Any fund family can come up with a fund or more that make is to the top quartile. Is this a measure of skill or luck?
When it comes to investing, we are big believers in families—mutual fund families, that is. Before you decide to marry your soul mate, you need to know if he or she comes from a good family. Likewise, before you decide which mutual fund to buy, find out more about its family or sponsor. For obvious reasons, you need to:
- ensure that your investment is entrusted
to a well reputed organization that has been in business for some time, and that is likely to be around for
the next few years;
- get a good feel that your fund company cares about your long term interests and not only about the management fees that it collects from you;
- select a fund company with a history
of consistently producing above average returns in more than one or two funds, to reduce your cost of switching between funds when need be.
Your ideal mutual fund company will have most of the following characteristics:
- Good size and financial strength that allows it to attract skilled fund managers and investment analysts
- A good selection of mutual funds covering the core investment categories, thus allowing you to adjust your portfolio allocation strategy
on regular basis at minimal cost;
- A stable team of capable fund managers with minimal vulnerability to fund manager turnover;
- Reasonable management fees and expenses: a family where the majority of funds have below average management expenses is better than a family where most funds have above average expenses.
Other things being equal, families that offer low cost funds have a distinct start-up advantage over high cost
operations. Low cost fund companies do not spend extravagant amounts on advertizing and other sales promotion expenses, to convince
you that you should buy their funds. They
usually promote their business by producing good results. Low cost companies often rely on a historical record of
superior performance to attract investors. They develop a market niche by word of mouth or a similar low key marketing approach.
Consistency of Performance
Assume that fund XYZ has reported spectacular results for the last
three-years. Does that mean its sponsor is a great company? Not if those results were a
fluke. If a fund company has one or two great funds, it could simply mean that it has one or two good fund managers, or it could even
mean that one or two of its managers have been just lucky. If a family has half a dozen or so of funds that consistently
out-perform their peers, it means much more. Strong, consistent performance by various funds within the family could mean a lot of good things. For example:
- The Family will likely have a good selection of skilled fund
- Fund manager turnover in the family is probably low;
- The family has powerful investment resources (e.g. research team);
- The family's investment philosophy is constructive and long-term result oriented.
- The family is less prone to fund managers' defection. If a fund
manager quits, his / her replacement will quickly embrace the company's investment
philosophy and can benefit from the powerful investment resources and research tools
available to him/her. Objectives and results
will be less affected.
For you as an investor, the long-term implications
of those features are enormous. In the least,
you will increase your chances of maximizing long-term returns. Also, the larger the number of consistent above
average performing funds within the family, the more choice you have to build a
diversified portfolio within the family. It
also means there will be no (or minimal) transaction costs when you decide to switch funds
to reallocate your assets or adjust your investment strategy.
Choice provides you, as an investor, with flexibility. Intuitively (this has been supported by empirical
research in the United States), investors urge to redeem mutual funds is tempered by
various factors, including sales pressures and transaction costs (this is especially true
if you have paid load, or if you are faced with the prospect of paying additional load). Obviously, the decision is much easier if you want
to switch funds within the same family: you would face little, or no pressure to change
your mind, and transaction costs are negligible, if any. Therefore, it is important for you to ensure that your mutual fund company
provides you with an adequate choice of funds that address all your investment needs, by
covering the largest number possible of mutual fund categories.
FundScope's Family Snapshots are a great tool to evaluate your fund's family based on the above factors. For each family, you can evaluate the size and trends of assets and market share. You can also assess the number and percentage of funds with below average cost, or below average results. When you find a fund that you like, check the Family Snapshot before you buy it.