As a reader of this blog, you have invested or are intending to invest available cash, or to switch investments. Unless you are familiar with the different types of investments and ways of investing, I imagine you will have wondered how financial advisers arrive at their decision to recommend a particular fund or group of funds and what criteria they take into account.

Asset allocation/risk

Before any discussion regarding an investment can take place an IFA assesses your attitude to risk. Once this is established it is then possible to carry out the asset allocation appropriate to that attitude. It is a question of determining the proportions of the different asset classes within the portfolio i.e. the percentage of shares, fixed income, property, cash etc. This is known as the asset allocation process and is critical in any form of portfolio management whether it is an institutional pension fund or an individual ISA.

Fund performance

We are constantly being told that past performance is not a guide to the future. This is true, however the figures have to be analysed. If the fund is consistently in the top quartile over a number of years in different economic environments, there are reasonable grounds for assuming that this will continue into the future. The performance should in any case be monitored on a 6 monthly basis.

Age of the fund

The longer the fund has been going with consistently good performance, the better.

Fund manager

How long has s/he been running the fund? What has his/her performance been like in comparison to his/her peers? Has s/he always been running funds similar to the current one?

Foreign exchange (FX) exposure

This can be critical. If, for example, a third of a fund’s investments are denominated in a currency other than sterling (the currency of reference for a UK investor) and sterling weakens against other currencies, the performance of the fund will improve. If sterling strengthens, then logically the value of the fund will decrease.

Industry concentrations

This is what we pay portfolio managers for and where they have to make decisions. For example, recently funds that have stayed clear of banks have had better returns; a concentration in mining stocks would have contributed to an out-performance of a fund. Success is determined by the right concentrations at the right time.

The above list is not exhaustive but will hopefully provide an introduction to your understanding of the factors that need to be taken into account when evaluating funds for inclusion in a client’s portfolio. It may also assist you in asking the right questions of your adviser.

Whoops! I fear I may be talking myself out of a job…!

 

Archiemidas

 

 

This article is not to be construed as financial advice. The views expressed above are those of the writer alone and do not constitute a recommendation to purchase, hold or sell. It must be borne in mind that the value of investments and any income will fluctuate. The value of your Investment can fall as well as rise and you may not get back the original amount invested. Past performance is not a guide to future returns.