The information age has made the financial markets more accessible than ever. But is accessibility a substitute for a good portfolio manager?
The answer: It depends.
Knowing whether to invest in a mutual fund or just do it yourself (DIY) depends on several factors, including your investment goals, timeline, experience, starting capital and opportunity cost. Another factor is how much time you can devote to portfolio building, tracking, rebalancing, etc. – you get the idea.
Let’s say that, after careful consideration, you decide to invest in a mutual fund. Other than evaluating the fund’s fees, there are at least four broad factors you should consider when evaluating different fund managers.
Learn more about the portfolio management process here.
Key Factors to Consider
Broadly the important criteria to evaluate a portfolio manager can be boiled down to the following factors:
Leadership Quality
The leadership qualities of a mutual fund’s management team are paramount in your selection process. Factors such as experience, expertise, ethics, culture and skin-in-the-game are all helpful when evaluating a manager.
You can assess whether your portfolio manager has “skin-in-the-game” by looking at how long they’ve been at their firm and whether they buy into its vision and long-term growth strategy. Dysfunctional money managers often have high turnover rates and end up managing under-performing funds.
Investment Process
In the case of an actively managed fund, you are putting trust in the fund’s management team to generate your returns. But that doesn’t mean you shouldn’t have a grasp of the fund’s investment process, its prospectus and long-term track record.
As a general rule, if a fund employs an overly complicated investment strategy, it’s not worth your time. Again, look at the fund’s performance and the expertise of the managers who constructed it, and don’t be afraid to ask questions. Knowing how a manager works during market downtrends can help you decide whether they are worth the time.
Learn about other portfolio management concepts here.
Risk Management
Risk management is one of the best reasons to have your capital managed by a professional, but it only works if you understand how aggressively the fund pursues the desired returns.
When selecting a manager, it’s important to look at their investment strategy and risk management techniques. If you’re a conservative investor, it doesn’t make sense to invest in a fund that is overly aggressive. It’s important to evaluate a portfolio manager’s loss-prevention strategy. One way to do that is to track the manager’s performance during bear markets or big corrections.
Performance Comparison
At the end of the day, there’s no getting around the fact that performance is critical when evaluating a portfolio manager. Even if they tick all the boxes as mentioned previously, if their performance is mediocre or below-market, you probably want to avoid them.
One way to evaluate a portfolio manager is to look at their short-term and long-term performance and compare them with similar funds or benchmarks. At the end of the day, you’ll probably want to pick a portfolio manager who can generate above-market returns and who employs proper risk management strategies during cyclical downtrends or bear markets. Performance (i.e., percentage gains/losses over time) reveal a lot.
The Bottom Line
Choosing the right mutual fund isn’t an exact science. Careful consideration for leadership quality, investment process, fund performance and risk management techniques adopted by the portfolio manager could help you narrow down the options.
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