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Monitoring – an overlooked aspect of fund selection

Fund monitoring and deselection is an often overlooked area but a diligent approach can save time and have long-term benefits.


PA Europe

Over the years, there have been numerous papers and books dedicated to the art of fund selection. However, there is an equally important question that tends to be overlooked: when to dump a fund?

To illustrate that point: the term ‘fund deselection’ only gets 15 hits on Google, compared with 344,000 for ‘fund selection’.

Every self-respecting fund selector has a standardised fund selection process. But when we asked the fund selector audience at a recent pan-European EI congress, half of delegates said they did not have a specific process on how to deselect funds (see chart 1). 

Being selective

Fund monitoring and deselection often do not get the attention they deserve, says Jeroen Vetter, a consultant who has helped several Dutch wealth managers over the years to improve their fund selection process.

“My experience is that there usually is not much wrong with the way they select funds. The process is usually robust. But fund selectors often stop there. They don’t fully appreciate that monitoring should be an integral part of the fund selection process,” he says.

According to Vetter, fund selectors should already have the monitoring process in mind when selecting a fund. “They should identify the strong and weak points of the fund during the selection process,” he says. “This ought to give fund selectors vital hints on what areas to monitor most strictly.”

He advocates adopting a ‘traffic light’ model (see chart below), which involves fund selectors assigning a green, orange or red colour to each aspect of a fund when doing their due diligence. 

“For example, if a fund is small, or is relatively unimportant for an asset manager in terms of revenue generation, they know size is a criterion they should mark orange or red, because such a fund risks being merged or liquidated,” he says. “If a fund is highly dependent on one manager, or if a few analysts are responsible for all the alpha, it is important to monitor team changes.” 

Performance focus

However, in practice most fund selectors tend to just monitor performance, if only because qualitative aspects of a fund are more difficult and more time-consuming to track. And in the end, clients judge their wealth managers on the returns they deliver. Therefore, this is the one area that logically gets most attention.

Tanja Wennonen-Kärnä, senior portfolio manager at Evli Bank in Finland, is one of these fund selectors who initially focus exclusively on quantitative factors when monitoring a fund.

“In addition to the funds we are invested in, we also monitor a few competitors in the same asset class,’ she says. “Altogether, we monitor about 40 funds, including some in-house funds. We monitor the performance of all of these funds superficially on a weekly basis. Once a month, we conduct a more in-depth review, to check whether anything unusual has happened to the fund”. 

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