For most fund selectors, the track record of an investment fund takes a pivotal place in the selection process. “When selecting a [alternative Ucits] fund, I assess the Sortino ratio, the performance and volatility,” says Omar Gadsby, head of fixed income fund selection for the private banking arm of Credit Suisse. Gadsby looks at other factors too, such as the intrinsic strategy applied by the fund manager. “But in the end we want to see the track record as demonstrable evidence that the strategy works.”
However, Soegaard warned of the pitfalls of giving priority to the track record when selecting mutual funds. “In doing that you open yourself up to a host of behavioural biases,” he said. “Secondly, risk-adjusted performance can be misleading because there are many examples of funds out there which have, for example, changed their volatility target or investment policy along the way. So you then basically buy them on the basis of what they have done in the past, not what they are doing now.”
Selection bias
So Soegaard gives priority to rather less quantifiable selection criteria. “Key for me is absolute transparency of the investment process and unrestricted access to the managers, while management and performance fees are extremely important to me as well.”
There is a range of biases which could fool a fund selector, such as recency bias and confirmation bias. The former refers to overemphasis on the most recent performance data, while the latter means fund selectors tend to turn a blind eye to any negative qualities of a fund after having initially been impressed by its track record.
Holistic approach
Some fund selectors attending the congress said they therefore deliberately ignore the track record initially. Niclas Hiller, chief investment officer of Norwegian wealth management company Formuesforvaltning, is one of them. “I never start by looking at the performance of a fund,” he insists. “Before that, I consider what drives the performance, but I always start by making up my mind about what kind of fund I actually want; what kind of manager do we look for and what sort of strategy are we aiming to buy?”
But for Gadsby, the track record remains at the centre of the selection process. “When selecting an alternative fixed income fund, we want a manager who reaches our objectives, which is Libor plus 300 basis points, each calendar year. Therefore I want to see evidence that government bonds, quality credit as well as high yield all contribute to return, in other words that the manager’s asset allocation ideas have delivered over the cycle.”
