How to find the Best Managed Funds Part 1
by, 7th-December-2009 at 03:33 PM (2852 Views)
Finding the best managed funds is not difficult. It is a 2 step process. All you need to do is find the best performing funds within the best quality of fund managers. In more technical terms this is using both a qualitative and quantitative approach to selecting the best managed funds. Part 1 of this report is about the 1st step or qualitative approach to finding the best fund managers. Part 2 of the report will explain the 2nd step or quantitative approach to finding the best performing funds.
Using managed or mutual funds are a popular way of investing and getting exposure to diverse markets that you cant always do with direct shares.
The universe of managed funds to choose from is large. In Australia alone you have a choice of over 12,000 funds although many of these are structured as superannuation or pension funds.
Outside of superannuation there are over 4000 funds to choose from. Many of these funds will have a targeted investment philosophy such as only investing in the top 100 Australian shares or small cap shares. Others still will invest in demographic regions such as US, Europe, Asia or Japan. They might also decide on a sector approach like just investing into industrial shares or resource stocks and could even target a specific niche like gold stocks.
With such a large universe of funds to choose from, finding the best managed funds can be a challenge. Chasing the best performing funds may also prove dangerous and short lived. They may be poor quality or have unproven investment strategies and inconsistent investment managers.
Independent research houses are widely used by financial advisers to provide a qualitative analysis of fund managers. The important thing to understand with most of the research houses used by financial advisers is that the fund managers pay the research houses to have their funds researched. This creates an unfair playing field for the smaller fund managers who are unable to afford the high research fees needed to complete a comprehensive research.
The other aspect of most research houses is that their research is mostly of a qualitative nature. In other words, they place little or no weighting on past performance and the ratings of any funds are based on assessing the skills and experience of the managers, the investment approach used and what controls are in place to handle risks.
It is not a perfect world and many good quality funds are never recommended by financial advisers simply because there has been no independent research carried out. If you find any of these funds then you will need to do your own research otherwise stick to those funds which have been researched.
After completing their qualitative analysis of the fund manager and their respective managed funds the research houses will award them a rating. There are also many research houses to choose from and the more popular ones used by financial advisers include Morningstar, Lonsec and VanEyk. Morningstar use a star rating system from 1 star to 5 stars. 5 stars representing the highest quality of fund and manager.
The first step in finding the best managed funds is simple. Stick to the funds with either a 4 or 5 star rating. Nothing else should be considered.
The best quality funds can also be the worst performing funds. In part 2 well look at how you find the best performing funds.