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Investing basics: 5 questions to ask before investing in funds

Emma Rapaport  |  23 Nov 2018Text size  Decrease  Increase  |  
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Don't want the hassle of managing your own investments? Don't have enough resources to get exposure to a particular corner of the market? Managed funds may be the answer – a terrific way to access the expertise of investment professionals and diversify your portfolio.

However, with more than 500 managed funds domiciled in Australia, the task of choosing a fund your portfolio can be intimidating.

It's tempting to visit a website like Morningstar.com.au and just pick the top performing fund. But while performance is important, but there are other things to consider when selecting a fund. You need to make sure you pick on which suits your investment goals, portfolio and personality.

This article will arm you with five questions to consider as you approach the marketplace of managed funds. These are based on the five pillars that Morningstar analysts themselves rate a fund on; known as the ‘five ps’.

PEOPLE: Who is running the fund?

Typically, an investment management firm is made of two key groups of people – portfolio managers who make investment decisions, and a team of research analysts who provide research and input to the portfolio managers. Each analyst will usually have a specific sector expertise such as consumer or healthcare stocks, or regional knowledge. In some funds there may be more than one portfolio manager operating a collegiate approach, in others, often smaller mandates, there will be a sole fund manager.

One person can change the course of history, or the direction of a fund. It's important to know who calls the shots – and how long they've been doing it. Delve into the manager's history to see how they've done during times of volatility, such as the 2008 downturn. While not essential, it's a good sign if the manager who founded the fund is still the one in charge. Look for someone you think you can trust to manage your money, and whose investment philosophy you believe in.

PROCESS: What is the investment strategy?

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The types of assets a managed fund invests in gives us a clue about risk and performance. Are they investing in stocks, bonds, both? In Australian equities, developed markets, or emerging markets? Big companies or small companies? These asset classes and regions each have different characteristics and you should expect them to perform differently.

Each fund's investment strategy is important to deciding whether the fund is right for you and your investing personality. Some managed funds take a growth approach, loading up on high-priced companies that are growing quickly, or a value approach, favouring stocks with lower earnings prospects but cheap prices. Others use a broadly diversified portfolio with hundreds of holdings, while others focus in on just a few dozen names known as a concentrated portfolio. If you're not sure what these words mean, check out my previous article 'Investing basics: How to decode the name of a managed fund' for a handy glossary.

The best way to familiarise yourself with a fund's strategy is by reading their product disclosure statement. Make sure you're comfortable with the risk level, volatility and the approach. Each quarter you should also get a feel of how the investment management team is feel about the market, and how they intend to position the portfolio.

Remember, before you invest you should consider how the fund fits into your larger portfolio. And consistency is key. You don’t want to give your money to a flake who changes his or her process with the seasons. Inconsistency costs you cash. 

fees performance managed funds

PRICE: How much does the fund charge?

Managed funds aren't free. That's because there is a team of people managing your money –researching, analysing and picking stocks. You should pay for professional management if you need it but remember every dollar you give to fund management is a dollar you take away from your own return.

So how can you discover whether you're paying too much? Pay attention to the fund's ongoing fees which will be listed on their product disclosure statement. Compare how the fund's fees compare with other similar funds.

PERFORMANCE: How has the fund performed?

If you're shelling out for an active management, you expect the fund to deliver a good return. However, it's not always useful to turn to a 'top performing funds' list for direction about who to invest in. While most people would assume a fund which returns 10 per cent is better than a fund that returned 5 per cent, that's not necessarily the case. The fund that gained 5 per cent may have beaten competing funds that follow the same investment style, while the 10 per cent fund may have lagged its direct competitors.

To really get a sense of how well a fund is doing, put the fund's returns into context. Compare the fund's returns to the appropriate benchmark – to indexes and to other funds that invest in the same types of assets with the same investment style.

PARENT: Who is the asset manager?

A managed fund's parent company is a lesser known but an important component of success. A parent company is the asset management firm. It's important because the quality of the parent company will give you a good indication of the strength and integrity of the people running the money.

A good parent company is one which retains staff, has a diverse staff and rigorous internal processes. They are willing to close the funds to new money when they grow too big to execute their strategies effectively – and merge those which have grown too small to deliver. An as investor, you want a company that emphasises good employee culture, drives down costs, provides stability and puts investors first.

And if these five concerns are too much for you to consider – Morningstar analysts are on hand to do it for you.


More in this series

• Investing basics: Check this before investing in LICs and ETFs

• Investing basics: the art and science of valuing stocks – pt.2

• Investing basics: the art and science of valuing stocks – pt.1


is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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