A mutual fund's back story too often overshadows its actual returns -- at least in the eyes of advisors, argues one industry veteran.
“Advisors and portfolio managers like a good story whatever their story is,” said Mike Bayer, a financial planner with Strategic Analysis Capital Management Inc. “Whoever has the best story will be the most popular, but that is not necessarily the one that delivers results and proper returns.”
A survey, released Thursday, by Aberdeen Asset Management in the U.S., asked more than 200 Registered Investment Advisors (RIAs) what they viewed as the top considerations when evaluating mutual funds. A majority (59 per cent) agreed that clarity over the fund manager’s investment philosophy and strategy was most important, while historical returns (19 per cent), fund rankings (10 per cent), fund manager tenure (8 per cent) and brand name (3 per cent) though important, ranked lower.
"Simple, open and honest communication from the fund manager is of utmost importance to advisors when determining which funds to invest in on behalf of clients," said Mickey Janvier, head of wealth management in the Americas for Aberdeen Asset Management, in a release. "Fund managers that can clearly and concisely articulate their investment philosophy and strategy are more likely to garner interest from advisors and attract assets.”
Though Bayer agrees that philosophy and strategy are key when building a client’s portfolio, he feels the focus on product returns, rankings, brand names and fund manager tenure are futile for predicting a long-term returns.
“Of course, philosophy is the most important thing, but most of them (investment advisors/portfolio managers) have the wrong philosophy,” he said. “The other items on the list are almost completely useless in terms of predicting future returns. What is really important is asset allocations. That is the most critical decision in determining the expected returns.”
Additionally, the Aberdeen survey revealed that two-thirds (67 per cent) of respondents agreed that the complexity of investment products were increasingly more difficult for clients to understand. However, just as many feel these sophisticated products reap greater benefits their clients’ investment objectives.