Just as you’d research and analyze a stock before investing in it, you should do likewise before investing in a fund. Investment fund analysis can be done “qualitatively” and “quantitatively” – and both techniques are equally important. Going over a fund’s factsheet and reading any accompanying commentary is an example of the former. So what else should you look at when evaluating quality?

Most funds are run by a lead portfolio manager (PM). It’s always worth assessing the PM’s experience, reputation, and track record; ideally, you’d want to be handing your money to someone with strong scores on all three fronts. In terms of judging how much a PM has investors’ best interests at heart, you might want to investigate whether they’ve got some of their own cash in the fund, and if their compensation is tied to performance. Such information is often available in the fund’s prospectus or statement of additional information (SAI).

You can do something similar with the rest of the investment team too. PMs normally oversee a group of analysts whose job it is to research and recommend individual investments. Assess their experience and structure and keep an eye out for red flags like high team turnover – rarely a good sign. This sort of information can be found by searching financial news sites.

Focusing again on the factsheet, it’s worth checking out the weighting of the fund’s top 10 holdings. A fund that’s more than 50% invested in those top 10 positions may be over-concentrated and vulnerable to shocks; if more than 10% is invested in a single position, then that could also be cause for concern. Still, you don’t want a fund that’s too diversified either – one that holds, say, 100 or 150 positions. Not only is it unrealistic to expect a PM to stay on top of so many investments, but an overly diversified fund risks becoming an “index hugger” which merely mirrors the movements of a market index. That’s not what you’re paying an active manager for.

Which brings us to our last qualitative question: cost. At risk of stating the obvious, the lower a fund’s price, the better. This can be assessed in a number of different ways – but the most commonly consulted formula is total expense ratio (TER). A fund always has to disclose its TER, and you can usually find this on the factsheet.

The TER expresses overall running costs in any given year as a percentage of the fund’s assets. This includes management fees (not necessarily including performance bonuses) as well as trading, legal, and other operational expenses. Essentially, a fund with a TER of 1% will lose 1% of its value that year before factoring in investment returns. That means the PM has to beat the market by at least 1% for their fund to outperform – and justify its existence to investors. ⚖️