One of the biggest challenges a do-it-yourself investor faces is finding the cream of the crop among the thousands of funds all aiming to do the same thing - beat the market and their peers.
The trouble is that there are far more duds than gems, which makes finding a winner an uphill task. To help readers focus their sights on the superior options, Money Observer has created a shortlist of Rated Funds, which for 2018 features 199 active funds, as well as 63 low-cost index trackers.
Each quarter the list is reviewed, providing an update on a sector-by-sector basis.
As part of our review we look out for ‘red flags’, which may prompt our investment committee to put a fund or investment trust ‘under review’. This is not a sell recommendation for existing investors; instead, it reflects the fact that there has been a change since our Rated Fund list was put together at the start of 2018 that investors need to be aware of. At a subsequent review, funds and investment trusts ‘under review’ will either keep or be stripped of their Rated Fund status.
Below we explain the red flags used by our investment committee, which private fund investors should also look out for.
Some funds are managed on a ‘team approach’ whereas others have a lead manager at the helm. When a Rated Fund manager departs we automatically put the fund under review and give the new fund manager time to bed in before deciding whether to keep the fund or remove it from the list.
Fund size becoming too big
When it comes to funds, size matters. The bigger a fund becomes, the more difficult it is to move the needle and outperform peers or indeed the wider market. In contrast smaller funds, which are more nimble and flexible, have a structural advantage. Some fund management firms take the step of ‘soft-closing’ a fund when the fund hits a certain size, often in the form of an initial charge imposed to deter new investors from investing. When Rated Funds are ‘soft-closed’ on capacity concerns, we place the fund in question under review.
Performance coming off the boil
On a quarterly basis we keep tabs on how all our active funds are performing versus both peers and their benchmark. In instances where we have concerns over performance, whether that be over the short or the long term, or indeed both, we will place the fund ‘under review’ and wait to see whether an improvement takes place in the coming months.
High premiums are another ‘red flag’ that investors should keep an eye on. With our Rated Fund list we will place investment trusts under ‘premium watch’ if we deem the premium is too excessive for new investors. At the end of March four trusts with high premiums that we are keeping close tabs on are: Murray International, JP Morgan Global Growth & Income, Baillie Gifford Shin Nippon and Baillie Gifford Japan.
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