Thursday, 17 May 2018

How to Choose a Fund

Fund supermarkets or platforms offer a valuable, comprehensive and low-cost service to retail investors.

However, using the fund information provided by the platforms is not always the best way to select funds for your portfolio.

Yesterday, as a test, I looked at a fund supermarket, picked a random managed sector, and selected ten funds at random. Their fund information all showed essentially the same chart!

In fact, pretty much every fund I chose has a sales patter that says their product is a skillfully managed ultra-sophisticated benchmark-beating machine. The sales information for all of them has graphs where there's a line that is above another line. Guess which line represents the fund, and which one the benchmark?

In the early days of my independent investment career, using charts like this gave me FOMO (fear of missing out), so I bought a lot of funds. I wanted to own all these great products managed by brilliant people who could make me rich.

Eventually, I realised that by buying so many varied products I was now the proud owner of a very expensive world tracker.

So, I now treat a fund supermarket like a real shop - I prefer to know exactly what I want before I go in. I use other sources of research (Morningstar, general financial press, my own experience, etc.), and compare different funds and benchmarks together.

I have a very clear idea of the geographical split I want and if I can't find managers in whom I have the confidence to beat my benchmark then I go for a cheap tracker.

Where I do have managed funds they are now with a limited range of individual managers who have a style I like (I read what they write, watch what they record, see how invested they are in their funds and look at their portfolios and activities). Alex Wright, Nick Train and Terry Smith are three examples of rock-star managers whose funds I hold.

Having fewer funds and a small range of managers to assess means that I don't fall into the trap of merely looking backwards, I can make a judgement about how well the funds are positioned to preserve and grow my wealth in the future.

To conclude, fund supermarkets offer great benefits to private investors, but they offer a huge choice and it's easy for the client to confuse sales information with impartial facts. So I do plenty of research of my own and know what I want before I log-in to make a new investment.

The Rural Investor

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