As an investor you would like to see that your investments are performing within the range of returns you have aimed, if not above that. For this reason investors in pooled funds like mutual fund, UITF, or variable universal life (VUL) would always check on the past performances of the funds before investing. But choosing a fund based solely on their past returns is not safe enough; past performance need not necessarily assure future results. Therefore, it is essentially also to find out about the people managing the fund. After all, their judgment is what will determine the returns your investment will yield.
Looking for the right fund manager is no easy task; it is like looking for a caregiver for your loved one. It involves a great deal of scrutiny and research. So where should you start when choosing a fund manager?
Consider these 5 factors:
1. Your investment goal: Establishing your investment goal should be your first priority. This involves determining the level of returns you are aiming for, understanding your risk appetite, and an idea about how long you are willing to hold on to that investment fund. These matters should be your key considerations in choosing the fund manager. You should find someone who fits your investment goal. There is no point searching for someone if you do not know what you want.
2. Performance track record. Looking at the past 10-year investment return of a fund will not tell you how good or bad a fund manager is. You have to ask, is this fund manager the one calling the shots for the past 10 years? Like any other industry, fund managers come and go. Switching departments, or even companies, is very common among fund managers and if this is the case, the figures quoted in a fund’s portfolio report is not reflective of a single fund manager’s investment style. It is better to track the personal historical performances of the fund manager rather than the fund’s quoted returns in the past. If the fund manager came from a different company, check what was the previous in the work. This will give you a clear picture on how the fund manager performs in different market environments. Is the fund manager doing well only during bull runs? How did this fund manager performed during bad market cycles?
3. Investment philosophy. Like a professional basketball player, a fund manager has his own signature move in making a goal and this is characterized through his investment philosophy that serves as guiding principles, influencing his investment decisions. Investment philosophy and style varies from one fund manager to another. Some fund managers uphold value investing where they seek relatively undervalued stocks with the belief that in the long run earnings of these stocks will catch up and eventually increase their values. Others practice growth investing where they buy companies that have high growth potentials. Some uses fundamental investing by looking and identifying stocks with superior earning capacities while others are into technical investing where they rely on stock price movements and patterns on their trading. There is no single investment philosophy that enjoys 100 percent success rate and all of them are equally useful so it is best to choose someone that is aligned with your personal investment philosophy and style. Review the content of a fund manager’s portfolio to check on the particular stocks he is buying to validate his investment philosophy.
4. Years of experience. One decision you need to make in choosing a fund manager is whether to employ a seasoned fund manager or go with a young fund manager eager to prove his worth in the field. The clear advantage of going with a fund manager with long experience is that he has seen both good and bad days in the investment world. He has an established set of investment style and philosophy and will be able to offer long years of stock picking experience. But one should not quickly discount what the “young gun” of fund management has to offer. Young fund managers are proactive and aggressive in proving they belong in the league. They offer fresh and non-traditional approach in portfolio management. They also carry with them years of experience in research, analysis and technical know-how before they came to lead a fund management team.
5. Benchmark. Fund managers gauge their performance by comparing their returns against a benchmark. Usually, the benchmark is an index. In the Philippines the index is PSEi or Philippine Stock Exchange Index. It is the benchmark for the over-all performance of our local stock market. It is composed of 30 listed companies, which represent the general price movement. As investors, it is prudent to check how the fund manager historically performed compared with the benchmark. Three to five years of underperformance versus the index tracker is a red flag. You should look for a fund manager who is outperforming the benchmark to deserve the fees that you are paying. Otherwise, you might be better off investing passively through index funds that offer lower fees.
Evaluating and choosing a fund manager can prove to be taxing and can be a conundrum for many but carefully undergoing this selection process on who to entrust your hard earned money with is all worth it as your effort shall pay high dividends on your investments in the long run. So, choose wisely!
Cheers and Good luck!
Jesi Bondoc is a Registered Financial Planner of RFP Philippines. He is the Director of My Wealth MD and Partners, Inc. specializing in investment advisory and oversight. You can send your money questions at firstname.lastname@example.org or email@example.com and they’ll be answered on his next article. For more info about Registered Financial Planner program, e-mail to firstname.lastname@example.org or text <name><e-mail> <RFP> at 0917-9689774.