One of the questions I often get asked is how do you pick a good managed fund? (I also get the same question about finance companies).
Is there a secret recipe one can use when looking for a fund? If so, what is it?
To my way of thinking, which has been honed by years watching fund managers, one of the most important factors is people.
Who is running the fund, how long have they been there and what is the team like? I like to think that a good manager will have stuck to his (or her) recipe and constantly produced good returns for investors.
Perhaps the key thing to trigger concern about a fund is if the manager suddenly leaves. When that happens think about whether you want to stay in the fund.
Managers tend to have a standard 'public relations' response to this which goes along the lines of we have good processes in place and underlings who have help so there will be no change.
When looking at funds try to compare fees. Remember you are paying the fees and they come out of the performance you are getting.
Performance is also important. What you really want to find is the fund that consistently places in the top half of the performance tables. They don't have to be the top performer, as often this fund will be towards the bottom the following year.
If a fund does something like 30 or 40% return in one year, don't for a minute think that they will be able to keep this up year after year.
Make sure the fund can take regular contributions and the minimum level of contributions is low, especially if you want to save regularly, rather than putting in a lump sum amount.
There is a lot to consider with brand too. I sometimes think going for the bigger, time-tested brands isn't a bad thing to consider. However, managed funds are a little different. Sticking with the big guys has merits in that they have the resources to run big, complex funds efficiently.
But there are also managers who are smaller and more specialised. A good example of this is the growing plethora of people who run New Zealand share funds. These organisations have a place in the picture, with one caveat; they have to stick to their investment philosophy.
I once saw a manager, someone I respected greatly, change the way he was investing. After that he made a couple of bad calls, the performance of the fund tanked and he decided to take on more risk than normal to get back to where he wanted to be performance-wise. Unfortunately, the strategy back-fired and the business struggled for some time.
More and more people are using the method of regular low contributions to a managed fund as a regular savings plan.
Other things to look for, which can be useful, are the size and age of the fund. In New Zealand we have hundreds of small, uneconomic managed funds on the market.
People who put their money into these funds are probably paying too much.
Also it is nice to see a fund growing and getting support - that indicates it is doing the right thing.
I sometimes think of it like selecting a restaurant in the town you are unfamiliar with. If there are two side-by-side one is empty and the other is full, then go for the latter.
Make sure the fund can take regular contributions and the minimum level of contributions is low, especially if you want to save regularly, rather than putting in a lump sum amount.
More and more people are using this method of regular low contributions to a managed fund as a regular savings plan.
Fees are also important - but complex. When looking at funds try to compare fees. Remember you are paying the fees and they come out of the performance you are getting.
Find out more about RaboPlus' managed funds products.
Philip Macalister is a finance industry commentator for 18 years and founder of www.GoodReturns.co.nz. He is also the managing director of Tarawera Publishing Ltd.