How do you judge a fund manager? Many distributors look at the past performance of a fund manager to decide whether it is worth entrusting their clients’ money to the manager.
While past performance does matter, you need to look at how those returns were generated. Fund managers are supposed to invest according to the fund’s mandate. So you need to ensure that the fund manager is sticking to the scheme mandate to generate returns. For instance, if you wish to invest your client’s money in a large cap fund, you need to see if the manager has not bought stocks which don’t fall in the large cap universe and generated returns by taking excessive risk. “I make it a point of looking at the risk-adjusted returns rather than absolute returns. I’m comfortable if the portfolio generates 10-15% compounding return with lesser risk,” says Vinod Jain of Jain Investments.
In addition to looking at the risk-adjusted returns, you need to look at the scheme portfolio to get an idea about the fund manager’s philosophy. “Looking at the portfolio gives you a fair idea about the fund manager. Based on the stocks and sectors he/she has invested you come to know about the style and the philosophy of the fund manager,” says Vinod.
Manoj Nagpal of Outlook Asia Capital also tries to understand the philosophy and thought process of fund managers. “In addition to quantitative factors, we try to look at qualitative factors like philosophy of a fund manager. No fund manager will be consistently successful but you can predict in what market scenario a fund manager could do well. For instance, a well known CIO is known for identifying undervalued companies. He is not a momentum player. So we try to match the philosophy of a fund manager with the investor’s profile.”
Besides, it is also important to look at how many funds a fund manager is managing. In the race to move up the AUM ladder, AMCs can launch many funds, especially during a bull market to attract investors. After a few years, these funds may languish and AMCs may turn their focus on some other ‘flavour of the season’ funds. So if a fund manager is assigned to manage too many funds with different investment objectives he/she may lose focus. Having said that, if a fund manager is managing 3-4 funds within the same category, say large cap, it should not be a problem as it is likely that the fund manager has developed expertise in a particular segment of the market.
Advisers believe that educational qualification is not a strict filter when it comes to choosing fund managers. “The fund manager should have knowledge about the markets and how the economy functions. He should be good with numbers. Beyond this, I would not assign too much importance to educational qualifications,” says a Mumbai based adviser.
Over the years, fund managers build a good reputation among investors and distributors with their performance. Sometimes, you may be tempted to allocate a majority of your client corpus to the schemes managed by a particular fund manager. However, this may pose a risk. Even if you like a fund manager, it is best to avoid giving him/her your entire corpus to manage. After all, fund managers are human beings and they can make mistakes. So it is best to diversify your clients’ portfolio across different fund managers in order to mitigate ‘fund manager risk’.
To sum up, distributors need to look at a number of factors beyond just past performance. Let us know how you select your fund manager.