Advisers involved in fund selection in the UK, Germany and Switzerland agree that there is no single set of criteria and that any process must start by assessing client needs.

Ed Wilson, head of investment re-search at HSBC Gibbs in Manchester, explains the process: The first thing we do is take a step back to look at the client’s liabilities and the requirements of the trustees. From there we devise an appropriate investment strategy. We then introduce managers to the trustees in a beauty parade, then assist the trustees on the investment strategy decision over a series of meetings.”

Heinz Werner Rapp, head of portfolio management at Bad Homburg-based FERI Trust, has developed a specific method for fund selection. The firm advises institutions on managed portfolios, insurance contracts em-ploying funds and on asset allocation. Rapp says: “We have a clear focus on tax optimisation and are not too aggressive in the stock market area. We focus on mixed and balanced portfolios, some true fixed-income and in some cases global portfolios.”

The firm has developed its own specific concept for fund selection. “We look at the relative elasticity profile of a fund. This is especially useful for institutions. Once you have determined the special segments you want to be in and you have picked up your risk characteristics, you can narrow the selection to funds that show the appropriate risk profile.”

The method allows an investor to judge a fund not only on its historical performance but on expected returns.

He explains: “With this method, you get an appropriate track record and in addition a measure of the risk profile. You should be able to pick the appropriate fund based on relative performance and absolute performance, which gives a proper view of future expected returns and expected risk profile.”

Rapp also emphasises the importance of the stability of a fund measured against its peer group. “We do it graphically and can see at a glance which funds have shown relative stability.” The company has also made comparisons based on the location of research teams. This has shown that much more depends on the quality of the team than on location.

Daniel Häfele, president of FondVest in Zurich, says that the first criterion in fund selection is regular outperformance of the market and adds that only between 10 and 20% can do this on a regular basis.

The fund does not just review the past few years’ performance. “We choose several six-month and one-year periods to examine performance. A good manager is able to outperform the market over most of these periods.”

FondVest selects funds which are traded on a regular basis. “Normally we only choose funds which are at least redeemable on a weekly basis.” says Häfele. He points to other pitfalls, in that old funds may have a 10% of investments barrier on redemption of investments. In such cases FondVest is careful not to have invested more than 6-7%. Häfele also stresses issues of investment philosophy, ex-amining the reasons for any derivative investments, the asset allocation, particularly in the case of a regional equity or global bond fund, and currency exposure considerations.

On costs, he says: “Normally thesefunds are not set up for institutional investors so we negotiate for our institutional clients. For an equity fund, the maximum should not exceed 1%, for bonds 0.5%. Up-front commission shouldn’t exceed 3/8 to 0.5%.”

Wilson also keeps an eye on cost. “We are aware of the charges in the market in general. If a fund is particularly out of line we want to know if the manager is adding value appropriate to the charges. It is not a price-driven market as such. With index trackers, price is more of an issue than with aggressive active management where there is scope for fees to be higher.”

As with FondVest, Wilson says that for the most part managers will negotiate on fees but there are some exceptions: “Certain funds market themselves as very cheap but because they don’t have a sliding scale, fees can be high for larger clients.”

Neither German nor Swiss managers see advantages in moving to segregated management. Rapp says his company’s evolution has been in the opposite direction while Häfele adds that with segregated funds the benefit of competition is lost. Wilson is more circumspect, saying that it depends on the pension scheme, emphasising that a particular size of investment does not necessarily trigger a move to segregated management, with some large investors using pooled funds and smaller investors employing segregated management to fit specific re-quirements.