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6 simple ways to assess your mutual fund manager
Here, we discuss some of the common parameters used to assess fund managers. These are important because a fund's performance is directly linked to the fund manager's ability to consistently select the best-suited picks for his/her fund.
1. Style
This is one of the most important parameters. Most fund managers in India today follow multiple styles of managing funds. Having said this, we can still evaluate fund managers on broadly two styles -- first; top down and bottom up approach and secondly value and growth investment strategy.
As the name depicts, the top-down approach emphasises on the impact of certain macroeconomic conditions in a country, sector and finally, a company. For example, in the case of a global fund, the fund manager may make use of this method to decide and maintain the relative weightage of each emerging market in a portfolio.
But, in a bottom-up approach, the company stocks are analysed on their individual merit and selected in a portfolio irrespective of the business cycles.
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Disclaimer: This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients.
Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
6 simple ways to assess your mutual fund manager
Fund managers with a value-investing approach study the company fundamentals very carefully and invest in stocks only when good value can be found. While, the fund managers who follow growth strategy would look at future earnings potential of a company notwithstanding the price.
Thus, the funds belonging to value investment strategy have comparatively lower portfolio P/E than their growth counterparts. Though, the value driven technique may not easily materialise into gains because market analysts may sometimes relate the beaten down value to diminished chances of higher profits.
Now, let us say, you are a conservative investor who wants stable returns from your money without too much volatility. Then, you would do well with a fund manager with a more 'top-down and value' approach towards investing.
On the other hand, if you are 'growth' investor who is willing to take risks in the hope of higher returns, then you rather put your money with a 'growth and bottom-up' fund manager. The fund may be a lot more volatile, with both returns and losses generally on the higher side.
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2. Fund manager's product basket
You have to be sure that the fund manager under whose leadership you are going to put your money with has more or less the same financial objectives as you.
For example, several fund houses have launched infrastructure sector funds. Despite execution issues, the infrastructure growth story holds promise in the long term; however, you would have to be patient with your mutual fund holdings till then.
Lately, gold-linked mutual funds are available in the market. Most of these funds are presently riding on the phenomenon of 'risk aversion' and 'flight to safety' amongst international investors which is driving up the gold prices.
Consequently, all funds related to the traditional safe haven have given big returns in the recent history. However, when the global macroeconomic scenario improves, this gold rush may not continue for long time.
Thus, it is for you to decide, whether or not, the funds are suited to your investment goals and risk profile.
6 simple ways to assess your mutual fund manager
Although all mutual fund advertisements and scheme information documents warn you that 'past returns are not an indication of future returns', it is still nonetheless a good assessment tool.
You should look for mutual funds with a good 5 to 10 year track record -- this is certainly a good indicator of the fund manager's ability. A mutual fund that has given a stable return over this time and consistently outperformed the benchmark and other funds in the same category effectively reflects the fund manager's expertise in managing the fund.
The recent SEBI (the stock market supervisor or regulator) guideline urges fund houses to showcase returns from all funds that are being managed by a fund manager. This initiative too would help in assessing the performance of the fund manager.
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Awards are typically given out by professional mutual fund tracking companies. These companies have professionals who look at a mutual funds' performance in many ways to determine its eligibility for an award.
If a fund manager consistently wins awards from different agencies, it means that the industry is recognising his/her performance as the best. So, you might also take that lead!
5. Fund size
Usually, the more success a fund has had, the larger it is. But size is relative.
It may vary as per the launch date and the nature of the fund. For instance, HDFC Top 200 is the largest fund in India with over Rs 10,000 crore of assets. This large cap fund was launched way back in 1996 but has outperformed the benchmark. [As on December 31, 2010, this fund has given annualised returns of 30.93% over a 10-year period while its benchmark index, the BSE 200 Index has given annualised returns of 19.19%. Even over a 5-year period, this fund has given annualised return of 23.03%, while its benchmark has given 16.37%. (Source: fundsupermart)]
On the contrary, a 'feeder' fund can 'feed' into a large multi-billion dollar overseas fund. Thus, when we analyse the fund performance, we should also keep a close lookout on the performance of the mother fund.
The performance of the feeder fund is likely to closely track the performance of the mother fund. In normal circumstances only the expense ratios would differ between the mother and the feeder fund.
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6. Experience in fund management
Fund management companies often mention that their fund managers are structured in two ways. In the former, the head of the team of fund managers is very important. You can keep a look out on his experience and the sectors that chief investment officer/head of investments has more investment experience in.
You can also assess the capability of the team by the performance track record of previously and currently managed funds and the rate of turnover (though attrition rate is not publicly available, one can sift through the fact sheet to estimate how long the fund is being managed by a particular fund manager).
So, how can you learn about the fund manager?
Typically, the monthly fact sheet carries the equity and debt outlook by the chief investment officer or head of investments in a fund house. Besides, the investment strategy for each fund is stated separately along with the historical performance and other information. The experience of the fund manager in managing the fund is also mentioned in the fact sheet.
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Conclusion
Past performance of a fund is of course no guarantee for future performance, but it is the best indication that you have. At the end of the day, it still depends upon you to choose the fund properly, especially into the sectors/themes that you are thinking of investing in.
In a bull market, even the worst fund manager can achieve reasonable returns whereas a volatile market condition may deter you from entering it. So, you may be in a dilemma of finding the right market level than better find the right fund manager. But of course, it is best if you can find both.
Yet, at the end of your investment horizon, the fund manager makes all the difference in the mutual funds' returns and not the market condition (as it remains common across all funds).
Therefore, you should not fret or be ignorant of your fund manager! Just do your own basic scrutiny, review the fund managers' performances and investing styles before investing in a fund.