't do too badly either. Hedge fund managers can make considerably more than anyone else – but they're a special case.

Fund manager pay is rising. Research by recruitment firm Morgan McKinley suggests top performers in the sector can now earn salaries of £140k, plus a bonus which can be several times higher, depending upon their performance over several years.


The attributes required for a career in fund management vary according to the role. Laura Everingham, graduate recruitment manager at Fidelity International, says: "Researchers will need an enquiring mind, an avid interest in the stock market and a passion for finding out what makes a good or bad investment."

Richard Barry, HR manager at fund management firm Baillie Gifford, agrees: "Fund management is very different to investment banking; it is more about qualitative rather than quantitative research, making it good for graduates with any sort of degree," he says.

"We look for lateral thinkers and people who are naturally inquisitive. We want really bright people who are going to come up with winning ideas that will work, although you do still have to have some numeracy skills and have a good academic record."

Fund managers need to be able to assimilate large quantities of information and then identify the key points to make investment decisions, stresses Shane Kelly, head of international graduate recruitment at fund management firm BlackRock, formerly Merrill Lynch Investment Managers: "In asset management we generally look for potential – passion, ambition and enthusiasm for our business – rather than specific traits. But good quantitative, numeric and communication skills are a must."

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