Mutual Funds
With 38 fund categories and more than 5000 mutual funds to select from, investors can conceivably construct a portfolio of any distinction, but how? Though traditional forms of securities and/or credit analysis cannot necessarily be applied directly, in addition to completing a risk assessment, both qualitative and quantitative features may be examined. Elements of mutual fund analysis include: people, philosophy, process and performance.
-
People
Evaluation of a fund’s manager, analyst team and other key personnel is arguably the most important aspect of mutual funds analysis. A fund’s manager and supporting team should be experienced and the organization should have strong, stable ownership and be well-capitalized. Ideally managers should enjoy a stake in the success of the organization and related contingencies including succession planning should be in place. -
Philosophy
Investment philosophy is a manager’s way of thinking about how financial markets work and how they might be incorrectly priced and therefore taken advantage of. Sometimes referred to as style, an equity managers philosophy might be viewed as value or growth, sector rotation, market-oriented, growth at a reasonable price (GARP,) contrarian, hedge and more... Likewise, fixed income strategies may be passive or active, be based upon interest rate anticipation or credit risk analysis or focus exclusively on a particular type (high yield for example.) -
Process
Process is the method by which a fund’s manager will invest the fund’s assets for the benefit of the unitholder. While a particular manager might choose a bottom-up fundamentals approach in choosing investments, another might apply a proprietary screen, sector weights or even limit the number of holdings to enhance the security selection process. Though many managers may share a similar investment philosophy, the many unique investment process applied behind the scenes can serve to set a particular manager apart from his/her peer group. -
Performance
Performance is the result of the fund manager’s application of philosophy and process and considers the value added (if any) over a related benchmark. Relative performance considers the risks taken to achieve the portfolio return – more important than absolute returns achieved is the fund’s consistency over time. Rather than chasing performance, a quality money manager will maintain his/her investment philosophy and process. Though past performance on its own should never be considered an indication future returns, by combining complementary, yet not perfectly correlated money managers, investors can increase the odds of a positive portfolio outcome over the long run.
