It has been at least eight years since Moneywise: Bermuda reported in depth on the common mutual fund. The mutual fund investment vehicle (more than 65,000 globally) is still the most favoured structure for pensions, small and large investor portfolios as well as allocation components of very large institutional managers.

Growth and Consolidation

There has been growth in this sector and consolidation. Some fund managers have been absorbed by larger name brands, while others crashed and burned, bringing new entrants into the field. Some mutual funds are composed of pure underlying individual security holdings. Other mutual fund managers may actually hire best in breed sub-managers for various pieces of the fund while putting their own brand label on the end product.

Transparency, Accountability and Uniformity, Professionalism

There is much greater consistency of reporting on fund structure, performance, fees, and many other criteria than there used to be. In 1998, when I returned to Bermuda after working in the dominant United States investment world, it felt like stepping back in time. Offshore investor information was scant, unavailable, often vague, and very inconsistent. One individual presented me with a one-page copy of fund newspaper advertisement that was considered the fund profile fact sheet. Funds did not uniformly report even rates of return, making it extremely difficult to compare gross returns against those fund managers where all management fees were deducted prior to the stated rate of return. Comparisons to other like-type funds in the same peer group was extremely difficult, expensive to find, necessitating having a friend with Bloomberg access or purchasing costly mutual fund comparison software.

Today, our local fund reporting is as uniform, transparent and accountable as any other international finance centre. Additionally, we have Internet access to just about every mutual fund out there. We are slowly seeing the demand for knowledgable licensed qualified investment professionals increase. This elevation of quality has been driven by you, the investing public, as you have become more aware of needing the advice of a trusted finance professional. In future articles, I will provide tips on finding and comparing mutual funds via the web as well as using good old investment homework methods. We have come a long way.

More Choices

Bermuda residents have more choices. There are more than seven or more domestic investment firms offering mutual funds. More choices mean more competition.

This is good for the consumer and good for the investment product provider. It brings everyone up to the top of their game. The more you understand about what you own and the choices that you make, the better you will feel about the long-term future of capital market investments.

The Mutual Fund Structure

We will start with what a mutual fund is, following along in articles about the prospectus, investment policy statement, fund criteria, comparing to benchmarks and peer groups, fitting the fund to your lifestyle, understanding the difference in risk between two funds with the same performance, questions to ask your financial salesperson, understanding that citizenship - say United States - and tax regimes will also play into good and bad mutual fund choices, and where to find additional information.

We will use real examples; there are no reporting rules except that readers should know that the names will be changed. This column exists to provide educational investment advice rather than specific tips on specific investments.

Mutual Fund Investment Criteria

See the chart attached. What should we look for in a mutual fund? The criteria list is actually pretty long, but performance should not be the first or only consideration. Here are a few preliminary points for thought perspectives.

Expense ratio (the cost of running the fund)

Is the fund cost lower or higher than its peer group? If the mutual fund is actually a fund of fund structure, what are the sub-fund underlying costs as well as the overall management fees. Expenses are relative: if the performance is superb, no one minds paying the price as is evidenced with high fees charged by successful hedge fund managers. You should still understand what you are paying for, however.

Turnover (the number of times expressed in percentage that assets are bought and sold in one year)

Is the fund stable, or are the managers buying and selling everything in sight? This causes volatility and extra fees that may subtract from the eventual return. You may want a stable manager having a longer term view than just chasing performance.

Volatility Risk Rating

Means that you'd probably like your invested money to take the least risk to earn the same return, where as another fund with an equal return may be extremely risky and volatile.

Ranking

There may be thousands of funds in the same category. You want yours to be consistently in the top 25 percent of the field.

These are all evaluation criteria that will distinguish this fund These are all evaluation criteria that will distinguish this fund from its competitors and help you with the decision on which to ultimately purchase.

Other comparison criteria include:

• Reputation of fund company,

l Types of companies (and their stock) that the fund invests in,

l Fund company's tenure in business,

l Fund manager's investment style,

l Composition of the fund by sector and by kind of investment,

l Fund manager's reputation and professional background,

l Length of time the fund manager has managed the fund,

l Report on load adjusted rate of return,

l Currency exchange risk,

l Total net assets held in fund (this is an important one as small funds below $80 million may not be as cost efficient) and that may affect your rate of return for you, the fund owner.

l And of course, what of your intended investment goals?

That's just for starters, there are many other criteria for the fund and questions you need to ask your financial advisor, too. Stay tuned for this continuing series, get out your mutual fund investment fact sheets, including your pensions and be prepared to do some research.

Martha Harris Myron, CPA, CFP (US) TEP (UK) JP- Bermuda is an international Certified Financial Planner™ practitioner. She specialises in independent fee-only cross-border tax, estate, investment, and strategic retirement planning services for Bermuda residents with US/multi-national connections, internationally mobile people and US citizens living abroad. For more information contact martha.myron@gmail.com The article expresses the opinion of the author alone. Under no circumstances is this advice to be taken as recommendations to buy or sell investment products or as a promotion for financial plans. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.