Choosing the right fund manager is an important decision for investors, and many rely on data screens to help them sift through mountains of performance numbers. But screens alone don’t tell you the whole story. To get a clear view of how a fund might fit into your portfolio, you also need a window into the mind of the manager.
What vs. why
When you examine a manager’s performance data, you’re learning about what happened in the past. What did the manager’s fund return last year? What was its standard deviation? These statistics are important to know, but before you screen out a fund manager based solely on historical data, you also want to understand why the fund performed the way it did.
- Did the fund benefit from a broad rise in the market? Or did the manager do a skillful job of selecting investments?
- Did the fund underperform due to the management style being out of favor? Or, was underperformance due to poor judgment in security selection?
- Did the manager change how they managed the fund?
Data screens lump past performance into two boxes: good and bad. They don’t identify whether those results came from market conditions or a manager’s philosophy and process. The table below illustrates how a qualitative window complements backward-looking screens. By understanding a manager’s investment process and philosophy, you can begin to make judgments about how he or she may perform in various markets in the future.
Skill, with favorable conditionsGood performance based on consistent and skillful application of a sound investment process. |
No skill, with favorable conditionsThe outcome of a market environment that favors the portfolio but is likely not repeatable nor the product of skill. |
Skill, with unfavorable conditionsConsistent application of a sound investment process that wasn’t in favor with the market environment. |
No skill, with unfavorable conditionsPoor results due to low skill, unsound process or inconsistent application. |
For illustrative purposes only
Looking through the window
It’s important to remember that process and philosophy are not synonymous with “style category.” For example, the “value” category of mutual funds — in general — seeks to invest in stocks that are currently undervalued. But there are many ways for a manager to implement that view. To illustrate, here are three ways that different Invesco managers approach value:
- Deep value: The “deep value” approach looks for companies that are trading at a significant discount to their true value — the value of their underlying assets. The team believes that over time (in the absence of a permanent deterioration in company fundamentals) stock prices will naturally move back toward true value, rewarding patient investors.
- Relative value: This approach seeks companies that are undervalued and under-earning compared to the markets and to their own history, and that are unloved by Wall Street analysts. The team believes that when companies like this experience a positive change, that presents a great opportunity for investors.
- Dividend value: For investors biased toward capital growth, this team offers a total return strategy that emphasizes appreciation, income and preservation over a full market cycle. For income-biased investors, the team provides a dividend income strategy that emphasizes companies with above-market and defensible yields.
Sorting it out
So, how can you learn more about a manager’s philosophy and process? At Invesco we offer several avenues to hear from portfolio managers, including our blog, insights and product commentaries. Each fund has a product page that includes a wealth of information on each fund. Additionally, we encourage investors to consult their financial advisor with any questions on their performance.
No single investment process will outperform in all market environments. Therefore, we believe one of the most challenging aspects of investing is to identify and hold skilled managers whose processes aren’t in sync with current market conditions. A screen would lump an underperforming manager into the “bad” category, but a window may reveal that this manager may be in good shape to take advantage of the next market shift.
Important information
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
There can be no guarantee or assurance that companies will declare dividends in the future or that if declared, they will remain at current levels or increase over time.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.
©2015 Invesco Ltd. All rights reserved.
Screens vs. windows: Why choosing a fund manager requires both by Invesco Blog
