Tips to help choose a managed fund

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By Stuart Fechner*

Stuart Fechner

As investors, we’re always told that “past performance is no indication of future performance”.  But if investors aren’t to consider performance, how should they assess investment managers when choosing a managed fund?

There are many different factors to review, but as a starting point, there are two broad areas to consider.

The first is the business itself – is it profitable?  Does it seem stable and likely to have longevity?  Some simple research into the asset manager business itself can help provide some clarity and comfort for potential investors.

The second is to do with the investment team and their process, and includes aspects such as having appropriate resources and skill sets to adequately fulfill the legal, compliance and administrative functions that are needed in operating the fund.

As part of this, investors should consider five main areas:

  1. Investment team

Understandably, the quality of the investment team is key to the success of any managed funds.

Aspects to look at include:

  • Experience – how long has the team been managing money?
  • Track record – what investment strategy or approach is being implemented today and is it the same as that which existed when the track record was built? Have they shown they are good at it and have the capacity and insights to add value?
  • Team size and depth – how large is the team? It doesn’t necessarily mean that a larger team is better, but do they have the appropriate resources within the team to be able to implement the investment process? Some approaches are more resource intensive than others.  Also, does the team have stability?  Ideally you want a good level of continuity and cohesiveness amongst team members.
  1. Investment process

The investment process involves identifying and selecting investments, such as stocks, for possible inclusion in the final portfolio.

Assessing an investment process includes trying to understand where a team’s investment ideas come from. Is it purely from their own thoughts and ideas, or do other factors come into play? There can be a whole range of these, including broker research and insights, industry conferences, economic related readings and company and industry related meetings.

Next, look at how the detailed company research is conducted and by whom. That is, are the various members of the investment team specialists, focusing their knowledge and efforts on particular sectors or stocks? Or do they take more of a generalist approach and cover a range of different sectors and stocks?

It’s also important to understand the screening process – that is, what screens or rules are applied to the full range of investment options that are available.  As an example, this might include ‘screening out’ companies who are felt to have too much debt on their balance sheet or not a high enough level of interest cover.  Or it could involve screening out companies that don’t meet governance or social impact requirements, such as tobacco or gambling companies.

Finally, what range of stocks are available for possible inclusion into the portfolio? Is there a defined ranking of these stocks, or perhaps another type of scoring or categorisation process conducted?

  1. Portfolio construction

The stock research and portfolio construction are related, but are very different roles and require different skill sets.

After all the hard work of the stock research has been done, it’s important to then understand how the best stock ideas make their way into the final portfolio… and at what weighting? Ideally, the stocks with the stronger level of conviction will have a higher weighting within the portfolio, but how does this process work?

It’s not just about seeking to achieve the best possible return, but also how the assessment of managing risk within the final portfolio is conducted.

For example, it’s not a good outcome for a portfolio to perform poorly due to an unknown factor or event that hadn’t been identified – let alone assessed.

For a fund manager, this involves identifying and understanding what the potential risks are and what impact they may have on the portfolio should they play out.

  1. Fees

The fee level is certainly something that should be assessed, but it’s not as simple as saying the lower the fee the better.

Rather, it’s about assessing if the fee level associated with a fund is at a reasonable and appropriate level for the type of fund that it is.  As an investor, are you getting value for money? For example, a higher fee may be warranted if the investment provides a higher return.

At the end of the day, when net returns are looked at (that is, the return the fund provides after taking fees into account), it can easily be seen if the fund has delivered good value.

  1. Investment style

Each fund or investment strategy usually has a particular investment style or approach.

Certain styles – and hence funds – tend to have different characteristics of how they typically perform in different market conditions.  For instance, a fund could seek to outperform a strong market, or it could focus on minimising losses in a weak market.

When a fund’s investment strategy is implemented on a consistent and repeatable basis, it provides a greater level of comfort and predictability as to how a fund may perform under certain market conditions.

This is called being ‘true to label’, and makes it much easier for investors to identify and select a fund to play a particular role or meet a more defined need within their overall portfolio.

At the end of the day, it’s about trying to gain a level of comfort that a fund can and will perform well and meet its stated investment objective.

* Stuart Fechner is account director of research relationships at Bennelong Funds Management.


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