1. Equity funds (country; e.g. US Equity or regional; Emerging Markets)
2. Market Cap biased Equity funds (all cap or more specific)
3. Growth or Income oriented
4. Sector specific (Financials, Bio-tech, Healthcare)
5. Bond Funds – Govt, Corporate, High Yield (one or more countries, one or more currency)
6. Absolute Return (generate positive return irrespective of market conditions)
7. Property Funds (invest in direct or indirect property instruments (REITs or property equity).
8. Commodity Funds (directly in gold, oil, copper or commodity related instruments like mining shares or oil producing stocks)
9. Target date Funds (structured to address a capital need at some date in the future, such as retirement.).
10. Thematic Funds (Sustainable, socially responsible)
11. Mixed Asset/Blended Funds (different strategies/asset classes)
12. Fund of Funds
13. Index Funds (passive mgt, similar to ETFs but structured as funds)
What to look for when picking mutual funds?
Looking at absolute numbers is helpful but in order to make sure that the investment is sound, you would need to know if the fund is actually overperforming the market/benchmark or not (i.e. the relative performance). For instance you might think that a fund which increased in value by 15% is a good thing. If on the other hand you notice that the fund is underperforming the benchmark by say 10%, it means that had you invested passively in an index your investment would have increased by 25% and not 10%!
Sector Averages (Peer Group analysis)
These are basically return figures reported in one figure which include a collection of average fund returns that would have the same objective as the fund you are analysing. Sector averages are generally compiled by data providers like Morning Star, TrustNet, City Wire and S&P.
Fund managers generally also quote the Quartile Ranking figures which are basically a measure of how an investment is performing in its peer group. It is measured by ranking the performance of all the funds in a particular sector over any period, into four sections. The first (or top) quartile will be the top 25% in terms of performance, the second quartile will be the next 25%, the third quartile will be the next 25% and the fourth quartile will be the last 25%.
Sector averages and quartile rankings tend to provide a ‘fairer’ comparison because you would be comparing fund managers in the same sector with each other whereas with a benchmark you would be comparing the manager with an index which has no management or administration fees being taken for active management.
2. Risk/Return metrics
a. Standard Deviation
how much the return on a fund is deviating from the expected returns based on its historical performance.
A high value means higher degree of risk because the predictability of returns less certain
b. Sharpe Ratio
the excess return for any extra unit of risk
SR tells us whether portfolio returns are due to smart decisions or a result of excess risk
The higher the better (more than zero and highest as possible)
Negative SR means that a riskless asset performs better than the fund
Measures volatility against the market
B: 1 =price moves with the market
B<1 =price less volatile B>1 = price more volatile
Funds risk-adjusted performance relative to benchmark
Managers contribution to performance due to security selection or market timing
+ve alpha fund did better than benchmark on a risk-adjusted basis
-ve alpha, fund did worse than benchmark on a risk-adjusted basis
e. Information Ratio
fund manager's ability to generate excess returns relative to a benchmark
High IR, the more consistent a manager is
f. Tracking Error
the standard deviation of returns relative to its benchmark
The lower the tracking error, the more faithfully the fund is matching its index
g. Max drawdown
Decline in value from highest peak
3. Other Considerations
• Age of the fund - Do you want a fund with an established track record or you want to get in early when a new fund is launched and hence maximising returns?
• Number of holdings - a fund which has fewer holdings is considered more aggressive than the one having a higher number of underlying instruments.
• Size of fund - This indicates the fund’s popularity and past success at attracting investors. However, some funds can be so large it’s difficult for the fund manager to run it. A small fund is sometimes easier to manage but might impose higher fees and contain more risk.
• Fund manager tenure - Consistent fund performance often relies on a fund manager having managed it for some time. Ofcourse ‘star’ fund managers can change jobs from time to time.
• Independent ratings - Companies such as Morningstar, Standard & Poor’s, TrustNet and CityWire provide independent ratings for funds’ performance, creditworthiness and consistency of management.
• Charges - Look closely at all the fund charges—are the ongoing charges excessive, are there penalties for withdrawing your money? Are the charges being levied on the income before paid out or on the capital?