A: There would be two major reasons. The first one is if the expected stock selection didn’t come through over a period of time, and if we don’t see a good reason for future improvement. That’s the more difficult decision after all the work for finding the individuals you believe are exceptional. Obviously, even great fund managers have tough times so the last thing you want to do is to sell them after a poor period of performance. The other reason, which is an easier decision, would be if we find someone that we believe is better than the manager we currently hold in the same area.

Q:  Do you pay specific attention to tax efficiency when building the fund?

A: Actually, in the U.K. it is different because the tax issue is relatively simple. We pay tax on dividend from equities so we can buy U.K. and European funds sold in the U.K. market and they are taxed in the same way. Very occasionally there might be a fund with tax implications. For instance, if we have bought the HSBC India Fund, any capital gain would have been taxed as income. In those circumstances we would avoid that fund but that’s pretty rare.

Q:  What’s your approach towards portfolio construction?

A: Our starting point is that the fund is always the purest representation of looking for the stock selection skill and that overrides everything else. We could have run it against an index, such as the MSCI World Index, but we have a different approach. The funds make it into the portfolio based on the quality and the level of added value through stock selection. So if we find a number of exceptional managers in Japan, then we would have a relatively high weighting towards Japan. The asset allocation is driven by where we find the best managers, not by whether we believe in that market itself.

The underlying philosophy is that we spend no time considering whether Japan will be better than the U.S or the U.K. Our assumption is that over time markets will produce pretty similar returns and, therefore, we’re focused on the managers that add value above and beyond their market or their particular style set.

To those ends we tend to have quite a significant overweight in the U.K. and Europe where we find a lot of exceptional fund managers. That’s because there are a lot of funds managing money in the U.K. or Europe that we can actually buy. The best managers available to us tend to be the ones that are managing the greatest amount of money and those funds tend to be in the U.K. or Europe.

So the strategy is that stock selection dictates our global allocation but we’ve made the exception to restrict our U.K. exposure to a maximum of 60% of the portfolio because we want to have a global portfolio. So the fund has always tended to have 50% in the U.K. and the overseas exposure is dictated by the managers we can find in the different regions. The international exposure hasn’t actually been beneficial but in times when the Sterling weakens and the U.K. market underperforms, our international exposure will help.

The portfolio has a tendency to invest away from the larger stocks in the market because we find that the advantage of stock picking is not that great within the large areas of the market. Obviously, that’s beneficial when mid- and small-cap stocks do well and can be detrimental when those markets shake out. But it is our belief that the managers will add more value by being in that area over time even if in some periods that works against us. Everything keeps feeding back to the idea that stock selection drives our long term returns and so far that’s been the case.

Q:  When you have multiple managers in the U.K market, how do you avoid the overlap in terms of holdings?

A: We actually don’t try to avoid the overlap. Fundamentally, if a lot of our managers like the same stocks, and we believe that they’re all exceptional stock pickers, then this stock is most probably going to be pretty good. So we don’t mind relatively high exposure to a certain stock. In fact, we want high exposure to the stocks that our managers like the most as we see that as a positive thing that gives us confidence in that stock.

Q:  What kind of risks do you perceive and how do you mitigate them?

A: The portfolio originally was launched under the name Boutique Opportunities because we tended to invest in the boutique groups. That’s still the case and we always want to have at least 80% of our investments in the groups where, as a culture, performance comes through proper incentivization. Quite often, the boutique groups themselves are quite risk averse. They do take risks in their portfolios but the average manager tends to be more concentrated on downside risk.

The large managers that wouldn’t get into this portfolio are probably more concerned with tracking error than with absolute risk, while our managers want to massively outperform the index without losing much money when the equity markets go down. The result for our portfolio is relatively low beta during the down market and relatively high beta during the up market. I think that the focus of the underlying managers and the type of groups that we’re buying, give us a slight edge on the risk perspective.

We don’t necessarily influence the underlying managers and we’re not overly controlling the funds from a stock-bystock perspective. As I said, we wouldn’t try to minimize the risk by stopping the managers from holding the same stock. To a certain extent the risk in the portfolio is a byproduct of the risk of the underlying managers and we’re not deliberately targeting a specific tracking error; we’re trying to generate the best possible returns.

Within its own sector, the U.K global growth funds, the fund has had the second lowest risk since it was launched as a byproduct of the way the underlying managers manage money. Also, we’ve got enormous diversification. Within the U.K. market we have exposure to hundreds of underlying stocks. Many of these stocks aren’t in the big indexes because many of the managers tend to add value outside the main market. With 25 funds in the portfolio and close to 1,000 underlying companies, there’s enormous diversification that helps to cut the risk down.