Choosing a good fund manager who will invest your money on your behalf is always a tough challenge. There are various factors or features of the fund that you will have to seriously look at. For example, do they have the “skin in the game” where the managers are also investing substantial money in their funds? What is the nature of the fund ownership and what is the size of the fund. You also have to evaluate the interaction of various factors that will give you a clue as to whether you have selected the right fund that might be suitable for your investing needs.
Here are some key tips on how to choose the right fund manager for your needs:-
What is the fund ownership like?
The skin in the game criteria generally has very good merit. Go for the funds where the employees have significant stake or substantial assets under management in the fund. The skin in the game can be looked at in two ways: one is by the personal investments by employees in the fund and the other is the ownership of the management fund. Having a stake in the assets under management allows the managers to also focus on capital preservation rather than just a laser-focus on growth in spite of the risks involved. Having a fund where the managers have a “skin in the game” also promotes the independence of the fund.
Look at their staff turnover
What is the staff turnover of the fund? Smaller, newer, independent and boutique setups may have some core staff with solid expertise that they heavily rely on and the exit of these staff may cripple the performance of the fund. A larger investment fund will likely have multiple talents handling the same matters and the exit of staff may not have a detrimental impact on its performance and operations. Use LinkedIn to evaluate the fund’s current and former staff. What kind of experience do they have?
What’s special about the fund?
Most fund managers are good at articulating the qualities that set them apart from other funds. It’s the value proposition which they use to attract new clients. Research about the fund manager and list the factors that they say sets them apart from others. What investments do they choose? Do they use data that other funds don’t use? Do they have a different approach of analyzing information? What is their fee structure and how does it compare with that of other fund managers? What is their incentive model?
Who is heading the fund?
Every investment fund has a founder or a lead person who drives the vision and the investment strategy of the fund. This is generally the person that calls the shots in the fund and makes buying and selling decisions. It should be clear who this person is, what their decision-making process is, their track record as well the time duration that it takes to make the call. There are funds that are more nimble than others and you will need a fund manager who is in tune with the right trading strategy.
How transparent are they?
If a fund has got something to hide, then run for the door. A fund should be as transparent as possible about their history, the structure of their business and their operations. They should also respond to your inquiries promptly and with clarity. A lack of transparency on the part of fund is generally a sign that something is amiss and they are probably hiding some dirty linens about their past dealings.
What is their track record?
Does the fund have a good track record of consistently good performance? While there is little correlation between past and future performance, a consistently bad run in the past may be a sign that something is amiss in their investment strategy. The fund should be able to clearly articulate how their strategy and approach has yielded results to date and what they expect to change in the future.
How does the fund manage risk?
Every fund manager will have an internal mechanism in their investment process on matters such as asset diversification, screening, size of investments and the circumstances that will prompt the sale. These rules govern their operations. When selecting a fund manager, you need to ask about these rules and assess the fund’s fidelity to its own guidelines.
How many people are involved the fund?
The number of people involved in a fund can be a double-edged sword. A fund with a large team has the wherewithal to delve into affairs of numerous companies and ensure more efficient fund management. On the flip-side, a bigger team may lead to a more cumbersome decision-making process. A smaller and lightly resourced fund may not have the capability to handle multiple complex global transactions but a small and a new setup may also have the enthusiasm, good ideas and the conviction to build a track record in the industry thereby delivering superb performance to clients. What really matters is how well a fund works as a unit to deliver on the expectations of its clients.
Portfolio concentration or the number of stocks within the portfolio should also be looked at closely but not in isolation. Conventional wisdom says that the risk increases as the weight of the portfolio gets bigger. However, there are funds with a large number of stocks that do as well as those with fewer stocks in their portfolio.
The location of the fund
The physical location of the fund has zero relevance on its performance but it can have an impact on your interaction with your portfolio manager. Generally, investors like funds that are local as they are able to get better access with their fund manager and relate better with them.
However, your investments should revolve around your local fund manager. In certain instances, if you are unable to find a suitable option locally, you may be forced to go out of your comfort zone and shop for a suitable portfolio manager without a geographical bias. You should, however, remember that as an investor, you will need timely access to information, especially in a fast moving market. So shopping for a fund manager across time zones may not be a particularly good idea. If you are planning to play in the global equity universe, you also have to grapple with cultural differences, language and a different competitive landscape.
Think of the bigger picture
Think of how the fund that you are planning to invest in fits into the overall scheme of things as far as your investment plans go. Does it align with your investment objectives? Does it fill in a gap that was previously underserved? Does it provide a superior quality product and service than other investment funds that you have used in the past? Is the fund’s current strategy suited for the current market trends?
Will they keep you regularly informed?
When planning to invest with a fund manager, you need to look at how the fund will keep you regularly informed on the goings on. As an avid investor, you will want to be kept in the loop on what your fund is doing with your money through regular updates. Choose a fund that has excellent ongoing communication. After all, one of the reasons why you chose to invest your money with a fund manager was bring out full transparency and improve your investment experience.