For individual investors, the process of choosing the markets, sectors and companies to invest in can seem incredibly confusing. For more of us, the truth is that we will always struggle to understand what’s involved.
In a sense, it’s this fact that ensures that there will always be a demand for professional investors. Those who manage significant funds are clearly expected to make use of their experience and expertise.
With this in mind, it seems clear that out-performing the market requires a level of knowledge that is not available to most of us.
So how do the professionals make judgements? Looking at information provided on the Nevsky Capital website, it’s clear that there is a structured process in place for making decisions. This can be broken down into a number of areas and involves the following steps:
There is a mass of data involved in carrying out proper analysis, including company accounts and broader macro-economic data. Into this mix is put the results of meetings with those involved in particular businesses, together with individuals who are responsible for setting policy.
Having all of the above information must be useful, but it would not lead anywhere, without having the knowledge and tools to carry out proper analysis. Here, it seems that Nevsky have a framework in place that always looks to consider management quality and strategy, prospects for growth and the liquidity of any business.
The latter involves considering a diverse range of elements, including balance sheet data.
In order to produce forecasts, specialist software is used. Although it’s impossible to see what the future may hold, it’s presumed that such software is based on the previous performance of companies and that it also takes into account specific knowledge that is held by the team of analysts.
Finally, there’s the need to come to a decision on when to invest and when to let go of a particular investment. The timing must be critical in some cases and it’s likely that such decisions are taken by a team in most cases.
The above is based on reading between the lines on the work done for a particular fund. It’s likely that most fund managers will look to undertake a similar process, although there will be variations from one to the next.
In the case of the Eastern European Fund, it’s clear that there’s a need to hold specific information on different countries. That means knowing what’s happening in the Czech Republic, for instance, in political, economic and social terms.
In some of the countries that are considered, it’s presumably the case that the situation can be quite fluid. Understanding the changes that are taking place will be a key part of the challenge.
The job of a fund manager must be fun at times, but it’s clear that there’s scope for considerable levels of stress. Making the right decisions certainly won’t be easy on all occasions, but the drive here must be to get things right on the majority of occasions, maintaining a certain competitive advantage.
That’s why funds are measured against peers, in order to see whether the right decisions are being taken frequently and whether it’s possible to stay ahead of the game.
The Eastern European Fund is managed by Martin Taylor and Nick Barnes.