Financial Times Guide to Investing in Funds

A disciplined approach 1 09

Chapter 4), which traded futures, was strange in purporting to follow

a strategy entitled ‘global fixed income markets’. That distortion made

me very wary of that manager from the start.

There are many books about the trading styles of different manag-

ers and it is not the purpose of this one to reiterate some of the very

good material that exists. What you should be concerned with here

is the exercise of matching what is traded with what is represented to

you. For instance, a manager may purport to trade European markets

but you need to know what that means in practice. Starting with the

basics and by way of example, what this means is that the portfolio

is made up of European stocks which should be highly liquid. It may

also contain stocks from developing markets depending on the defini-

tion of European in the legal documents, for example, where risks may

be much higher due to lack of liquidity. Do not be surprised if you

uncover emerging market stocks in the portfolio as this will be legal if

included in the prospectus. I do not mind if the portfolio has develop-

ing market stocks as long as:



the manager is upfront about it and able to explain why (e.g. some

opportunities from emerging markets are too good to miss);



I know that the manager is actively pursuing a risk management

policy that deals with associated risks; and



the manager has appropriate expertise.

A disciplined approach

You should ask a manager whether it has any practice/set discipline

in the way it makes an investment decision. Over time it is clear that

the best traders, like the best athletes, are people of incredible skill

who have the talent to train their minds to act in a certain way. The

best way to train the mind, much like the body, is discipline so that

certain actions become a reflex and emotions are taken out of the

equation. If you can find evidence of this then you are doing well.

Just as revealing is evidence of the opposite, and that is often a con-

cern. This form of review is also a good way to appreciate whether the

strategy will change over time (this is known as style drift), which