What to look at while screening through fund managers for good stock tips?

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  • Many ASX listed fund managers have done well in the past, some are continuing the stride
  • Key to success depends on goals set for portfolio, stock tips, size and type of the funds

Choosing a fund manager is like choosing a care taker for your house, it is as important as it is choosing the fund itself. The screening through fund managers becomes essentially important to get the right fund manager which eventually decides the returns on your fund and your overall portfolio. Performance analysis is key to evaluating and picking managers, and far more goes beyond the published numbers. Statistical measures of the funds are equally useful in evaluating fund manger’s performance. A good understanding of the goal the fund manager is trying to achieve is an added advantage to the process. Having a growth oriented approach or a value, one can make investor aware of the market scenario that will fit the manager’s approach in investing. The performance of the peer group is also a factor to look at, as sometimes it can be misleading in choosing the right manager. Lastly, time horizon (long term or short term) is another vital component of performance measurement.

When screening a fund manager, you should have a clear understanding of their part in your investment portfolio. Developing clearly defined goals for your portfolio is a very important as a first step. If the fund manager invests in their own fund, then their interests might get closely aligned with yours. With larger, institutional funds, fund managers may not be required to invest in the funds they manage. The size of the fund is equally important: As the size increases, its managers may be inclined to buy stocks in larger companies, and this may sometimes ignore stocks of smaller businesses that might have performed well in the past. In such a case, an independent director may play the role to ensure that a fund management company has a corporate governance framework in place.

Many ASX listed fund managers are eyed by investors for good returns. For example, you have Magellan Financial Group Ltd and Platinum Asset Management. These have exposure to international equities as well and compete with Pendal Group, Macquarie Group and AMP. Magellan for instance, has recently touched upon the benefits from its two strategic acquisitions: Frontier Partners in the United States; and Airlie Funds Management, which will help it enhance its distribution and management capabilities in markets like North America. Magellan also pays an Interim and Final Dividend of 75-80% of the Funds Management profit, but this excludes crystallised performance fees. Then you also have funds like Paradice Investment, which has become a substantial shareholder of Bapcor Ltd (an auto parts business) recently. Thus, knowing where these funds invest in, do project their targeted strategy and return profiles.

Further, the type of fund you invest in, the service you receive and the outcome you get should determine the level of fee you pay. For example, you would expect lower fees on a liquid fund and higher fees on a Debt fund. When picking stocks directly, you need to do all of the research and construct your portfolio yourself. Investors also need to monitor and review each of the stocks closely, and decide when to buy and sell, and at what price. You will often hear that past performance is not an indicator of future performance. History may not necessarily repeat itself, but it usually does rhyme a bit. So, it’s important to dig deep and review monthly performance to understand how results have been achieved.

Going through fund managers’ investment policy statements (IPS) and disclosure documents carefully is very important. Through this research, you’ll see that each IPS is written in a similar manner, making it easier to compare fees and processes. In terms of managers involvement, active and passive investing is the key. Active managers will set buy-and-sell limits for each of the stocks they hold and look at dividend yields as a parameter to measure the performance. Active managers are also able to offer protection to fund values in falling or volatile markets unlike passive mangers.

When talking about the disclosure statements, it is important to consider any market related movement of the past or something which is on-going when evaluating the overall prospect. For example, AMP is under a lot of scrutiny owing to Royal Commission and the recent unveilings of its misconduct and inappropriate dealings with clients. Thus, you would not want to invest your money on such managers who fail to stand on your expectations in the long run.

Then you have a growing wealth and fund management business, Netwealth Group Limited (ASX: NWL) with a market cap of A$2.02 billion, however, the stock has a high P/E of 137.320 while EPS is 0.062 AUD. Netwealth Group Limited is an Australia-based company that offers superannuation and non-superannuation platform products. Its platform allows users to buy and sell investments within an account; set up savings and contribution plans; set up reinvestment plans; access investment research; move assets in or out of managed accounts; track and monitor investments online within a single account; and administer life insurance and access a suite of reports, including asset performance and allocation. Consistent with the prospectus, the first dividend is expected to be paid in October 2018. Since inception, the performance change for NWL is 59.77% as at May 16, 2018. Although we keep a watch on NWL, it looks touch expensive at the moment.

While it is not as simple as sipping a cup of coffee to identify a suitable fund manager, a thorough research is crucial to understand the whole gamut entailing the performance, disclosures made, and inclusion of type of stock tips for enhancing portfolios when one is looking at different fund managers.


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