How Do We Choose the Funds We Use?

Does it seem like there’s been an extra level of uncertainty lately, threatening your investment plans? Of course, there are always big events going on; that’s the world for you. But today’s brew of geopolitical threats, inflation trends, rising interest rates, recessionary fears, and lingering COVID concerns may feel especially daunting. The market’s volatile reactions to it all may have left you wondering whether, this time, seemingly heightened risks call for a higher-alert approach to your investment selections. We would like to assure you that we are always on high alert and have a detailed research process related to our chosen investments.

Seeking Clarity in Volatile Times

If you’re seeking clarity on how to position your investment portfolio, the daily spew of financial commentary won’t help. To cut past the clutter, let’s revisit our investment selection process, which speaks to the importance of looking past today’s unsettling news in pursuit of your greater, long-term goals.

The first step in our investment process is deciding which asset allocation is right for you (more on this topic another day). Once an asset allocation decision has been made, we are very thoughtful about how investment exposure to each asset class is obtained in portfolios. There are thousands of mutual funds to choose from and they each have different levels of historical performance, fee structures, volatility, and other factors to evaluate. The key questions that we seek to answer in researching funds for investment are:

1) How has this fund performed historically, net of fees, on a risk-adjusted basis?

2) Is the fund likely to invest in a similar manner going forward and do they have the resources and structure to do so?

There are a few key factors we consider that help answer these questions for us and better enable us to select mutual funds in which to invest. They are:

Performance (what are the investment results of this mutual fund relative to the asset class benchmark and their peer group over the long term?)
Fees (are fees reasonable and are funds earning their fees based on their historical risk-adjusted performance?)
Risk (what is the volatility of this mutual fund relative to the benchmark and its peers? Is outperformance only achieved by taking more risk? How should we expect this fund to behave in down markets? Up markets?)
Institutional Stability (how long has the mutual fund management company been in business? How stable are they?)
People & Process (How does the mutual fund achieve its results? Are its processes and results likely to be sustainable and replicable going forward?)

Once we have selected investments, we continue to monitor them regularly to make sure they are behaving how we would expect them to through both up and down markets. We also make sure that they continue to earn their fees and provide competitive risk-adjusted performance. Finally, we watch for any manager changes or structural changes at the asset management firm that could create disruption to the funds’ processes and performance in the future.

By starting with this clear research process, we are able to eliminate as much distracting noise as possible. It is a whole lot easier to remain resolute when market turmoil rears its head. One thing fund selection should not depend on is reacting to the daily news. The world’s financial, economic, and geopolitical events do influence your returns. But just as the weather is one thing and climate is another, our focus remains on harvesting seasons of bounties, while standing firm against the inclement days that come and go.