Fifteen people to decide what goes in a fund portfolio: too many or clever idea?

Few people will have heard of 2XIdeas Global Mid Cap Library but its unusual methods seem to be working

The boom and bust of Neil Woodford’s fund management career showed that star fund managers are not invincible and that a better solution might be to have two or three managers making investment decisions as a team rather than rely on one person.

But what if that team consisted of 15 people? That is the situation with Swiss asset management firm 2Xideas, which has taken the view that one person alone cannot provide consistent and repeatable positive investment results. It has taken the unusual step of forming a large committee to decide what goes in and out of its 2Xideas Global Mid Cap Library Fund (BJVQPB5), with everyone following the same research process.

One might argue that ‘too many cooks spoil the broth’ and in 2Xideas’ case, 15 decision makers might seem excessive. The asset manager argues otherwise.

Bellevue Alumni

2Xideas as a business was set up 10 years by a group of equity analysts who used to work together at Bellevue, the Swiss asset manager best known for running biotechnology investor BB Biotech (BIO:SWX) and London-listed investment trust Bellevue Healthcare (BBH)

Its mid-cap fund takes a similar approach to Fundsmith’s Smithson Investment Trust (SSON) and Columbia Threadneedle Global Smaller Companies Fund (B8Q73W3). They are all looking to invest in companies with quality characteristics.

2Xideas is trying to do what it says on the tin –double investors’ money over a five to seven-year period. That works out as a 10% to 15% return per year. ‘The only companies that can do that fit into the profile of quality growth. Particularly good business models, high margins, high returns, strong moats,’ says sales director John Kelly.

The first step of its research process is to narrow down the investible universe. Once it excludes companies worth less than $2 billion (c45,000 stocks) and more than $100 billion, and then applies ESG filters, the universe is narrowed to approximately 2,600 liquid stocks.

It then screens and scores these companies, searching for those that have historically achieved high margins, returns and growth. It also uses sector knowledge to filter out the good from the bad.

EQUAL-WEIGHTED PORTFOLIO

One unusual quirk of the 2Xideas fund is that its portfolio is equal-weighted. Most actively managed funds will have a bigger percentage in their best ideas versus the rest of the portfolio. By having an equal-weighted approach, each holding theoretically has the same importance as all the others.

Every three months the 2Xideas fund will rebalance so the best performing holdings do not become dominant and the laggards do not dwindle away. ‘Share prices tend to overshoot or undershoot in the short-term. Rebalancing neutralises this effect,’ says the asset management group, which also says an equal-weighted approach eliminates behaviour biases.