BizWeek asked S&P's Investment Services managing director for Asia Pacific William J. Reidy, a few questions on factors investors should keep in mind during this selection process and how best to gauge an asset management company's performance.
BizWeek: With the deluge of unit trust products entering the market, how or what yardstick should be used to select which one to invest in?
Reidy: Prior to subscribing to a unit trust, investors must consider several factors. First, they must understand their investment objectives, expected return, and risk tolerance. This will help determine their investment horizon. Then, along with their financial consultants, investors can decide on the portfolio allocation to best address their needs. Only at this point, should investors look at individual funds to see which ones would fit in with their investment strategy.
As for selection criteria for funds, historical performance is certainly important but equally as important is the consistency of that performance in both market upturns and downturns.
If we need to choose a fund based on its track record, should we go for how one has performed over three years or five years or even ten?
The longer the track record, the more we are able to gauge the consistency of a fund’s performance. Generally speaking, we need a minimum of three years’ historical performance before we can truly tell how consistent a fund’s performance has been on both an absolute and relative basis (i.e. as compared to its peers).
How relevant is the funds' performance during crisis times in judging if they are indeed the stronger performers?
This is not only relevant but in fact, critical. Under bullish market conditions, some funds that have performed spectacularly might be taking on excess risk to achieve their stellar performance. Such a fund would be severely challenged in face of a downturn. For this reason, we must evaluate the performance of fund managers under both bullish and bearish market situations to determine if they are indeed consistently outperforming their peers.
The choice of fund clearly has a bearing on the risk appetite of the individual. Elaborate on how one makes a choice based on this individual preference
Let me first clarify how investors should look at risk when it comes to fund investments. Risk is something that should not be looked at in isolation but rather be analysed in relation to the fund’s return. Is the higher risk assumed by a fund justified by a greater return or is the fund still producing mediocre returns despite being highly volatile? This is the perspective that investors should adapt.
Another point that investors should bear in mind is how consistent is the risk level of the fund. Has the standard deviation or volatility been quite similar throughout different periods or has it been fluctuating? Naturally, we would prefer a fund that is less volatile (i.e. less risky) and has been giving consistent returns.
To sum up, there is really no “good” or “bad” risk. All we should be concerned about is how the risk level affects the return of the fund and whether we have the tolerance for bearing that risk.
For instance, if you have a very stable income stream with very little financial burden, then you can take on much more risk than, say, a person who has little savings and is nearing retirement age. Individual circumstances determine to a very large extent the risk tolerance that one can accept; therefore extensive planning should be done prior to making any investments.
What should a potential investor who wants to outsource his money to fund managers look for and bear in mind all the time?
Investors should look at the performance of a fund on both an absolute basis as well as relative to its competition. Volatility is also important because that determines how risky the fund is and investors must look at that in reference to their own risk tolerance.
Finally qualitative factors such as the experience of a fund manager, calibre of the research team, financial strength of the fund management company, and consistency of investment strategy should all be looked at in detail as well. Most of this information would be available in the fund fact sheets that are distributed by banks and other fund distributors.
Is it more prudent to spread the money to fund managers that are exposed to both equity/fixed-income and other instruments? If so, why?
It isn’t necessary for investors to subscribe to funds that are invested in a wide range of investment products. What is critical is for them to develop a portfolio that is well-diversified (i.e. invested in a variety of products and markets) so that their overall risk level is lower.
How relevant or important is The Star/Standard & Poor's Investment Funds Award Malaysia 2003 for those who have investments in various fund management companies and those in the process of selecting them.
The global methodology deployed by Standard & Poor's in the selection of our award winners has always been focused on performance consistency over the medium to long term as well as the risk management of these funds as compared to their competitors'.
We believe that fund managers who outperform their peers on a risk-adjusted basis consistently should be recognized for their ability in lowering the volatility of their investments and for delivering returns that are superior both to their peer group average and market indices, thereby adding value to the fund holders.
Therefore, in our opinion, a fund's performance at Standard & Poor's Investment Funds Awards is one criterion that investors should consider when making their investment decisions. Other factors such as risk tolerance, investment horizon, and portfolio diversification must all be looked at in detail before subscribing to any fund.