Choosing a fund manager involves plenty of contradictions. On one hand, each fund boasts how well it has done in the previous year, or three years past…But underneath the glossy advert, the regulator insists on a disclaimer: “past returns are not a predictor of future performance” …
For most of us, our investment selection process boils down to picking mutual funds based on their past performance and future potential, but performance alone is not enough indication. Performance is a product of both skill and luck. A shrewd investor needs to investigate fund managers to distinguish the skilled from the lucky. A fund manager who is unskilled but lucky is most dangerous because at some point this luck will run out.
So how do you choose a good fund manager for your money market fund?
The best place to start is assessing your investment objective and your risk tolerance. Once you know your investment objective and you know your risk tolerance, you can choose the fund that best suits your profile. Essentially, you will invest in the funds that can earn the most without taking so much risk.
The 3 Ps to consider:
People: Identify experienced people whose main focus is managing a single strategy. Choose someone dedicated to the fund. As a general rule, avoid managers who are listed as the lead manager on more than three funds. As the saying goes, an expert in all is a master of none. Additionally, choose a manager with skin in the game, having either invested in the same product or is looking to outdo the normal returns so to make good returns as well. Nothing will motivate a manager’s performance more than his own bottom line.
Process: The second P of fund manager selection is the process or the manager’s investment strategy. You want a fund manager who has a disciplined and repeatable strategy to ensure the impressive performance can be sustainably repeated. A manager’s competitive edge is only an advantage if it can be repeated consistently.
Performance: The third P is for performance. While past performance matters, picking a fund manager is not as simple as choosing the best performer in an asset class. Instead, investors should consider the level of risk the manager had to take to get to the top spot. You want a manager whose investing success doesn’t require unnecessary or excessive risk-taking, compare the fund’s standard deviation or the degree of volatility it has, with those of the fund’s underlying benchmark and its peers.
Monitoring changes in a fund’s performance (relative to other funds) over time often gives an indication of underlying changes in the investment approach. This may also be the result of a change in the person managing the fund.
Read the full article on the Vasili Africa Website
To learn more about money market investments, read our previous article on Understanding Money Market Investments.
This article was written by Rose Ellah Ngari, Chief Executive Officer at Vasili Africa.
Get in touch with Rose for free investment advice via [email protected] or fill in your details below.