Edmund Yun of CIBC Private Wealth Management discusses some of the key issues and considerations for investors when looking at mutual funds, and explains how advisers can help in the process.
Date: Jan 2011
Trading mutual funds
When looking at how many Asian investors trade mutual funds – which is similar to how people in other parts of the world trade stocks – Edmund Yun said in an interview that this is only suitable in more volatile markets, where investors might not want to invest over the longer term, and therefore might want to trade some of their non-core holdings.But, he said, he would recommend clients to hold global stock or global fixed income funds as part of their core holding – and not to trade them.
Yun said that research covering 1996 to 2006 supports the need for investors to ensure they are diversified in their mutual fund investments.
The research showed that no single market is consecutively in the top three performers, he said. This means that if investors buy last year’s top-performing market, then they shouldn’t expect it to achieve the same performance the following year.
Chasing top-performing funds is therefore not a sound investment strategy, advised Yun, and clients should instead be fully diversified to match their strategic asset allocation.
When it comes to avoiding excessive concentration through mutual funds within the context of an individual’s overall asset allocation, Yun said he recommends clients to do a monthly review, to act as what he described as an auto-stabliser.
For example, a bullish media report on commodities might lead to individuals switching out of their initial holding and putting everything into commodities. Yet this is the most dangerous time to do it, he explained, plus when a market falls investors will tend to hold the fund to wait-and-see if it recovers.
Yun said this shows the downside of investors not sticking to their strategic asset allocation.
Common mistakes
According to Yun, some investors think mutual funds can only go up, so if after two or three weeks they don’t see a fund rising, clients will be asking their advisers why this is the case.
Instead, investors need to look at the benchmarks and what types of strategies each fund uses. In general, he explained, if the fund is bottom-up in its focus, then it should be less correlated to the market. Whereas if it is top-down, it will more closely track the index.
Investors must also ask questions about the liquidity of the fund, he added, and not make any assumptions without first reading the prospectus.
Advising clients
Yun said it is vital for investors to look to create a diversified portfolio of mutual funds as a core investment over a three- to five-year time horizon, with at least an annual rebalancing.
In addition to liquidity, he said it is important to look at the management fee, and the transparency of information in terms of whether the fund makes information available to investors.
Such factors drive many of Yun’s buying decisions on behalf of the bank’s clients when it comes to mutual funds.
Differentiating fund providers
To differentiate the many fund managers on behalf of its clients, Yun said CIBC Private Wealth Management makes use of independent research, focusing on the Sharpe ratio, especially for at least three years.
New fund houses tend to have constraints to limit their early-stage developments, he explained, plus their sustainability is in question.
Yun said it is also important to use independent research to track whether a particular investment team is in good shape and is following the fund’s mandates. Only once there is at least a three-year track record is it possible to see a trend, he said.
Whether the funds are held by a third-party custodian is another important factor to look at, he added, to avoid any conflicts of interest.
Yun said he also does a year-on-year review of the fund houses which are on the firm’s private banking platform, to ensure they continue to give the bank comfort in terms of the fund’s investment approach and strategy.
