Rafael Hurtado Coll. Professor. IE Business School
13 February 2015
Although, at first sight, choosing funds and shares require a similar approach, there are some key differences that make choosing a fund a more complex task than choosing shares
There are plenty of posts, articles, books, and research papers on the selection criteria that should be applied when investing in shares, describing in detail stock fundamental analysis. However, there are very few documents on how to select investment funds. This is surprising when we take into account that there are many more investors that build their portfolios on investment funds rather than shares.
The main differences between selecting shares and selecting funds are summarized here:
In funds this is not possible. If you are managing a US equity fund portfolio, with the objective of beating the category average, it’s impossible to index it to the average because there are hundreds of funds. If a fund portfolio manager takes S&P 500 as a reference, the indexation is to the stock market not the fund market, and will not reflect how he is doing in relation to the average fund. It is possible to be indexed to a certain category of stocks, but not a certain category of funds. Fund portfolio and fund of funds managers always have to decide which part of their portfolio will be invested in passive management products, while betting that passive management will outperform the majority of funds in a given category.
In conclusion, selecting funds can be very tricky and implies significant doses of psychological insights (to evaluate how the human factor affects performance) and a wide network of contacts in lieu of public reports. As we have seen, selecting funds has its own peculiar characteristics, which make it a complex task.
Rafael Hurtado is Chief Investment Officer (CIO) of Allianz Popular Asset Management (Allianz Group) and associate professor in IE’s Master in Finance and professor in the Executive Education course Investment Strategy: Managing Money in Today’s Financial Markets (April 20-22, 2015). The objective of this course is to help participants manage financial investments more effectively. It will provide an in-depth understanding of market trends, macro-drivers of performance, asset allocation techniques, and innovative investment strategies. Participants will learn to apply professional portfolio and investment techniques to achieve their financial goals. For more information please contact firstname.lastname@example.org.