Which fund is right for you?

'Some choose performance as basis for selecting a fund, but the best performing fund in one year may be the worst performing the next'

MANILA, Philippines – Investment funds are becoming more known these days. Whether it is a bank UITF or a Mutual Fund, they enable investors to take advantage of having a professional manage their hard-earned money, monitoring the market on their behalf: what stocks or bonds to buy, when to sell, if to sell, and in what mix. 

But with 156 funds to choose from in the market (as per Bloomberg.com) selecting one that fits you best can be quite staggering. It is very tempting to go with the popular choices, but that would leave out some relatively unknown funds that do outperform the more popular ones. Some choose performance, but the best performing fund in one year may be the worst performing the next. 

So, how does one select a fund? What are the filters or criteria that one looks for in a fund before investing?

The suggested courses of action for these have been discussed in one of the continuing education sessions of Pennsylvania-based fi360, an organization that advocates international best practices in investment and fund management. I have come across Craig Watanabe’s presentation on fund selection and monitoring, some points of which can be very applicable in the Philippine setting. 

In fund selection, he says, some components to be considered are:

  • Regulatory Oversight – In the Philippine scenario, UITFs are under the supervision of the BSP while Mutual Funds are under the SEC. Having a government regulator over your funds ensures that it is legitimate in nature and in operation.
  • A Minimum Track Record of at least 3 years – A fund with at least 3 years track record can already demonstrate performance consistency and fund management style.
  • Organization Stability – Also known as “manager turnover,” as a US study showed that “manager changes were highly correlated with poor performance and outflows.” This makes perfect sense as different fund managers employ different investment philosophies and strategies and thus, returns. 
  • Assets under Management (AUM) – Funds with smaller AUM can be more agile in their trades and thus secure more trading gains; funds with larger AUM, on the other hand, are less agile as they would have to pace their trades so as not to move the market artificially.  
  • Expense Ratio – High cost of trading, commissions and other fees bring up the expenses of the fund which, in turn, are subtracted to its income and thus its value at the end of the  day.
  • Risk-adjusted Performance – For Watanabe, the fund should belong to the top 50% of its peers for its risk-adjusted performance.
  • Absolute Performance – The fund should be above 50% in one, 3, and 5-year historical performance versus peers.

In addition, Morningstar, the world’ leading mutual fund ranking and research firm, analysts have identified five “pillars” when choosing a fund:

  1. Process – This includes investment philosophy, strategy, stock/security selection, fund governance and operation
  2. Performance – The fund’s historical performance and how it compares to its peers.
  3. People – The management team behind the fund, their track record as well as their integrity and competence
  4. Parent – The company that oversees the fund
  5. Price – High management fees eat up on the returns that the fund provides

Common industry practice is that funds are net of taxes and fees. Hypothetically, if you add back the high management fee to your return, then that would be the added return to your investment per year!

In the Philippines, mutual fund returns can be seen at www.pifa.com.ph while UITF returns can be checked at the bank’s respective website. A more detailed list of the funds available in the Philippines can also be seen at this site. – Rappler.com 

 

Rienzie P. Biolena is registered financial planner of RFP Philippines, a professional group of financial planners in the country. To learn more about RFP, you may email info@rfp.ph.

Rienzie is also an accredited investment fiduciary of Pennsylvania-based fi360 and an international member of the Financial Planning Association, the largest association of financial planners in the US. You may reach Rienzie at rienzie.biolena@gmail.com, his Facebook account or Twitter @rbiolena.

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