How to Pick the Right Fund

There are many ways to go about investing in the stock market. We can achieve market-like returns simply by investing in index trackers. In Singapore, there are the SPDR Straits Times Index Exchange Traded Fund (SGX: ES3) and Nikko AM Singapore STI Exchange Traded Fund (SGX: G3B) which tries to mimic the returns of Singapore’s Straits Times Index (SGX: ^STI).

The STI has returned about 10.1% annually for the decade ending 31 March 2013 and investors in the ETFs can get returns very close to what the index will continue to achieve in the future. And if the future is anything like the past, a 10% annualised return is certainly nothing to sneeze at.

On the other hand, there are other investors who would like to do better-than-market returns through investing in individual companies (that’s us at Motley Fool Singapore!) or to invest with actively-managed mutual funds or unit trusts.

A lot has been shared about the art of stock-picking and individual investors have an embarrassingly rich library of investing-literature to learn from (the books and letters from investors like Warren Buffett, Peter Lynch, Benjamin Graham etc. are great examples). But for investors who wish to delegate the responsibility of picking stocks to fund managers, the situation becomes murkier.

The odds of picking a professional fund manager that can beat the market are surprisingly low and for market-losing funds, that means the management fees being paid to the managers have mostly been for naught. Investors will be better-served by investing in index trackers. But, there are funds or managers who can turn in great performances over time. The question remains though, ‘How do we identify them?’

For that, we can turn to Sir John Templeton – an exceptional stock-picker who turned every dollar of his investors’ money in 1955 into more than $20,000 by 1992 (for comparison, $1 invested into America’s stock market index, the S&P 500, would have turned into ‘only’ $1000) – who might be able to provide some clues to answer our question.

In Investing the Templeton Way, co-authors Lauren Templeton (Sir John’s grand-niece) and her husband, Scott Philips, shared Sir John’s investing exploits, strategies and philosophy. In one of the book’s chapters, they described how Sir John invested in the Korean stock market not by picking stocks there, but by investing with a fund manager that specialized in that market. The Korean fund increased by 267% in just two years after Sir John’s investment so there should be some lessons in there for us all.

So, how did Sir John go about identifying this fund manager? He found a fund manager whose approach to investing mirrors his.

Sir John was a value investor who wanted to buy stocks at a low Price-Earnings (PE) ratio and he was comfortable holding such stocks for years. He believed in those methods and rightly so, judging by the riches he has brought to his investors. Because of that, he sought to find a fund manager with an investing approach similar to his. Sir John knew what good investing was all about and wanted to see his Korean-stock fund manager having similar attributes. In that way, he could delegate the responsibility of picking the right stocks to the fund manager knowing that the odds of success will be high.

And that brings me to the key message of this article: a person has to know what constitutes good investing to greatly increase his odds of finding a good fund manager. That’s the real tip that Sir John left for investors wanting to find good fund managers.

If you think that trading in-and-out of stocks is hazardous for long-term returns, then find a fund that holds its stocks for years (you can check its portfolio turnover ratio for that). If you think buying low PE stocks is the way to go and find a fund that’s advertising its low PE-strategy, then calculate the average PE ratios for its stock holdings to see if its walking-the-talk.

The bottom-line is this: There’s really no free-lunch in this world when it comes to investing. It pays to put in some effort for some investing self-education. Some investors can strike it lucky and invest with the next Warren Buffett-in-the-making. But don’t count on luck alone in investing – that would be pure folly.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.