“I need to compare funds, Joy. How do the managers stack up and would they dovetail in a portfolio?”

I’m often asked this question; colleagues and clients want to know how to build the perfect portfolio. I’m a ‘data girl’ and I love crunching the numbers: from investment holdings style analysis to correlation matrices, and periodic returns to standard deviation. Luckily the list of statistics I can compare seems endless.

But when I put together the data it always feels like there is something missing. Is this the most useful information I need when I’m trying to choose a fund manager? For me there are some really important things that quantitative analytics just can’t provide.  One question has to be answered before I will trust a fund manager with my hard-earned money:

Are my best interests being put first?

There are a three ways to determine this; questions you can ask of all the funds in your portfolio:

Three questions to ask your fund manager

 

  1. Does the fund manager invest my money in the same way that they invest theirs?

    If a fund manager invests using a particular strategy I want to be certain that my money is invested in exactly the same way, on exactly the same terms. This alignment of interests is crucial. I don’t want the fund manager running a side portfolio somewhere else that lets them invest differently. This is really important to me; if it’s good enough for me, then it better be good enough for them. If the manager is willing to sell you an approach then I want to know they have their money invested in it too, and then I know our interests are aligned.

  2. Are they obsessed with performance?

    And when I say obsessed with performance I mean absolutely fixated on it. It’s really important to me that a fund manager can deliver great results for their clients. Or is the manager happy to just plod along, posting average returns?

    What I definitely don’t want to see is a manager who is driven solely by asset accumulation. I want to be sure that they are willing to take a strong stance in their investment beliefs and are not afraid to be different. This may mean making unpopular decisions and doing the opposite to the market at times; but my view is that if they are going to be benchmark-focused then why invest? If you are happy to always be average you may as well invest in an index-tracking fund.

    One reliable indicator of performance-obsession is remuneration structure. Performance fees are an excellent way to measure commitment. If a fund manager only gets paid well when its funds perform well you can be pretty sure they will be highly focused.

  3. Will the fund manager do what they said they would do?

    It is absolutely critical that the manager sticks to their approach. Too many times in my fund analysis I encounter managers who have changed investment approach, often when the going gets tough, or the opportunity set changes. External pressures can sway the manager to deviate from their investment style during difficult or stressful times, or extreme market conditions such as exuberance. Investors are no longer getting the approach they wanted and were promised when they first invested, which means the fund may no longer be playing the same role in a portfolio.

    Before I decide to invest based on a manager’s approach, I need them to prove that they have not deviated from their philosophy. I want to know that I am leaving my money with an expert; I don’t want to have to think about it.

Number-crunching is vital before investing with a fund manager, but it is only one piece of the puzzle. Thinking outside the box and not being afraid to ask questions to get the full picture is vital. They should be able to answer you clearly and be very transparent about it. It is the only way to find out if your best interests are being put first now and over the long term.

 

Joy Yacoub holds a Bachelor of Economics and a Bachelor of Commerce (UNSW), specialising in Economics, Finance and Business law.