What to make of unit trust industry gongs
● Unit trust industry awards such as the Morningstar awards provide an insight into which managers and houses are consistent performers, and serve as a guide to choosing a good manager or fund.
Awards are a reliable guide to performance if they use a measure of consistency of risk-adjusted performance rather than merely honouring the fund that is currently at the top of the performance tables.
The Morningstar awards measure top performers on the basis of both straight performance and risk-adjusted performance, taking into account their volatility.
But performance alone is not enough to help you choose a fund. Before you begin looking for a fund, you need to identify your investment needs and look for funds that could deliver what you need — for example, income or growth and what risk of losses over various periods you can afford.
Then you can consider performance, among other factors, but bear in mind that performance is backward-looking, and past performance is no guarantee of future performance.
When Morningstar awards its Star Ratings to funds, it uses performance as well as some qualitative measures of the people at the manager, the investment processes used, and the fees charged.
When Morningstar assesses the people who manage funds it considers not only their experience but how they are incentivised and whether they invest in the funds they manage.
Morningstar has found there is a direct correlation between the level to which a fund manager is invested in the fund they manage and how well a fund performs, and how long a fund manager stays with an asset manager.
Sometimes good performance is a result of a manager or team of managers. If they leave, the fund’s performance track record may change.
When it considers the investment process, Morningstar considers whether the manager can explain their investment process and can prove it is following that process.
The fund manager should also be able to tell how the fund will perform under different market conditions, and its performance should be consistent with that.
Morningstar has found fees are a good predictor of future performance, because higher fees create a higher hurdle to after-fee performance.