wrapper

Not only the film industry has glamorous events such as the Academy Awards (better known as the “Oscars”) and the “Golden Globe Awards,” where juries select and reward the best movies from their point of view. The mutual fund industry also celebrates its best performing funds with fund awards ceremonies at the beginning of the year. As with movies, these fund awards are determined by a jury (a qualitative screening) or with a quantitative screening on a global basis by the likes of Morningstar and Thomson Reuters Lipper, who use a similar quantitative methodology for their awards all around the world. Or the funds are selected by local players, who award funds only in a single country or region according to their definition of the best funds.

Are awards useful tools for fund selection?

Fund awards reward the past performance achieved by a portfolio manager. Since past performance is the only way to evaluate the achievement potential of a fund manager, fund awards—like fund ratings—can be used as a tool to support a quantitative fund selection process.

Opposite to fund ratings, where normally a group of funds gets the highest score, there is only one winner in each peer group for a fund award. In this regard, one can assume that an award can be used as guidance for fund selectors. But this is only true if the methodology on which the award is calculated suits the expectations and requirements of the investor, especially with regard to risk-adjusted returns. It is key for investors who want to use awards as tools in their fund selection process to know the methodology and/or selection process employed in the determination of the award winners.

Unfortunately, the majority of funds are not able to maintain their top position for the succeeding year. Even though some observers see this as a big disadvantage of fund awards, it is the nature of the beast; not all investment approaches such as value or growth work well in any given market environment. But, unlike for movies, there are funds/fund managers that are able to win the categories year after year, and these might be the funds an investor should examine more closely.

Fund flows as an indicator of future performance

Another issue that can’t be neglected is the impact of high inflows and outflows on a mutual fund. As shown in the study “The Kiss of Death” by Matthew R. Morey, a good rating can have a massive impact on the flows into a fund, which can at some point have negative impacts on its performance. Even though the author analyzed only the impacts from one rating and the negative effects do not apply to every fund, investors need to monitor the flows of all funds in their portfolio regularly, so they can act appropriately if a fund becomes too small or too large.

Summary

Fund awards, like fund ratings, are an additional tool that can be used by investors to support their fund selection process, as long as the criteria used to nominate the award winners suit the needs of the investors. It can be concluded that fund awards ceremonies, which are typically held over the first quarter of any year, are not only a show event where the employees of the mutual funds industry enjoy a glamorous evening and the organizers do their marketing bit; the funds also get a lot media attention at these ceremonies. But a fund award can’t replace a full fund analysis process; investors still need to invest a lot of work in their fund selection process even if they may use awards as guidance. At the end of the day, as it is for the movies, not everybody likes all the winners; everyone is looking for different funds that may be the winners the next year.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

Detlef Glow

Detlef Glow is Head of EMEA Research at Lipper, a Thomson Reuters flagship brand. In this position he is responsible for the Lipper research reports on the European ETF industry and special research reports on newsworthy market topics. Besides these tasks, he is acting as spokesperson for Lipper on TV and in print media, as well at conferences and expert panels. Detlef joined Lipper in mid 2005 from Feri Wealth Management, where he was Director of Portfolio Management, managing segregated accounts for high net worth individuals (HNWI). Prior to this he spent nine years with Tecis Holding AG, most recently as Head of Fund Research for Tecis Asset Management AG. In this role he was responsible for the quantitative and qualitative fund research for the Tecis fund of funds, the HNWI accounts and the recommendation list of funds for the financial adviser arm of Tecis. Detlef has an MBA focusing on Financial Services from the University of Wales/Cardiff, as well as a BA in Business Administration.”

Website: www.lipperweb.com

Press

Les clients vont-ils bientôt investir en ayant ...
La sortie de l’Union européenne va-t-elle faire ...
La mission du cycle de conférences organisé à ...

Press

Even spoilt Muscovites are surprised by the ...
Embraer presents the Phenom 300 Jet at ...
Following the success of “The Most ...

About Us

Shorex is a specialist media group for the wealth management industry and the high-end luxury market. Our purpose is to provide our partners, delegates and visitors with an effective networking platform where they can forge productive relationships and come away with strong ideas... read more