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5 ways to judge your fund manager
December 30, 2004 11:57 IST
The fund manager's role in determining the success or otherwise of a fund is undeniably an important one. He is the individual who has been entrusted the responsibility of managing your money and is in some ways the one who will help you achieve your financial goals.
Now for the big question: how does your fund manager mange the funds? Does he have a serious investor-like approach to managing money; i.e. are his decisions based on a 'by the book' approach and driven by solid rationale.
On the other hand he could be an individual who simply invests in the season's flavour and is constantly on the look for an opportunity to make a quick buck.
Knowing what category your fund manager fits into is vital. But there is no surefire method to determine the same. The fund manager's actions over a period of time, in varying scenarios offer ample indicators of his style.
We present a checklist of five pointers that investors must watch out for, to gain a better insight into their manager's investment style.
1. Consistency of performance
Most investors' attention is focused on the returns clocked by their funds. While the importance of returns cannot be undermined, the consistency of performance is equally important.
Find out how the fund has performed vis-à-vis its benchmark index at various time intervals. Similarly the fund's performance on the risk-adjusted returns parameter speaks volumes about the performance in light of the risk borne.
A fund manager who takes on unduly high risks may look good on the returns parameter but will be exposed on the risk-adjusted returns front.
2. Adherence to the investment objective
The fund's investment objective defines amongst others what its investment universe will be i.e. will it invest in stocks of the mid cap variety or those of the large cap variety, etc.
Check how faithful the fund manager has been to the stated objective. While a serious fund manager will stick to the stated objective, the punter will invest in the stocks that are 'hot property' at the moment.
The recent rally in mid cap stocks saw quite a few managers of professed large cap funds get invested heavily in the mid cap segment.
3. Calendar year returns
Returns on a compounded annual basis fail to reveal the ups and downs faced by the fund; this is especially true in times of a bull run like the present one.
Calendar year returns on the other hand reveal a better picture. The fund's performance during a bull run and bear phase can both be objectively viewed. A strong process-driven approach will generally ensure that the fund doesn't suffer huge losses even when the markets run into rough weather.
This is quite contrary to the punter-managed funds that clock extraordinary growths when the markets do well and crash severely when markets correct.
4. Presence of systems and processes
A well-managed fund generally draws from the presence of strong systems and processes. For example an upper limit is placed on the amount that can be invested in each stock or each sector.
Similarly ceilings are placed in areas like the top 10 fund holdings. Such features are sorely missing in punter-styled funds; if a given sector is in flavour the fund manager wont hesitate to go overweight in the same, even if it means making the fund a candidate for volatility.
5. Portfolio turnover ratio
The portfolio turnover ratio is indicative of how often the fund manager has churned his holdings. A higher turnover ratio apart from leading to higher expenses (which in turn adversely affects the investors' returns) is also indicative of an aggressive style.
If the fund is managed with a cerebral approach, the portfolio generally displays a high degree of consistency in stock picks and sectors as well; this will also be reflected in a low turnover ratio.
While a punter may deliver over the shorter-term; over a long-term horizon your interests are likely to be safeguarded by a fund manger who has an investor-like approach.