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Choosing the right fund that will provide the best net returns over the long run is your objective.
So how do you pick from the thousands of available funds, managed by hundreds of different managers and spread over a wide diversity of sectors and countries?
Although the choice is much smaller if you confine yourself to the New Zealand market place, we suggest you select your fund(s) only after working through the following steps.
What type of fund suits me?
Firstly focus on the type of fund or funds you should be invested in, based on your risk profile.
Completing the little questionnaire here (courtesy of Colonial First State) forces you to think about your needs and requirements and helps to determine the asset classes that may be suitable for you. Do that now please before proceeding.
This table shows just how your investment objectives could influence your choice of fund:
|Investing for income||
If you want to live off your investments, an income fund will have your capital invested in cash or fixed interest securities - possibly property and will thus provide higher income.
Investing for growth
If you seek wealth accretion over a longer term (and are not so focussed on income), then invest in an equity fund (that is a fund that buys shares in companies) – property funds may also be appropriate.
Investing to minimise tax
Some Australian managed funds provide tax advantages in the form of imputation credits or tax-deferred income. Some New Zealanders on a higher tax bracket will benefit from a lower PIR. If you are considering tax effective investing, you may also want to consult a professional tax adviser.
Investing in balanced funds
There are some funds with diversified portfolios that provide a good mixture of growth and income.
Who do I prefer to manage my fund?
It is not easy to identify a preferred fund manager from the large number offering funds, particularly given all the "noise" and marketing hype.
Certainly your manager of choice should have a proven track record over at least a five to ten year period.
Do not be influenced in this key decision by the trumpeting of short-term performance, no matter how good it may be. Too many disastrous decisions are made on the basis of last year's outstanding performance. So try to ascertain consistency of performance within the time period you are evaluating and remember every manager has a bad year from time-to-time.
You should also establish that the fund provider has the financial wherewithal to operate a credible long term funds management business. Look at their website, do they employ sufficiently experienced professionals to achieve their published investment objectives? What are their backgrounds and skills? If the fund manager is a public or listed company take a look at their financial statements or have your accountant give them the once over.
Depending on how much you are investing, it is not essential you are invested just through one manager. But neither do you want to be with too many managers, nor be switching back and forth all the time.
What is the performance record and is it relevant?
Morningstar and many of the larger fund managers provide a facility for reviewing NZ fund performance by period, sector and manager.
Look at some of the possibilities to see how various managers’ funds are rated and how they have performed on a sector by sector basis over different time periods. Bear in mind that fund performance by itself tells you little. It has to be viewed in the context of the manager's peers, sector performance, market performance or some other relevant benchmark for that particular period.
Remember too, that past performance is no guarantee of future performance and you should not hope to pick winners from last year's big performers.
A few years back we looked at a Morningstar report on the top 10 performing retails funds over the previous year. Take a look at those funds and our comments because they are just as relevant today as they were then.
So choosing a fund based on past performance is not recommended (and neither is taking a contrarian approach and investing in the poor performers of last year) but choosing a manager on the basis of a consistently good record of performance over time is what you should aim for. The level of fees, if you can find them, should also be of some relevance to you, particularly if they look substantial or are described only vaguely.
What are the fees and are they important?
Fees can have a significant impact on investment returns over the long term. It is at best, difficult to determine exactly what fees, costs and expenses are charged against managed funds and therefore to compare fees and net returns by fund.
There have been reports that as much as one third of the returns generated by some New Zealand funds are being ripped out in the form of fees and charges. For further details see our analysis here and a recent article on the naughty bits by Diana Clement in the NZ Herald.
(Until the funds management industry in New Zealand resolves this problem, it is likely that investment in managed funds, with the possible exception of KiwiSaver, will stagnate or decline.)
How many funds should I invest in?
Depending on how much you want to commit to managed funds, we suggest you select the applicable number of funds as follows:
|Amount Investing||Number of Funds|
*Keep small amounts on Term Deposit with a big bank.
What if my research yields nothing?
Your research should be based on your time horizon, financial and personal goals and tolerance of risk. If you are not satisfied that your chosen fund or funds will meet those objectives, you should widen your search, seek professional advice or leave your money on term deposit with a big bank until you are sure.