What is the definition of an ‘excellent’ investment fund?

The team that manages the fund, the return obtained in comparison with other funds in the same category, and the relationship with risk, is part of the characteristics that should be taken into account to see if a fund is 'excellent' as detailed by the experts below.

Nicolas Fallope, fund selector at Assurances BPCE

Analyzing and finding a good fund need several steps: One of the most important things for me is to analyze performance year by year. A good fund has to be a resilient performance in different periods (bullish and bearish markets).

Some asset managers justify a good relative performance compared to a benchmark or peer group, especially in a bearish market but I prefer a fund with an absolutely positive performance in a bullish market and flat or not too-bad performance in a bearing market always linked to its volatility.

A good fund needs to have a challenging benchmark compared to the investment strategy and assume to be still over its benchmark.

The level of Management must be considered in relation to the market and his peer group. I think it’s important to challenge the top 10 positions for each fund and analyze business cases about sustainable thematic and potential controversies and how there are managed.

For ESG funds as the others, I try to put myself in costumer’s shoes who want to invest in a good sustainable fund and I expect a short and clear explanation as possible of the sustainable management process whether for an impact or transition fund and not an endless list of data only use by financial professionals.

I’m very careful about checking the number of positions followed by analysts or managers of the fund, they have to be in phase in the management team of the asset manager.

Stability of the management team (manager, analysts, and sales) is, of course, essential to have a good following of an excellent fund.”

Marta Martins, fund manager, and fund analyst at IM Gestão de Ativos

Nowadays, the variety of investable universes, investment strategies, and different approaches when it comes to actively managed investment funds makes the fund selector role quite an evolving and challenging process.

First, it is desired that a fund performs well and delivers a return above its benchmark or, if not applicable, delivers an absolute positive return given its expected risk profile. In this case, and although past performance is not an indication of future returns, it is the best proxy for what we can expect hereafter. Therefore, assessing the consistency and robustness of a fund’s behavior is a key element to take into account when selecting an investment fund since this is closely linked to the ability of the strategy and investment philosophy to generate superior results conditional to its risk profile. In this sense, understanding and having a clear idea of the strengths and weaknesses of the fund’s investment process, the way risks are controlled within the portfolio, and the manager’s flexibility and open-mindedness to react to market swings and opportunities without falling in love or becoming entrenched with certain positions, are also important factors to contemplate.

Acknowledging all these lead us to another crucial point as the return: risk of the investment fund. How well the risk profile and investment limits are respected, what tools the manager can use to control volatility and minimize drawdowns, and what has been the reaction of the portfolio manager in adverse scenarios are key questions for a fund selector to assure that the manager in order to make up for losses do not change the risk profile of the fund and its way of investing.

As an investor, we wish to avoid surprises, particularly on the downside which can be particularly painful and hard to recover. Hence, staying true to what it is advocated, not only in terms of returns but also in terms of risk, and exhibiting a consistent alpha generation is, in my opinion, the fundamental characteristic for a fund to become an excellent investment.