Again relevant to the Indian markets... with fund mangers hopping all over the place (from one MF to another), and with MFs out to garner as much AUM as they can (whether they can manage it or not/ if they think markets & stocks are overvalued or not), this holds relevance.
John Husselbee
John Husselbee is a Director at Henderson Global Investors, where he is responsible for portfolio construction and fund selection for a complete range of multi manager, mutual fund portfolios. John has over 10 years experience, both at Henderson Global Investors and Rothschild Asset Management, researching and selecting fund managers to include in his retail portfolios. He sits on the AUTIF Performance Committee as well as the advisory panel for the Investment Week Mutual Fund Awards. John writes a regular monthly column for Bloomberg Money and is a regular guest on Bloomberg TV.
Selecting a mutual fund manager
1. Never use an old map to find new countries.
One thing I firmly believe is that consistent performance doesn't exist. The past is only a guide. I prefer to use it as such and then look a little deeper. I want to find out how and why a fund has achieved a top ranking and then establish whether those reasons can be imposed upon current market conditions and future market prospects.
2. It's not all about returns.
It may be a simple observation but a fund's objective is a key issue for me. And the objective is not simply to make lots of money. Each fund has a stated objective, quoted in their scheme particulars, and guidelines on how it aims to achieve it. Does the objective match your own? Is the manager's style, which can be gleaned from the types of company he holds (larger companies or smaller companies, for example), appropriate? A clear understanding of the objectives and management style and consistency of approach will assist in predicting how the fund will behave in the prevailing market conditions.
3. Experience brings its own rewards - let the apprentices practice with someone else's money.
The fund manager's experience is extremely important. And that means experience relevant to the fund he is managing. Look at the manager's track record for both his current fund and any previously managed funds. This information can be easily obtained. I'm happier investing in managers who have mastered their craft in varying types of market conditions. This is particularly relevant given the extended bull run we've seen recently. There are many managers out there who have no experience of managing money in bear markets.
Loyalty and length of tenure are also attractive qualities in a fund manager. As well as providing a clear track record, they can also highlight whether a manager's own objectives are in line with the fund's.
4. You can get a better view from the big house on the hill.
The larger investment houses can bring a great deal to the party. In many instances the investment house dictates asset allocation and has particular views which the fund manager is bound to follow. This will naturally have a big effect on how the fund is managed and how it performs. So remember you're buying the house as well as the manager.
The larger houses can also provide a great deal of resources to the fund manager, particularly in the form of global economic and company information. The manager of a large house will gain greater access to the companies he invests in. Such first hand information will certainly benefit you as an investor. These houses can also provide an element of security and inspire confidence.
5. Elephants can't gallop.
The size of a fund matters and can bring with it problems for the manager. Good managers very often become victims of their own success. Cash pours in from investors hoping to share in the success of the top performing funds. Trying to invest large amounts of money can dilute a manager's ideas.
Make sure the size of the fund sits well with the fund's objectives. A smaller companies fund, for example, is going to have difficulty investing 1 billion. A word of warning though: small funds can flatter an average fund manager so don't go small for the sake of it.
6. Show me what's up your sleeve!
Investing money isn't a magic show. You should expect complete transparency. There should be a clear flow of information, revealing exactly what a manager is up to. The companies he invests in, the transactions that take place and the reasons why decisions have been made. You can only make an informed decision if you have all the information to hand. The manager should have no secrets. If he's hiding something then he's got something to hide.
7. Beware the siren's call.
Don't let the clamour of sales and promotions distract you from the core essentials of investing. Be confident in the reasons why you are investing. Everyone's looking to promote Number One figures and you'd be amazed how many Number One funds there are out there. Look behind the figures and check the timescales and the management. A Number One fund is no good to you if the manager has since left. And watch out for the press-fuelled thematic bandwagon. It could entice you onto the rocks of an investment you're simply not suited to.
8. Be sure you understand what you're letting yourself in for.
Investing is a risky business. In fact it is the business of managing risk. Always understand that if you're chasing big returns they come at a price. Risk and return is a clear trade-off so make sure you're comfortable with the ratio.
9. A little knowledge is a dangerous thing.
You can't beat in depth research. Quality information makes the decision process less emotive. Look deeper - it's worth it.
10. Knowing when to sell.
You should review your circumstances and expectations regularly and see if your current portfolio still sits comfortably within them. If it doesn't, make changes.
Remember, poor performance may be temporary so understand why before making a decision. If a manager has left - what's the new one like? If the manager isn't doing what he said he would - what is the impact on you?
Most of all, take control. Ensure that you are getting what you want from your investments. They are yours, after all.
