Fund managers play a pivotal role in the performance of mutual fund schemes; but that should not be the only reason to select/exit a worthy scheme.
Advisers need to counsel investors not to take investment decisions just based on who manages a fund but emphasise on the processes and systems behind the performance of a fund. It is imperative to delve deeper and understand how a fund would perform sans the star fund manager, and not hinge on unreasonably on a star fund manager.
Advisers must educate clients on the approach to select worthy funds with utmost care and pragmatism.
The approach
If the client already holds certain schemes that the resigned star fund manager handled, it makes sense to initially put those on a watch list before taking any investment action.
Because a scheme’s performance also depends on how the fund house is doing overall in managing investors’ money, the proportion of assets actually performing. This will throw light on whether a fund house is an asset gatherer or efficiently managing investors’ money.
Further, recognise the investment processes and systems at the fund house, the risk control framework, the ability to mitigate risk emanating from the investments made (for the portfolio), the investment philosophy of the fund, the background of the founders, among a host of other aspects.
To make an informed investment decision regarding a scheme, advisers should take clients through numerous qualitative and quantitative parameters, educate and help them recognise their needs, investment objectives, financial goals, the time horizon before rather than allowing client to decide in an ad-hoc manner.
Advisers should recommend schemes to clients after assessing the following:
Doing comprehensive performance and risk analysis
Under this, one needs to analyse a mutual fund scheme on various time periods ( 1-year, 3-year, 5-year periods, and since inception), and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period. In addition, it is important to evaluate a scheme’s performance across market cycles (i.e. bull and bear).
Portfolio characteristics
Knowing about the scheme’s categorisation, asset allocation, market-cap bias, sectoral allocation, portfolio concentration, portfolio churning, etc. can throw light on how the fund would fare and risk it would attract.
Fund management experience
The fund house's vast experience, investment philosophies, the background of founders, the fund management team, the competence and experience of the fund manager; gives insights about its ability to manage investors’ hard-earned money.
Schemes-to-fund manager ratio
If a fund manager is managing multiple schemes with a large AUM single-handedly, the schemes-to-fund-manager ratio is high, then it possibly indicates tremendous pressure on the fund manager. Do note that some schemes managed by fund managers with 15-20 years of experience haven't necessarily done consistently well for a long time.
Research process
A mutual fund house driven by a dedicated and talented research team backing its investment decision can go a long way in driving the performance of a fund positively.
Investment philosophy, processes and system
Ensure that the fund house has robust investment processes and systems in place because process-driven investment decisions are often unbiased, and hence effective.
Investor service and transparency
Weigh investor service and transparency, which is also vital to make informed decisions.
Reiterate to clients that the fund manager plays an important role in a fund house which is process and team driven. However, the key lies in ensuring that the invested schemes strike a balance between the two, i.e. the fund house and the fund manager. One cannot base investment decision solely on who manages the scheme.
As a part of a continued relationship-building process, advisers should address clients’ queries and resolve them patiently. A regular portfolio review should be an indispensable part of the mutual fund advisory practice.
Handholding the investor to take prudent investment decisions both in the case of a lump sum or/and ongoing SIPs is a continuous part of the financial advisory practice. Recommendation to buy, hold and sell should be backed by in-depth research and analysis, keeping in mind the financial wellbeing of clients at all times.
In addition, advisers should ideally have additional support and backup staff, keep up with the timelines in providing prudent advice to clients, and respond to client queries promptly. All these steps will be perceived as immense value and keep your clients engaged and satisfied.
Final words…
Advisers should serve as financial guardians or financial doctors who counsel investors prudently and keep a check on the financial health of their investors portfolio and take timely measures if need be, in the interest of their long-term financial wellbeing.
If the client gets anxious and takes ad-hoc investment decisions based on the noise and incessant news-flow, educate him/her of the financial consequences of doing so.
In a fiercely competitive environment, standing for thorough research, honest, unbiased, and ethical advice and consistently being there for clients during testing times and aligning their risk-return expectations, will help financial advisers go a long way.