Understanding the Mutual Fund Selection Process

For many of our wealth management clients, we gain exposure to certain asset classes through hiring mutual fund managers. With thousands of available options, selecting a mutual fund is a daunting task for many investors.

Understanding a fund’s track record, expenses and other publicly available attributes might be a good starting point for fund evaluation, but it barely scratches the surface. We certainly go through an in-depth quantitative analysis, but we place an emphasis on the qualitative analysis.

Behind every mutual fund is a portfolio manager with a team working towards a stated investment objective. We are always looking for something inherent about the manager or their process that will add value to client portfolios over a full market cycle. There are unique standout fund managers who can provide value while diversifying the investment portfolio. We take pride in discovering those managers, and view them as partners, aspiring to hire them for a long-term relationship.

Identifying Fund Managers
In order to select fund managers for portfolios, we combine both quantitative and qualitative analysis. Our quantitative analysis allows us to filter to the top managers in their respective categories. Data points allow us to evaluate performance (compared to peers and industry benchmarks), risk profile, and fees just to name a few. This allows us to conduct a thorough qualitative analysis, where most of our time is spent. Our qualitative research helps us understand what is driving results, which is important in the pursuit of untangling luck vs. skill.

The qualitative analysis focuses on learning about a manager’s background and process through interviews, past investor communications, news sources, and leveraging our industry network. We look to understand how a manager thinks about the world and how they evaluate investments. We seek managers who are deeply motivated and have a significant stake in the success of their fund. Common traits of managers we allocate to include a steady temperament, transparency, humility, and a drive for continuous improvement in their process.

There needs to be confidence in their ability to execute on their strategy and remain disciplined over a full market cycle. This requires monitoring their actions throughout various market environments and observing whether their actions are in accordance with the process they have articulated. Due diligence takes several months if not years before we are comfortable allocating client assets to a manager.

Continuous Review
The work doesn’t stop once we’ve selected a manager. We track the success of decisions, ensure the manager remains disciplined, and look for any red flags. We read shareholder communications, listen to calls, review fund changes, and schedule calls with the manager to understand any changes.

We only allocate to managers when we conclude the process is intact and effective over the long term. However, we aren’t afraid to move on from a manager if the investment process changes or breaks down. Additionally, we are constantly seeking new investment opportunities and will seriously consider replacing a manager when there may be an opportunity to strengthen client portfolios.

Our Long Term View
Everything discussed above is all for nothing without patience. It is difficult to predict how a manager will do in the short-term. Chasing or bailing on managers based on recent performance is often a wealth-eroding endeavor.

We understand certain management styles will come in and out of favor throughout various points in the market cycle, however we are committed to managers for the long-term and strategically build portfolios designed to handle bouts of volatility.

When a fund manager is going through a difficult period, we come back to evaluating the process. There is an intensive focus on whether the process has changed in a way counter to why we invested in the first place. In all elements of investing, we emphasize process over outcome — and this rings true when it comes to mutual fund evaluation as well.

Want to refine your investment portfolio and achieve your financial goals? Please reach out to us to get started.