Mutual Fund checklist
Running the rule over mutual funds
Following last week’s money flow and investments article, we today begin a review of a mutual fund structure.
Moneywise noted the recent mutual fund statistics where more than $50 trillion are held and invested worldwide by individuals, financial institutions and more.
It is certainly a very reasonable assumption, based on my own practice experience in Bermuda, that thousands of local residents own one or more mutual funds as well.
Before continuing, I should disclose that I do not own, buy, sell, or recommend any mutual funds in Bermuda or elsewhere.
A mutual fund it is a pool of individuals’ and institutions’ money that is deposited into a legal/investment structure, such as a trust, or a company — it is not just a bunch of funds in a massive cash account.
Investors receive an allocation of the shares of the fund based upon their monetary contribution. The cash is placed in proportionate amounts (depending upon the fund objective) into investment markets, managed for diversification.
A mutual fund is a stand-alone entity, fully segregated from a bank, financial institution, or mutual fund company’s other internal or external assets.
As such, it has strict definitive operations: directors, portfolio managers, administrators, representatives, legal, tax, advisers and strictly regulated operating systems, all defined in its prospectus to every investor. It is generally, a lengthy tome that dictates every single facet of managing the fund, from the kinds of assets, to holding patterns, taxes, fees, and such like.
Further, under country security laws, Bermuda included, the mutual fund company must release an extremely detailed audited financial statement every year — some issue a half-year statement as well.
Failure of the fund to adhere to best security and legal practices will subject directors and managers to a monetary authority investigation, fines, and possible closure if malfeasance is detected. That is another good reason for small investors to pay attention to what they actually own and verify that the fund management is in good standing.
The prospectus is a vital, integral component of each and every mutual fund, yet unfortunately, I have seldom seen any investor request or read the ones associated with their fund ownership.
Yes, it is long; yes, it can be boring, but people — this is your money. Please read them. Request them if you did not receive them.
Why should we want to own one, or more, instead of do-it-yourself investing?
There are many reasons.
• Long-term appreciation significantly higher than term/fixed deposits;
• ability to platform off expert knowledge of capital markets that we cannot equal;
• low-cost entry to ownership;
• time efficiency:
• qualified portfolio managerial rebalancing for active structures;
• anticipatory risk stabilisation in volatile markets;
• avoidance of filing the frustrating compliance data required;
• transcend trading priorities in competitive platforms;
• research and strict assessment of each individual security within the fund structure;
• continued monitoring of valuations;
• certain rebalancing patterns to rationalise profits;
• portfolio experience in combating market timing;
• real-timer reporting, and more.
Seriously, managing individually owned securities within the complexity of capital markets today can be a tedious challenge.
Portfolio managers work full-time on managing money; small investors’ first mantra is holding down a job, caring for family and community, and living. Imagine trying to protect one’s investments against random tweets, sudden currency fluctuations, high-frequency trading (à la Flash Boys by Michael Lewis), or quantitative analysts algorithm chain sequences.
And a further good reason, most individual and employer-provided pensions today are managed in mutual funds, or like-kind portfolio structures. The more you know about your investments outside of and in your pension, the more comfortable you will feel about the pension reports you receive and saving/planning for the future.
Mutual funds are often loudly criticised on their fee basis. In all fairness, how would you like to, or even contemplate, handling the various scenarios listed above.
How do we know which mutual funds are is best for us?
Utilising the mutual fund criteria checklist that I developed working with many clients in Bermuda and the United States, you can research and increase learning about the kinds of investments on your own, watching and monitoring markets via internet, podcasts, webinars, and active broadcasts.
For your own reference, please download and print the checklist PDF, which is attached in the ‘Related Media’ section on this page.
You will be using your mutual fund fact sheet, and hopefully, a prospectus provided by your financial representative marketing the fund, to fill in the blanks.
We make a few observations, space does not permit detailing them all:
Fund launch. Longer term can denote stable, consistent activity.
Fund composition. What kinds of securities: stocks and bonds, cash, commodities, from what countries, sectors, in what currencies? What percentage asset allocation?
Portfolio turnover rate, annually. High trading means higher costs, lower turnover tends to be longer-holding patterns.
Fund manager tenure. Very important — longer time frame and experience does count. High manager turnover is not desirable.
Mutual fund company reputation. Again, quality, not quantity is necessary
Peer performance against a benchmark, say the S&P 500 Index. Did the fund outperform, or lag, and what was the cost to you the investor?
Consistency is key, too. You are looking for consistent performance, in good and bad years because this denotes good fund management and no surprises.
Cumulative performance, compared to annual performance. Is the performance consistent over time, or is the fund a one-year falling star.
Fees. We will break those down next week as we define passive versus active management fees.
Volatility and leverage employed. Two extremely important components (or detriments) of a mutual fund.
Next week, we review the mutual fund criteria against the performance of the oldest, continuing mutual fund in the US, the Massachusetts Investors Trust, which was incepted on July 15, 1924.
Why don’t I review a local Bermuda fund? Moneywise must remain neutral, completely unbiased — to give you the best information available to help you make your own investment decisions.
Be wise with your money. It should only slip through your fingers once, right into a savings or an investment account.
• The Money Flow Effect and Investments, The Royal Gazette, October 19,2019. https://tinyurl.com/y378xtoe
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: email@example.com
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