3 Types Of Fund Management Styles You Need To Be Aware Of
Let's talk about the different investment styles that fund managers often adopt and what you need to know before investing in either style.
The key consideration when examining the investment style of a fund manager is to look out for the alignment of the fund manager’s investment style with our style.
This is because by selecting fund managers with similar investment styles, we are avoiding any unpleasant experiences that may arise when the fund manager behaves in ways that we would disagree with.
While the market and the internet like to generalize funds to be either in the passive or active management category. I prefer to see things on a scale rather than in extremes.
On the left-hand side, you have the indexed funds that are designed to replicate the behaviour of a specific sector, country or region. As a result, there is little to no management involved as no value is added by the fund manager apart from replicating the underlying exposure of an index.
Index funds are suitable for people who subscribe to the efficient market hypothesis and do not wish to have any form of management involved within the fund.
The efficient market hypothesis is a belief the market participant is all-knowing and the price is a perfect reflection of all information. Therefore, neither technical nor fundamental analysis is useful in generating an excess return.
2. Actively Managed
On the right-hand side, you have the actively managed funds that are designed to deliver an absolute return to their investors. As a result, the fund managers usually have full discretion as to what they can invest in and would often deviate from the underlying index allocation and investments.
Actively managed funds are suitable for people who believe that the market is inefficient and would like to profit from the inefficiencies.
3. Passively Managed
In the middle, you will have passively managed (a.k.a smart beta) funds that are designed to resemble an index but take actions to improve its performance. As a result, the fund manager often uses an index as a reference and includes or excludes certain businesses at their discretion in an attempt to improve the fund’s performance.
As someone who does not subscribe to the efficient market hypothesis, I tend to seek out passively managed funds that can deliver slightly higher returns than the index without deviating too much from the index’s underlying exposure.
If I am unable to find any good passively managed funds for a given market, I will then fall back to the index fund just for market exposure.
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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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