October 24, 2014

Finding a Fund House to Trust

Trust plays a key role in the relationship between investors, financial advisors and fund houses.  In this post, I offer a framework for an investor or a financial advisor to evaluate the trustworthiness of a fund house.  Please note, it is not my intention to present readers with my preferred list of fund houses.  I intend to provoke thought on the subject in the hope that it will facilitate a meaningful discussion between investors, financial advisors and fund houses.

To most people that I have spoken to, the performance of a scheme is considered, in itself, a testament to the credentials of a fund house.  Some, on the other hand, believe that the number of investors or the amount of money managed is a great indicator.  “They must be doing something right to attract and retain so many investors,” I’m told. Or, “So many investors can’t be wrong.”   Frankly, neither of these parameters cuts much ice with me.  I regard the achievement of a pinnacle in the number of investors or the money managed as likely a marketing triumph, and I question our ability to accurately analyze performance and distinguish between luck and skill. 

In fact, I do not believe in starting by evaluating results (such as money managed, or performance).  Rather, I believe in assessing fund houses and fund management teams independent of their results, and then expecting good results to be a logical conclusion of the selection process.  I am not alone in this thinking- I have met a few financial advisors who have a similar thought process. Morningstar, as part of its stewardship grading, also follows a similar approach. In India, as far as I know, Morningstar hasn’t released any formal grading of the stewardship of fund houses.  However, as part of their Analyst Ratings for schemes, they do give a brief description of their opinion of a fund house’s stewardship.  At the time of writing, these ratings span 12 fund houses.

While I do not claim to have the thoroughness and structure that Morningstar follows, for whatever it is worth, I present below my framework for fund house analysis:


I start my evaluation process by looking only at fund houses that have schemes in existence (and under an unchanged fund management) for at least one complete stock market cycle (for equity schemes) and at least 3 years (for debt schemes).  I am open to investing small amounts with fund houses that do not make the cut on this parameter.  However, for me to invest significant amounts or to recommend to others, a fund house has to meet this criterion.


This represents a mostly qualitative assessment of the people hired by a fund house, not just in the fund management team, but across other visible areas such as sales and customer service.  I believe that the competence and personality traits reflected across people in an organization is reflective of the thought process of the top management that drives the firm.  Yes, I lay an extra bit of emphasis on the fund management team and closely look at their experience in fund management, and understand their perspective.  I also attempt to get a sense of what has worked for them and why, and what has not worked for them and why.


This essentially boils down to an analysis of the logic and investor-friendliness of visible processes.  For instance, the manner and speed in which investor questions and complaints are addressed.  Or the ease offered to investors wishing to invest directly.


This is a checklist of practices that I would not expect a fund house to follow.  It is a list that continues to evolve as questionable practices emerge.  Here are some key points that I look out for:

  • Frequent launches of new funds
  • Unjustifiably high expense ratios
  • Ambiguity and inconsistencies relating to expense ratios (includes non-disclosure in fact sheets, and frequent changes)
  • Dubious representation of fund performance
  • Inordinate incentivizing of financial advisors
  • Inexplicable changes in investment objectives of schemes

By applying these filters to the forty odd fund houses currently existing, there are only five that I feel comfortable recommending and investing significant amounts with.  To set the record straight, I accept the possibility that I may have a brutal evaluation process.  However, it is one that I have found no compelling reason to compromise on.

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