As you can see in the types of investment fund section, there are many different funds available. This section explains what to look for when selecting one for your portfolio. It splits funds into two distinct types, active investments and passive investments, as there are different things to consider for each.

Before selecting the individual funds you’re going to use, it’s important to determine your attitude to investment risk, investment objectives and asset allocation. The constructing your portfolio section can help you to do this.

When selecting a fund, you should conduct your own analysis based on factors which are important to you, because there is no definitive answer as to which fund is best, and a big part of selection of investment funds is subjective by nature. The overriding aim should be to select funds which fit well with your appetite for risk and investment objective.

Picking an investment fund

As explained in the types of investment fund section, actively managed funds are those where a fund manager makes investment decisions with the goal of outperforming a particular benchmark, such as an index or the performance of their competitor funds.

There are 5 main things to consider when choosing an active fund:

  1. What do you want to invest in? For example: UK Companies, Emerging Markets, Corporate Bonds, Commercial Property etc.
  2. What are the options in your chosen sector? You need to narrow down the available funds that invest within the particular sector you would like exposure to. This could be done through Strawberry’s available fund search facility or within the platform itself. The next 3 points should then be considered.
  3. What are the objectives and risk levels of the different options? Even amongst funds in the same sector, some may look to achieve capital growth whilst others may look to achieve a high level of income. A measure of the volatility of a fund is a key risk metric which you should look at.
  4. What are the key characteristics of your chosen fund? How big is the fund (a big fund may have struggle to buy/sell securities and therefore have liquidity issues)? What yield (income) does it produce? What is the process by which the fund is run? How is the fund currently positioned (e.g. sector, geography and market capitalisation breakdown)?
  5. How has the fund performed in the past? Investors can consider the cumulative performance of a fund (e.g. over 1 year, 3 years and 5 years) and/or discrete performance (e.g. 2008, 2009, 2010…) relative to the fund’s sector average or benchmark. However, the strapline ‘past performance should not be seen as a guide to future performance’ (or similar) should not be forgotten. A key ratio to consider for performance is the fund’s ‘alpha’. Alpha is a measure of a fund’s over or under performance compared to its benchmark which is exactly what an actively managed fund is trying to do; therefore a consistently positive Alpha shows the manager is achieving their core objective.

As explained in the types of investment fund section, passive funds aim to mirror or track a particular index. They are generally cheaper than active funds but do not provide the opportunity to outperform the index they seek to replicate.

There are 5 main things to consider when choosing a passive fund:

  1. Which index are you looking to gain exposure to? You need to decide on which market you would like to access, and within that market which index is most suitable for you to track. For example, if you want exposure to the US equity market, you could choose between the Dow Jones Industrial Average or the S&P 500, amongst others. You would then need to consider the composition of your chosen index, to ensure that it provides you with the exposure you are looking for. Did you know for example that the Dow Jones Index only covers the larget 30 companies in the US industrials sector?
  2. What are the options for that particular index? You need to narrow down the available funds that track the particular index you would like exposure to. This could be done through Strawberry’s available fund search facility or within the platform itself. The next 3 points should then be considered.
  3. What is the cost of the fund? Passive funds are generally a low cost option, but their costs vary even when funds are tracking the same index.
  4. What is the tracking error of the fund? The tracking error of a passive fund is a measure of how closely it follows the index it is aiming to replicate. Tracking errors can occur from the methodology used to track the index, costs incurred by the fund, and timing differences between when securities are bought and sold within the fund compared to the index itself.
  5. Who is the provider of the fund? It is worth looking at the provider of the fund to ensure they have a good track record and are financially secure, in order to minimise counter-party risks.
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