Choosing a fund manager involves lots of deliberation and plenty of contradictions. On the surface, each fund manager will boast how well they have done in the last year, last three years or maybe even the last five years. But underneath these big claims, there is often small print pointing out ‘past returns are not a predictor of future performance’. So, what should you look for when seeking out a fund manager?
1)Look at past performance
Although past performance is not a guaranteed predictor of the future, it often can tell you something about what the manager does. You shouldn’t necessarily write off funds that have underperformed, instead, you should look into why they underperformed.
For example, the fund manager may have underperformed because they focussed mainly on staid stocks, whilst racy ones were outperforming. This can tell you something about their investment style, and the conditions in which they might outperform the market.
2)Look at their portfolio
If the fund manager holds mostly the same shares, in the same weights, as the index, this may suggest they are running a quasi-tracker. On the other hand, if the managers shares are quite different from the index it is often much more encouraging, and suggests that the manager isn’t afraid to invest and buy whatever they think is best.
3)Look at the size of their portfolio
Evaluate how many shares the manager has in their portfolio. You want a fund manager who takes concentrated, high-conviction positions in their preferred stocks, not one who half heartedly owns lots of companies. Around 40 shares is a good number, although even lower is fine for a small fund.
4)Look at portfolio turnover
This is the percentage of the portfolio being bought and sold every year. It can be hard to judge this, because there are some strategies that revolve around relatively short holding periods, but for the most it should be fairly low, at around 20%. This means the fund manager is making high- conviction decisions and is giving time for the market to pan out, not just jumping in and out on a whim. Also, turnover affects trading costs, lower turnover means lower costs and therefore less drag on performance.