Thursday, April 17, 2008

Mutual Funds 2 - Funds Selection (examples)

For every type of investment, there should be:
- Selection
- Approach / Management (some call it Entry & Exit plans)
It's the same with mutual funds.

Selection Methods
There are basically 2 approaches to selection that I've encountered with many minor variations:

1. Performance only
The above example is for this selection method. How to execute? Simple

a. Get Lipper's, MorningStar's and Normandy's ratings from The Edge (weekly), Personal Money (monthly) or websites

b. Filter off for your requirements
eg. I only accept ratings
Total Returns & Consistent Returns of 5/Leader
Preservation of >= 3
AND Morningstar rating of >= 4
AND Normandy's Sharpe Ratio >= 0.75 if possible, else the top quartile
(Sharpe or Information Ratio shows the amount of returns over the amount of risks - a higher number is better)

c. For those who have more time to kill, check each filtered fund's returns for 3, 1 & 5 years (please tweak these to your needs).
eg I'd weight 3 year's returns highest (3), 1 year's returns next (1.6) & 5 years returns last (1.5)
Why those years?
3 yrs - my expected minimum time horizon
1 yr - to keep my selection skewed to the more current performance
5 yrs - in anticipation that I'll be keeping my investment invested 5 years and more
If it's via EPF investment, I'll of course filter for EPF approved mutual funds.

2. Funds strategy in-line with Investor's strategy / risk appetite
a. If I'm an aggressive long-term investor, I'd filter out a fund house's "aggressive" or equity heavy and/or theme-based (eg sector rotation) funds.

b. Then, I'll review it's prospectus on how the funds will be invested and the fund's strategy

c. If I think it's in-line with my expectations, then I'll compare it with the rest of the funds which made the cut and make a decision

You may want to filter for fund houses first before the above. Personally, I'd only invest in funds from Fund Houses that:
- have enough variety of equity & bond funds (I hardly touch capital protected or balanced funds)
- who's funds are mostly performing above average against peers & benchmark for a 3 years period

Reasons: I usually switch from one asset class to another upon a returns per annum trigger. Switching can only be done between funds from the same Fund House.
Switching is a method to "sell" a fund & "buy" another without incurring commission / frontload costs of 3% to 8%.

Ok ok - those who are too blur or time-tied (ahem ahem) to research, I'm holding Prudential and Public Mutual funds. I've been with SBB (now called CIMB), Pacific Mutuals & BHLB - my experiences with these fund houses' funds weren't too great on average.

For those who are interested in capital protected funds - my opinion is that ING's are one of the better ones available.

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