How to choose a fund manager

By choosing the right fund to invest your money in, you can have a team of professionals picking stocks, managing your money and executing trades. Large funds can afford to have a separate person focusing on picking stocks, allocating the assets of the fund into different areas (shares, property, cash, etc) and managing the most effective tax position. Large funds may also re-invest some of their funds under management into other funds, in the pursuit of lower risk and higher gains. The great thing about managed funds is that you are sharing the cost of getting these services with thousands of other investors in the same fund.

Track Record & Experience

However, not every fund performs well and just because a fund has performed well in the last few years, doesn’t necessarily relate to how the fund will perform in the future. In picking a fund, it helps to research the fund’s key personnel, their experience and accomplishments, the fees they charge, as well as their investment style.
 
In regulated financial markets like the USA, Europe, UK and Australia, governing bodies publish regular performance figures of the various funds on offer. These bodies will have information about the key personnel running the fund and may also attempt to define their investment style.

Managing other people’s money takes experience, maturity and a strong sense of responsibility. Check a fund manager’s track record; how they performed in the last fund they managed. While years in the industry is not generally considered to guarantee better performance than a fresh face, there is a lot to be said about experience in the markets.

Having a long view of your manager’s history of accomplishments will help you to see how they performed in both bull (strong) and bear (weak) markets. A consistent performer in both good and bad times is preferred for your peace of mind about your investment.

How does their track record compare to their peers? It’s important to compare like with like. Different fund managers have different styles of investing. Some invest in growth stocks; shares they expect will grow in value but that might be paying very low dividends. Others invest in value stocks to generate income. While others may take a contrarian view, looking for stocks that they believe the market has undervalued.

Adding “Alpha”

An important measure of a fund manager’s value is the “alpha” that they can add. “Alpha” is the measurement of how much more the fund manager adds to the value of your investment than if you had simply invested in an index fund. An index fund attempts to mirror the market by investing across all shares in the share market index.

Index Funds

Generally, index funds charge lower fees as they have much lower research and analysis costs. Also, they are not claiming to outperform the market. Therefore, if you choose to pay the higher fees to get the out performance and higher returns, be sure that the fund manager is not merely a closet index fund, following the markets.