What is a Fund Manager?
We all understand the fund manager as the one who manages our money. But the fund manager definition is quite nuanced. Here we look at who is a fund manager and what the actual fund manager means. We also look in detail at what is a fund manager and what is role that the fund manager plays. Here is a quick take.
Who is a Fund Manager?
Mutual funds and portfolio management services are managed by professionals or fund managers. These fund managers have the responsibility of executing the agreed strategy and managing the trades of that particular portfolio. Most of the fund managers are evaluated based on whether they outperform the index and if so, then to what extent. A typical fund manager must possess a high level of education, professional accreditation, and licenses as well as appropriate levels of investment management experience. Typically, fund managers globally happen to be specialized CFAs with a focus on investment analysis and portfolio management.
Quite often, fund management is a complex task and cannot be done by just one person and needs a team. Managed funds are diverse and manage a wide range of financial instruments like shares, commodities, currencies, bonds, etc. That means that on occasions co-managers will be appointed to ensure that people with the requisite skills and experience are working for the investors of the fund.
The basic role of a fund manager is to select what shares, bonds, and other assets the fund will buy with the investors’ money entrusted to them. The fund manager is normally supported by an investment committee that will focus on price-to-earnings ratios, asset price momentum, sales, earnings, dividends, and a variety of other such metrics. Based on these inputs and his discretion, the fund manager builds a portfolio of assets to accomplish the objectives of the fund.
Most fund managers enjoy leeway and freedom when it comes to managing money. While there is a broad constitution, the fund manager broadly decides specific markets, financial assets, and risk tolerance to handle. In short, the day-to-day operations are predominantly handled by the fund manager, and the PMS client or the investors have limited say on the day-to-day operations. To ensure the fund managers can enact the strategy of the fund as they see fit, investors are usually allowed to access details of the fund like portfolio, expense ratio, etc only periodically.
Role of a Fund Manager?
Broadly, one can say that the fund manager manages the fund and has accountability in terms of risk management and return generation. However, the role of a fund manager can be granularly broken up as under.
- Research is at the heart of what a fund manager does. Their day-to-day job typically involves selecting the best stocks, bonds, and other financial market instruments which will deliver results as per the objectives.
Fund managers take decisions on what to buy and what to sell and when. However, to do this, they delve deep into the financials of listed companies. They also leverage several tools and software platforms to screen stocks.
In addition, the fund manager also reads financial briefings, attends company meets and stays updated about global economic events and their impact. They also meet industry experts and company personnel to understand the nuances of the stock.
Normally, the fund managers create a shortlist of investment candidates based on their research where the stock is in line with the investment objective of the fund they are managing.
They also coordinate with the team of traders and dealers within the fund as well as outside the fund to get the best value for money trades and ensure that the fund and its investors stand to gain.
Fund managers and their team also prepare periodic reports for investors detailing the portfolio composition of the fund, explaining portfolio decisions are taken and performance. Normally, fund managers accompany the sales team on sales calls.
Fund managers have the important task of managing liquidity and risk. They have to ensure the fund has adequate liquidity to handle redemptions and there is no forced sale required.
Difference Between an Active and Passive Manager
Let us first look at an active manager. Typically, the active fund manager decides which stocks will go in and out of an equity fund according to the performance of the markets and the individual stocks. In other words, the active fund manager has accountability for the performance and for beating the benchmark index over the medium to long run.
On the other hand, a passive fund manager manages index funds and ETFs where the main task is to mirror the index. What goes in and out of the index is not at the discretion of the fund manager. The focus of the passive fund manager is to keep expenses low and to keep tracking errors as low as possible.
Frequently Asked Questions Expand All
At the end of the day, the fund manager is responsible for the investment strategy underlying the investment objective. Poor planning and execution of that strategy will result in even a sound investment objective failing an investor. Hence the fund manager must be evaluated on a number of parameters. Here is a quick summary.
The first way to evaluate a fund manager is based on the track record. This measure is very common when it comes to assessing performance. Though past performance is not a barometer for the future, it still is an important component in selecting a consistent performing fund and manager. Look for consistent performance over market cycles.
Focus on investment style and look for consistency. You don’t want a fund manager who shoots from the hip. Styles may vary and as long as the style works, it is good enough. For example, one fund manager may invest for the long-term while another may take several short-term positions. As long as the style is consistent and it is working, that is good enough.
This may not always be the right metrics, but keep a watch on whether the fund manager is invested in his own funds. That is called skin in the game. A fund manager charges a fee for managing other peoples’ money, but do they invest their own money in the fund? Ideally, they should.
Does the fund manager outperform the benchmark index on a TRI basis? Each fund is benchmarked to an index. If the fund manager consistently outperforms the benchmark index, it may be worth investing in. It is important to give more weight to performance during market declines. When the going is good, all fund managers may better their benchmarks. It is tough to separate the wheat from the chaff. Investors should opt for a skilled manager over one who just got lucky
This is actually an iterative process and does not happen overnight. This experience is key for a fund manager in shaping his market insights, understanding and choosing the right investment under different market conditions. Typically, fund managers look at company fundamentals including metrics like liquidity ratios, profitability ratios, revenue growth and cost indicators.
After assessing these factors, the fund manager prepares the final list of stocks that will become part of the portfolio based on outlook and past experience in analysing stocks. A similar process with is also employed for bonds.
Here are some qualities to look for in a fund manager
- Look for a manager with skin in the game
- Watch for style drift
- Focus more on risk adjusted returns
- Use Fama to gauge the manager's skill
- There can be a lot of value in out-of-favour managers
- Avoid fund managers who churn the portfolio too aggressively
- Avoid fund managers who attract too many investors