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Wealth Management: Mosaique Insights – Finding funds

29/10/2019

David Windisch, CFA, Wealth Management

Mosaique's approach to active investment selection

In 1983 Rothschild & Co backed Bruce S. Kovner when he started his investment firm Caxton Associates. Since launch, his macro hedge fund has returned more than 10% per annum net of fees.1 Over the subsequent decades, we have developed a tried and tested fund selection process, integral to choosing active funds for Mosaique portfolios. This article explains how this is done.

1Even though the firm started in 1983, the longest still-existing fund vehicle is the Caxton Global Macro fund, which started in January 1997. An investment of $100 at the fund's inception would have turned into almost $1,000 by August 2019.

Phase 1: Filtering

We begin our search with systematic filtering of funds by asset class, legal structure and performance. To assess performance, we examine a variety of time horizons as no matter how talented a manager, there will always be periods of underperformance. In line with our investment horizon, we place more emphasis on three, five and ten years than on yearly or monthly performance. To the resulting list we may add managers who were not included by the standard search, but who we value highly.

Phase 2: Understanding investment approaches and qualitative judgment

Following our initial filtering, we compare managers' investment approaches in order to understand how they invest and why they outperform. We believe that sustainably superior returns are a result of a solid and repeatable investment process allowing us to separate skill from luck.

This assessment requires a qualitative judgement call on fund managers after reading their publications, conducting onsite visits, talking to investment teams and obtaining references from a variety of sources including former employees, colleagues and fellow investors. This combination of tangible and intangible factors makes this phase of our selection process both qualitative and quantitative.

Phase 3: Select expert managers

Finally, we select just a handful of managers who we believe to be skilled and trustworthy stewards of your capital. As a sign of integrity, we prefer managers who invest their own money alongside clients. Similar to Warren E. Buffett we believe that successful managers exhibit integrity, intelligence, and energy; but without the first, the latter two may harm you.

Fund research examples

Whilst the quantitative part of our selection is fairly systematic, it is the qualitative part where experience and hard work allow us to add value to Mosaique portfolios.

For instance, since Mosaique's inception in January 2017 the Egerton fund has contributed some 2% to overall performance. However, to preserve performance the fund is closed to new investors. Through our fund research process we discovered and use AKO's Global Long Only fund as a trusted alternative. AKO was founded in 2005 by a former Egerton investment manager and over time we have spoken with the investment team, read their highly recommendable investment book2 and eagerly await their quarterly investment letters.

2Quality Investing: Owning the best companies for the long term.

Another example is Nordea's US Bond Opportunities fund managed by Jeffery Gundlach aka “The Bond King” at his firm DoubleLine. The fund gives European investors the opportunity to invest with a successful US fixed income manager who despite overseeing more than $100 billion remains little known across Europe.

In summary, we seek out managers who sustainably outperform due to skilful execution of a solid investment process. Our work can often feel like sifting sand. Through patience, attention to detail and a long-term perspective we nevertheless find the right active investment strategies for Mosaique portfolios.

Did you know?

A Political Economy student of Harvard College, Bruce Stanley Kovner (born 1945) did not immediately pursue a career in finance. Instead, Mr. Kovner kept busy after school as a taxi driver, writer and political campaigner - before discovering commodities trading.

As a novel trader, Mr. Kovner understood early on the importance of risk management, having seen his initial $3k investment become $40k before his gains diminished to $23k. Within six years, Mr. Kovner gained a reputation as a clearheaded trader and embarked to set up his own firm - Caxton Associates in 1983.

 

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