When selecting mutual funds for an individual client to invest in, what do you look at about the fund (other than the style)? For instance, one thing I look at is the Sharpe to see what the risk adjusted return has been. Just curious about what you all are looking at.
manager tenure - want to make sure youre not buying a former PMs track record expense ratio - looking at returns after fee is important, fees can be a high hurdle sometimes for outperformance, also make sure you understand the composition of the fee (12-b1, NO LOADS!, etc) holdings - make sure the manager’s mandate matches his holdings, i.e. dont want to think youre buying a large cap US fund that is then investing in emerging markets turnover - turnover can generate unwanted capital gains distributions that can make a fund tax-inefficient fund size - too big and too small can sometimes lead to problems, depends on the type of fund downside/upside capture - supposing you have found a fund thats holdings match its advertised style, up/downside capture versus the appropriate benchmark can tell you how much you participate in the index’s up moves and down moves these are a few off the top of my head, hope they help…
One reason I am asking this question (by the way i do look at most of what u just said), but I am working in an associate role and the main thing that the advisor looks at when determining one fund vs. another is historical returns and style. If the style is the same between 2 funds, he will pick the one with the best historical returns. I may be crazy, but I think there is more to it. He does take a glance at the expense ratios as well.
You should also consider which external wholesaler shares the most of your clients’ money with you by giving you the most goodies (drinks, meals, golf games, sporting events, etc.). I’ll bet that’s one other thing your advisor boss considers.
Good stuff from jkrecords. Look at R-squared, information ratio, tracking error, turnover, too. You’ll also want to put any new fund in a correlation matrix via zephyr or psn to see how the overall correlation changes and to asses the diversification benefits from a different manager/fund.
daviskr Wrote: ------------------------------------------------------- > Good stuff from jkrecords. Look at R-squared, > information ratio, tracking error, turnover, too. > > > You’ll also want to put any new fund in a > correlation matrix via zephyr or psn to see how > the overall correlation changes and to asses the > diversification benefits from a different > manager/fund. It’s so hot when you talk smart. I’m sad i can’t get onto GMail at work. I miss our chats. 
ASSet_MANagement Wrote: ------------------------------------------------------- > daviskr Wrote: > -------------------------------------------------- > ----- > > Good stuff from jkrecords. Look at R-squared, > > information ratio, tracking error, turnover, > too. > > > > > > You’ll also want to put any new fund in a > > correlation matrix via zephyr or psn to see how > > the overall correlation changes and to asses > the > > diversification benefits from a different > > manager/fund. > > > It’s so hot when you talk smart. > > I’m sad i can’t get onto GMail at work. I miss our > chats. *blush* lol … I always find it comical when people assume I don’t know what I’m talking about b/c I’m blonde. Yeah - I’ve got my gchat open everyday, but that won’t be the case going forward. I’m taking a new job on the sell side in November which means I won’t be able to log in to my chat forums/gmail daily. Miss you, too. It’s nice to have some of the crew back though like IEV/PT.
Historical returns vs. funds of the same style, manager tenure and fund guidelines (lvg, options, position limits), expense ratio. Expense ratio can be pretty huge in my weightings. Outperformance is something you hope will continue, but there’s no guarantee (let’s say you just bought into Bill Miller’s fund before he had his horrific year and wrecked his record). Conversely, the expense ratio is a definite. If the fee is 1.40%, come rain or shine, you (your client) are paying it. I think a lot of people forget that or underweight it. If the account holding it is taxable, it’s also nice to check turnover. As an added plus, low-turnover funds tend to be not only more tax efficient, but usually cheaper in terms of expense ratios (from what I’ve seen).
Your boss is focusing in on historical performance because it is easy to sell historical performance. It doesn’t matter that the historical performance is useless to a new buyer. And trying to compare funds of the same style is somewhat useless because no two funds are alike. At the end of the day if you have 10 funds that all look good on a qualitative basis you can pretty much flip a coin. After all, individual manager selection is not going to significantly impact the overall performance of a well diversified portfolio.
From the perspective of a retail financial advisor, choosing between actively managed funds is like flipping a coin to choose someone to in turn flip coins on your client’s behalf.
thanks for your inputs. I pretty much agree with all that was said and have been looking at the same things. I just wanted to see if i was missing something that I should be looking at.
Assuming you want exposure to a particular sector or asset class you should check for style drift over time.
We are completely passive (DFA) for our core portfolio (use 20-40% alternatives though). I am a big believer in not overpaying for beta. If you really want an active manager, take the handcuffs off and invest with hedge funds. When looking at hedge funds, you’re focused on what makes the manager so smart and operational risk. For 40 act funds, all of the things previously said: information ratio, up/down capture, skewness, kurtosis, style drift, drawdowns, etc. You can use MPI or Zephyr to check if the manager has added alpha over a style benchmark and the corresponding t-stat. There has been some backlash regarding this as it does not take into account the manager’s allocation decisions. Morningstar just had a new study that came out that said expense ratio is the largest determinant of future performance, which I fully believe. Turnover also adds to trading costs that don’t show up in the expense ratio. Again, reasons why I am passive for the majority of the portfolio.
Once again, picking mutual fund among different fund has to be a client-centered practice. Taxable or non-taxable client? Frequency of payout of dividend? 1099 or K-1 (in case of hedge fund). Is client subjective to AMT, and many many other questions like these. Of course performance and fee are very important issues, however, I bet, 9 out of 10 times, many none performance or fee related issues will be the decide which fund to use in your client’s portfolio.