Is this the world’s most thorough system of investment research?

A little-known consultancy subjects fund managers to extraordinary levels of scrutiny. This is how readers can benefit …

APOLOGIES, but it will take some time before we can actually name this week’s trusts.

This is because we first need to describe the intensive and rigorous research process that one investment analysis firm uses to identify the asset managers it can recommend to its own clients. Questor met the key members of this investment consultancy, Stamford Associates, recently and was highly impressed not only with the thoroughness of its process but with the fact that its methodology was unlike any other we had seen for selecting fund managers.

The results of its filtering process are that 85pc of the managers it recommends outperform the index against which they are measured over 10 years (it believes a long-term approach is essential), with average outperformance of 2.1 percentage points a year.

The first striking aspect of Stamford’s system is that it does not look at a fund manager’s record; it embodies the fact that “past performance is not a guide to future returns”.

Instead, it scrutinises, in exhaustive detail, whether fund managers’ actual investment strategies conform with what they promise clients; whether managers know their stocks in sufficient depth; and whether the environment in which they work exhibits healthy characteristics such as teamwork, acceptance of challenging views and proper incentive structures or unhealthy ones such as a domineering leader, a lack of leadership or groupthink.

The research is carried out by a team that includes not just investment professionals but also psychologists, a recognition of the part that a fund manager’s character and his or her decision making and social skills play in the success or otherwise of their investments.

The number-crunching aspect of the team’s work benefits from an extraordinary degree of access to information about the funds under scrutiny. In order to be considered for Stamford’s seal of approval, fund firms have to agree to share details not just of every holding but of every single trade, all on a daily basis.

This allows the firm’s researchers to choose certain holdings as “case studies” that they can quiz managers about when they make one of their many visits to the fund firm. The answers they receive to questions such as “why did you buy shares in Acme Group on April 12 and how did you assess their intrinsic value?” can be very revealing. The researchers have on occasion discovered that a fund manager lacked even basic knowledge of the stock in question.

“Our recommendations are evidence based, we accept nothing at face value,” the company said.

Once Stamford has recommended a manager or fund house to its clients, it maintains a constant review, carried out by a different team to ensure that its own decisions are not affected by groupthink.

Currently just 40 fund management firms, out of the many thousands globally, are recommended by Stamford to its clients. The company did not want to pick out a particular one for this column, but did cross-reference its current list of recommended managers with our requirement for investment trusts. Just two of the 40 firms offer a listed fund managed in line with an investment process that Stamford has scrutinised.

The consultancy can specify conditions about how a firm runs money for Stamford’s clients that an ordinary investor may not benefit from if he or she invests in a publicly available fund from the same group. These conditions include specifying particular individuals to manage Stamford clients’ investments and imposing restrictions on how that money is managed, such as a ban on smaller or illiquid stocks.

The two firms recommended by Stamford that offer listed funds in which readers can invest are Magellan and Edgepoint Wealth Management, and the two funds are Magellan Global Trust, listed in Australia, and Cymbria, listed in Canada. Not all brokers offer them but both are available via Saxo Bank. Ultimately, these are Questor’s tips for readers, not Stamford’s.

Questor says: buy

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