When it comes to fund selection, we know that things can get tricky. Why? Mostly for the following three reasons:
Past performance is not a good indicator of future performance. Research has shown that funds that performed well over a 5 years span, tend to do poorly afterwards.
There are so many different types of funds to choose from.
People tend to stick to name they have heard of
Firstly, the most common fund categories are: actively managed funds, passively managed funds and ETFs. Each come with their own pros and cons.
Are more expensive with the expectation that they’ll produce better risk-adjusted returns, at a rate higher than their benchmark (a market index within which the fund managers can pick stocks). If funds fail to do better than their benchmarks, however (in part, often times due to their high fees) then investors will see a delayed return on their principle. Remember, no one can control the market. Also with actively managed funds react better during market falls. It’s also important to understand the kind of index they seek to beat: equally weighted indices enabling better stock picking or market-cap weighted indices biased towards the most expensive stocks forcing managers to own more of those expensive stocks. All this put together, one needs to check how consistently able a fund manager is to keep a risk-return profile. This is what we call performance consistency.
Tend to be a good way to get a long-term exposure to markets. They replicate the performance the index is meant to follow.
Questions to pose when evaluating a passively managed fund are: is the index of good quality? Does it represent the whole market or does it have embedded biases?
Market-cap weighted indices tend to favour the most expensive stocks which could cause and investor to own more of the expensive stocks... . Furthermore, it’s important to evaluate if the index is a good representative of the economy you want to be exposed to. Are you OK with the fact that passive funds typically replicate exact market gains as well as market gains with no other risk management overlays that sticking to the index as it is structured?
On the flip side, keep in mind that they tend to offer real value for money.
Can be categorized as passive replica of indices. As such, these may pose the same challenges as passively managed funds. They also may expose you to risks that you may not be remunerated for.
These tend to be either structured products with counterparty risks, or may be comprised of so much of one market through direct ownership of the index constituent that they could become the market, thus their worst enemy (a client selling could push the ETF price down further).
However, unlike passively managed funds, they tend to trade as simply as an equity, a service for which you are charged via what professionals call a bid-ask spread. This means you buy a portfolio at a premium but usually sell it at a discount.
Understanding the information above, you can probably see how there usually isn’t one singular perfect fund category to make up your financial portfolio.
For this reason, we at S:YB evaluate a host of criteria to enable you to curate those funds you are most interested in. These include:
Fund performance consistency
Values you believe in such as socially and environmentally responsible funds (citizenship)
Fee: as in, our goal is to keep them low for you
Liquidity: how easy it is to trade a fund for when you need the cash back or wish to change your portfolio
Risk Tolerance, and thus management
Team longevity if you believe that the longer a team is working together, the better. It is not necessarily true but it is on regular occasions
Feel free to peruse our knowledge centre to know more about funds.
S:YB is being registered with the UK’s FCA as an investment advisor for sophisticated investors and eligible counterparties. If you are unsure of how suitable an investment is for you, please seek personal advice from a financial advisor.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments.
This website aims to provide information to help you make your own informed decisions.