What you should always look out for in a Mutual Fund

In what seems to have become a custom, I received yet another email from one of my readers, asking me what money market fund I would recommend for a newbie. After reading the email which said “Thankx (sic) for the post pls which one do you recommend for newbies?”, I wished I had the magic wand to know and recommend which money market/mutual fund that will make investors the greatest amount of money.

Ever since Nostradamus died centuries ago, it has become increasingly difficult to see tomorrow from today. This is even more difficult in the stock market where beating the market has become a mirage. Be that as it may, there are a few analysts, both on the fundamental and technical sides, that have managed to pick up stocks or mutual funds that have turned out to beat the market.

The likes of Buffet or Soros have done it, not because they have magic wands in their pockets or because Nostradamus left his garment with them as Elijah left his with Elisha. Instead, they did that because they knew what to look for in a financial product, to discover under and/or overvaluations.

They know what to look for to uncover hidden alpha. Therefore, I may not be in a position to recommend any fund to you. However, I’ve chosen in this article to take you through what you need to look for in a mutual fund, be it money market fund, equity-oriented fund or bond/fixed income fund.

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Fund Objectives or Style: Mutual fund investments are not usually for the short term. So, when choosing a fund, be prepared for the long hall. Having said that, one of the things that should determine the fund of your choice should be the investment objective of the fund. Try to choose funds with objectives that align with yours.

If your objective is to generate income while preserving your capital, a money market fund will be more ideal. However, if you are investing for growth, then an equity fund will be better. For someone with an objective that falls in between those two extremes, it will be better served by a balanced fund that is a mixture of fixed income and equity funds.

Performance History: It is often said in the arena of investing that past performance does not guarantee future performance. Although this is true, it often helps to examine the past performances of funds that you are interested in investing in. The longer the performance period, the better. If the data are available, looking at 5 to 15-year performance history is recommended. Where possible, compare the performance of the fund you are investigating and interested in with the performance of its underlying index.

Fund Manager Experience and Track Record: A mutual fund is as good as the fund manager that manages the fund’s asset allocation and rebalancing. Therefore, find out about the fund manager’s experience, how long he has been managing the fund or similar funds, what his track record has been, how many years the fund has been up since he started managing the fund as well as his academic and professional qualifications. Is he CFA certified, is he a CAIA. The longer a fund manager has been on a fund the better, but if a new fund manager is bringing past experience gathered from managing a similar fund in the past or elsewhere, that is a plus.

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Fund Fee/Expense Ratio: I have already written exhaustively on mutual fund fees. In choosing a mutual fund, pay attention to the fees being charged on the fund. Different funds have different fees and no matter how small the difference, it adds up at the end of the day.

Investment Strategy: Take a look at the investment strategy of the fund paying attention to the sectors of the economy that the fund invests in. Depending on your objective and risk tolerance, you will uncover from such a look if the fund is concentrated in the financial sector, for example, or if diversified. In most cases, a diversified fund is better from a risk point of view.

A fund worth Looking Closely at: Though I said earlier in this article that I do not have any crystal ball or magic wand in my pocket as to know what fund to recommend and that I am not in the business of recommending funds for people, there is one fund that has caught my eye. I am not invested in this fund but if I have to invest in any Nigerian mutual fund, it will be this fund. That fund is Stanbic IBTC Absolute fund. Stanbic IBTC Absolute Fund has been one of, if not the most consistent mutual fund in Nigeria in terms of performance.

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Since January 2013 when analysts at Quantitative Financial Analytics started tracking the fund, Stanbic IBTC Absolute Fund has made positive returns month after month except in June 2013 when it recorded a forgivable 0.58% negative gain. The fund made a return of 10.01% in 2013, 12.61% in 2014  13.19% in 2015,11.50% in 2016, and 18.48% and 14.28% in 2017 and 2018 respectively, according to records by Quantitative Financial Analytics. That comes to a total return of 79.49% since 2013.

So far in 2019, the fund has made 4.70% putting it in a position to repeat its 2018 performance, all things being equal. Though the fund, like most funds in Nigeria charges a management fee and other fees, the consistent positive return could be enticing.

Disclosures
The author or anyone in Quantitative Financial Analytics has no investment in Stanbic IBTC Absolute Fund or any fund managed by Stanbic IBTC Asset Management. The Asset Management company did not pay for this piece.

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