When comparing mutual funds, the first stop is usually performance numbers. Long-term performance is certainly important and should form a key part of the criteria for fund selection. Here are four other points that might help with your choices.
Understand the investment philosophy
By definition, a philosophy is a set of values, ideas and opinions. When applied to investing, a philosophy is the beliefs about how to produce long-term wealth. It is the structure for how the fund manager or fund company believes they will create wealth. The philosophy should be more than words on paper; it should be something that you can clearly see the fund company and its managers practice consistently. The investment philosophy at AIC strives to achieve the three universal needs of investors: preserve wealth by investing in excellent businesses; grow wealth by striving to invest in businesses in long-term industries; and minimize taxes by holding these businesses for the long run.
Understand the investment principles
A set of principles that guides investment decisions is critical. By understanding the principles, you can know what to expect from your fund’s manager and can match your personal investment objectives with the manager’s investment style. For example, if you’re a conservative investor you may want a fund manager who has short-term capital preservation as one of his/her main objectives.
Know the businesses in the fund
When you invest in a mutual fund, you’re really investing in a collection of businesses. The success of these businesses is what contributes most to your wealth creation. You should have confidence in these businesses; know their track records; and believe they are positioned to succeed in future years. You could start by researching a fund’s top 10 holdings. Check a recent annual report or a fund company’s website for the businesses’ names. Seek out some basic information. What industries do they operate in? What is their long-term track record and fi nancial stability? What products or services do they provide? Are they market leaders? Do they have a sustainable competitive advantage? Be sure you can answer the question that if you could only invest in one company this is the company you would choose.
Know the fund manager
The fund manager is the key person you trust with your wealth creation, so it’s worth getting to know the person’s career and investing track record. Sources of information include industry websites such as Morningstar.ca and Globefund.com. In addition to fund information, they may also provide independent analysis of the manager and his/her fund. The manager should have some longevity with the fund and their decision-making should also be consistent over time. Ask your financial advisor for a fund company’s statement of portfolio transactions and evaluate whether the fund manager(s) makes consistent and profi table decisions when adding and selling companies for the fund.
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