Mutual fund analysts share some tips and tricks in vetting mutual funds
Many investors can easily evaluate and find winning ETFs, especially since most of them disclose their holdings on a daily basis. It’s harder to do for mutual funds, which are not required to give out much information. But it can be done, as long as one knows what to look for.
One simple approach is to look for above-and-beyond disclosures of investment objectives, said Christopher Davis, director of research at Morningstar Canada. In particular, he recommended looking for managers who actively give insight and context behind their investment decisions on websites or in notes to fund-holders.
“If you see they are simply reacting to the latest news, they may not be making good decisions,” Davis told the Globe and Mail.
He also recommended doing a background check on the managers, ideally screening for ones with a long history of good performance and a solid reputation in the business media. Small fund companies might provide fresh takes on the market, but most big firms dominate simply because they have more resources and better intelligence at their disposal.
According to Davis, the most quantifiable indicator is fees, which are usually reported as a management expense ratio (MER). “All things being equal, cheaper is always better,” he said. “Research shows again and again that fees are the best predictor of long-term performance.”
Fund-tracking websites such as Morningstar have systems to rank different funds, but he cautioned investors to keep a basic investment tenet in mind: past performance is no guarantee of future results.
David O’ Leary, a mutual fund researcher who is also the founder and principal of Kind Wealth, agreed that fees are a good dipstick measure of performance for the average investor. But beyond that, he suggested looking at a fund’s performance history in times of crisis, such as the tech bubble of 1999 or the 2008 financial crisis.
“You can see these periods and find how they did,” O’Leary said. “Was the fund performing worse than the index or better than the index when the market fell apart?”
Information about a mutual fund’s top holdings should not be relied upon, he said, because they can change at any moment. Mutual fund providers also don’t update their information frequently. “You could be looking at something they held six months ago,” he said.
Investors may want to purchase mutual funds through an accredited advisor, who have more leverage with fund providers. “As an advisor, if you are recommending clients, the companies that sell the funds are probably going to give you more of their time,” O’Leary said.
Of course, some may prefer to invest themselves so they won’t have to pay commissions that may be embedded in the MER, as well as advisor fees such as front-end loads, back-end loads, or deferred sales charges. According to O’Leary, investors should avoid paying any loads because “they’re very close to being made illegal… They are now illegal in the UK and Australia.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Should funds be reporting peak-to-peak cycle performances?
Why is it so hard to find good active managers?
One simple approach is to look for above-and-beyond disclosures of investment objectives, said Christopher Davis, director of research at Morningstar Canada. In particular, he recommended looking for managers who actively give insight and context behind their investment decisions on websites or in notes to fund-holders.
“If you see they are simply reacting to the latest news, they may not be making good decisions,” Davis told the Globe and Mail.
He also recommended doing a background check on the managers, ideally screening for ones with a long history of good performance and a solid reputation in the business media. Small fund companies might provide fresh takes on the market, but most big firms dominate simply because they have more resources and better intelligence at their disposal.
According to Davis, the most quantifiable indicator is fees, which are usually reported as a management expense ratio (MER). “All things being equal, cheaper is always better,” he said. “Research shows again and again that fees are the best predictor of long-term performance.”
Fund-tracking websites such as Morningstar have systems to rank different funds, but he cautioned investors to keep a basic investment tenet in mind: past performance is no guarantee of future results.
David O’ Leary, a mutual fund researcher who is also the founder and principal of Kind Wealth, agreed that fees are a good dipstick measure of performance for the average investor. But beyond that, he suggested looking at a fund’s performance history in times of crisis, such as the tech bubble of 1999 or the 2008 financial crisis.
“You can see these periods and find how they did,” O’Leary said. “Was the fund performing worse than the index or better than the index when the market fell apart?”
Information about a mutual fund’s top holdings should not be relied upon, he said, because they can change at any moment. Mutual fund providers also don’t update their information frequently. “You could be looking at something they held six months ago,” he said.
Investors may want to purchase mutual funds through an accredited advisor, who have more leverage with fund providers. “As an advisor, if you are recommending clients, the companies that sell the funds are probably going to give you more of their time,” O’Leary said.
Of course, some may prefer to invest themselves so they won’t have to pay commissions that may be embedded in the MER, as well as advisor fees such as front-end loads, back-end loads, or deferred sales charges. According to O’Leary, investors should avoid paying any loads because “they’re very close to being made illegal… They are now illegal in the UK and Australia.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Should funds be reporting peak-to-peak cycle performances?
Why is it so hard to find good active managers?
