Two minutes with…Darius McDermott, managing director of FundCalibre

Can you tell us more about FundCalibre? Why did you launch it and what is the goal for the business?

FundCalibre is a ratings service for consumers that cuts through a lot of the noise in the financial services industry and provides a very clear and concise list of best-buy funds, which we call elite-rated.

Our independent ratings service, launched via our partnership with Albermarle Street Partners, leverages our extensive in-house research expertise and Albermale’s data modelling capabilities to come up with our list of rated funds across the various investment sectors.

Unlike some agencies, we don’t run a tiered system. Our philosophy is pure: a fund is either good enough or it’s not, and we typically award our Elite Rating to no more than 10% of any sector.

The point of FundCalibre is also simple. We want the Elite Rating to provide a badge that consumers can trust when it comes to selecting funds. However, while the goal is simplicity for end users, the mechanics underneath the ratings service our very detailed.

How exactly does a fund become elite rated?

Our process begins with our proprietary quantitative screening tool, AlphaQuest. A fund must pass this screen before we will proceed any further with our research. We start by measuring risk-adjusted performance and we always look at the figures after charges. Managers must have a track record of at least three years to be considered.

While many screens exist that analyse past performance, AlphaQuest is unique because it focuses on future performance. It estimates how likely a manager is to continue to deliver superior returns. It does this by stripping out the impact of market movements to identify the returns attributable to manager skill.

Alpha generation is often lumpy, reflecting style bias and market conditions. So AlphaQuest analyses the consistency of the alpha as well as its absolute level. It uses weekly data over 10 years (or the life of the fund or tenure of a manager if shorter) to calculate both the average annualised alpha and the annualised volatility of the alpha. It uses this data to generate an expected alpha range and predict the probability of positive future alpha in a statistically robust way.

Only funds that pass this screen and whose managers show a high probability of continuing to deliver alpha over the next 12 months will proceed to the next step of our process.

Those fund managers who pass the AlphaQuest test are then subjected to further detailed qualitative analysis. Our experienced research team will interview the fund manager face-to-face to better understand and assess how their investment process and style gives them an edge over other managers.

When we meet a manager, we grill them on their process and satisfy ourselves that they know what they’re doing. We identify their investment philosophy and drill down into their portfolio to check that it is consistent with that philosophy. We look at the team they have behind them and whether they have any constraints.

Once this analysis has been completed, the research will be subject to peer group review within our team. Only then will those funds, whose managers we believe to be the most skilful, be awarded an Elite Rating.

You already run a successful business in Chelsea Financial Services – how does Fund Calibre sit alongside CFS?

FundCalibre is a separate business to Chelsea but one which utilises the fund research expertise we have in-house, and which we have honed over more than two decades.

With more than 3,000 funds available in the UK, choosing a fund can be a difficult and daunting task. That’s where FundCalibre comes in. We do the hard work for you, seeking out excellence and whittling funds down to a more manageable number.

If you could give yourself one piece of financial advice to a teenage version of yourself, what would it be?

Save for as long as you can. Compounding does work.

If you could change one thing about the financial services industry, what would it be?

Too much regulation that often comes with hindsight. 

What would you do if you were Prime Minister for a day?

Ban tube and train strikes.

What is your biggest pet peeve, or makes you angry?

Tube strikes!

What are your hobbies outside of work?

As well as spending time with my family, I am also an avid Chelsea fan and travel to games around Europe watching the mighty Blues!

What would you do if you received a windfall of £10,000?

Invest it in Emerging Markets for the long term.

What is the one column or website that you read every day?

After the usual financial stuff I look at BBC sport.