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5 ways to judge your fund manager

December 30, 2004 11:57 IST
The fund manager's role in determining the success or otherwise of a fund is und
eniably an important one. He is the individual who has been entrusted the respon
sibility of managing your money and is in some ways the one who will help you ac
hieve your financial goals.
Now for the big question: how does your fund manager mange the funds? Does he ha
ve a serious investor-like approach to managing money; i.e. are his decisions ba
sed on a 'by the book' approach and driven by solid rationale.
On the other hand he could be an individual who simply invests in the season's f
lavour and is constantly on the look for an opportunity to make a quick buck.
Knowing what category your fund manager fits into is vital. But there is no sure
fire method to determine the same. The fund manager's actions over a period of t
ime, in varying scenarios offer ample indicators of his style.
We present a checklist of five pointers that investors must watch out for, to ga
in a better insight into their manager's investment style.
1. Consistency of performance
Most investors' attention is focused on the returns clocked by their funds. Whil
e the importance of returns cannot be undermined, the consistency of performance
is equally important.
Find out how the fund has performed vis--vis its benchmark index at various time
intervals. Similarly the fund's performance on the risk-adjusted returns paramet
er speaks volumes about the performance in light of the risk borne.
A fund manager who takes on unduly high risks may look good on the returns param
eter but will be exposed on the risk-adjusted returns front.
2. Adherence to the investment objective
The fund's investment objective defines amongst others what its investment unive
rse will be i.e. will it invest in stocks of the mid cap variety or those of the
large cap variety, etc.
Check how faithful the fund manager has been to the stated objective. While a se
rious fund manager will stick to the stated objective, the punter will invest in
the stocks that are 'hot property' at the moment.
The recent rally in mid cap stocks saw quite a few managers of professed large c
ap funds get invested heavily in the mid cap segment.
3. Calendar year returns
Returns on a compounded annual basis fail to reveal the ups and downs faced by t
he fund; this is especially true in times of a bull run like the present one.
Calendar year returns on the other hand reveal a better picture. The fund's perf
ormance during a bull run and bear phase can both be objectively viewed. A stron
g process-driven approach will generally ensure that the fund doesn't suffer hug
e losses even when the markets run into rough weather.
This is quite contrary to the punter-managed funds that clock extraordinary grow
ths when the markets do well and crash severely when markets correct.
4. Presence of systems and processes
A well-managed fund generally draws from the presence of strong systems and proc
esses. For example an upper limit is placed on the amount that can be invested i
n each stock or each sector.
Similarly ceilings are placed in areas like the top 10 fund holdings. Such featu
res are sorely missing in punter-styled funds; if a given sector is in flavour t
he fund manager wont hesitate to go overweight in the same, even if it means mak
ing the fund a candidate for volatility.
5. Portfolio turnover ratio
The portfolio turnover ratio is indicative of how often the fund manager has chu
rned his holdings. A higher turnover ratio apart from leading to higher expenses
(which in turn adversely affects the investors' returns) is also indicative of
an aggressive style.
If the fund is managed with a cerebral approach, the portfolio generally display
s a high degree of consistency in stock picks and sectors as well; this will als
o be reflected in a low turnover ratio.
While a punter may deliver over the shorter-term; over a long-term horizon your
interests are likely to be safeguarded by a fund manger who has an investor-like
approach.