Analytics

Lost in the mutual funds maze? Try the FundScope Way

Manager Value-Added: a recipe for success

Mutual Fund Reports: new and updated

Tax-Smart Investing: Portfolio Diagnostics as a tax planning tool

Family Affairs: check out the sponsor before you buy the fund.

Outside the Box: If you read the articles featured in this section, you will never look at mutual funds the same way again.

Family Affairs

Any fund family can come up with a fund or more that make is to the top quartile. Is this a measure of skill or luck?

When it comes to investing, we are big believers in families—mutual fund families, that is. Before you decide to marry your soul mate, you need to know if he or she comes from a good family. Likewise, before you decide which mutual fund to buy, find out more about its family or sponsor. For obvious reasons, you need to:

  ensure that your investment is entrusted to a well reputed organization that has been in business for some time, and that is likely to be around for the next few years;

  get a good feel that your fund company cares about your long term interests and not only about the management fees that it collects from you;

  select a fund company with a  history of consistently producing above average returns in more than one or two funds, to reduce your cost of switching between funds when need be.

Your ideal mutual fund company will have most of the following characteristics:

Good size and financial strength that allows it to attract skilled fund managers and investment analysts

A good selection of mutual funds covering the core investment categories, thus allowing you to adjust your portfolio allocation strategy on regular basis at minimal cost;

A stable team of capable fund managers with minimal vulnerability to fund manager turnover;

Reasonable management fees and expenses: a family where the majority of funds have below average management expenses is better than a family where most funds have above average expenses. Other things being equal, families that offer low cost funds have a distinct start-up advantage over high cost operations. Low cost fund companies do not spend extravagant amounts on advertizing and other sales promotion expenses, to convince you that you should buy their funds. They usually promote their business by producing good results. Low cost companies often rely on a historical record of superior performance to attract investors. They develop a market niche by word of mouth or a similar low key marketing approach.

Consistency of Performance

Assume that fund XYZ has reported spectacular results for the last three-years. Does that mean its sponsor is a great company? Not if those results were a fluke. If a fund company has one or two great funds, it could simply mean that it has one or two good fund managers, or it could even mean that one or two of its managers have been just lucky. If a family has half a dozen or so of funds that consistently out-perform their peers, it means much more. Strong, consistent performance by various funds within the family could mean a lot of good things. For example:

-The Family will likely have a good selection of skilled fund managers;

-Fund manager turnover in the family is probably low;

-The family has powerful investment resources (e.g. research team);

-The family’s investment philosophy is constructive and long-term result oriented.

-The family is less prone to fund managers’ defection. If a fund manager quits, his / her replacement will quickly embrace the company’s investment philosophy and can benefit from the powerful investment resources and research tools available to him/her. Objectives and results will be less affected.

For you as an investor, the long-term implications of those features are enormous.  In the least, you will increase your chances of maximizing long-term returns.  Also, the larger the number of consistent above average performing funds within the family, the more choice you have to build a diversified portfolio within the family.  It also means there will be no (or minimal) transaction costs when you decide to switch funds to reallocate your assets or adjust your investment strategy.

Choice

Choice provides you, as an investor, with flexibility. Intuitively (this has been supported by empirical research in the United States), investors’ urge to redeem mutual funds is tempered by various factors, including sales pressures and transaction costs (this is especially true if you have paid load, or if you are faced with the prospect of paying additional load). Obviously, the decision is much easier if you want to switch funds within the same family: you would face little, or no pressure to change your mind, and transaction costs are negligible, if any. Therefore, it is important for you to ensure that your mutual fund company provides you with an adequate choice of funds that address all your investment needs, by covering the largest number possible of mutual fund categories.

Family Snapshots

FundScope's Family Snapshots are a great tool to evaluate your fund's family based on the above factors. For each family, you can evaluate the size and trends of assets and market share. You can also assess the number and percentage of funds with below average cost, or below average results. When you find a fund that you like, check the Family Snapshot before you buy it.