7 Major Factors Affecting Performance of a Fund


 

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There are quite a lot of misunderstandings among new investors about how unit trust fund performs. One of them is about pricing.  They thought that the price of unit trust will be pushed up when there are many people investing their money into a fund.  This is especially true when they come from a stock trading background.

There are quite a number of factors influencing the pricing or NAV (Net Asset Value) of a fund.  This article just lays out 7 major factors. For simplicity, the formal technical term “NAV” of a fund will be just referred to as “fund price” or “fund pricing”.  The rise and fall of a fund price is commonly called “fund performance.”   A proper understanding of how fund performs will help us do our investment with unit trust with better efficiency.

1. Stocks Selection

First and foremost important factor influencing the fund performance is, perhaps, the stock selection. Normally, each fund will utilize the pool of cash entrusted by investors to select a basket of stock. This basket of stock could be numbered as many as ranging from 40 to 100 stocks. The daily fluctuation of its price is determined by the average price of its entire basket of stock selected upon market close on each day. That’s the reason why fund prices are always come out at least one day late.

When a fund selected good performing stocks, fund price rises in tandem with those stock prices. Conversely true when otherwise. Every fund manager then tried their best professional discretion to select which they think might be the best stocks in the industry. However, not all of them always turned out to be what they have expected, because stock selection is basically an art rather than science. That’s why we have different level of performing result among different funds in the market.  And because of the vast number of funds selected, their total average prices would not differ greatly in daily price fluctuation.

2. Portfolio Reshuffling

Even though fund manager selects their best initial basket of stocks, those selections are more dynamic than static. There are specialized executors to manage this basket of stocks, whether to increase or decrease according to changes in strategies or circumstances.  These changes are called portfolio management.  These changes will impact fund prices for the better or for worst depending on the action taken.

3. Market trend

Because fund prices are affected by individual stocks performances, when market falls, almost all stock tends to fall with the market.  That’s why no single fund can escape a falling market. The only issue is the control of the magnitude of the fall. The least falling fund will be considered the best performing fund in a falling market. This is what we called measure according to its bench mark or market index.

In this regard, we as retail investors, the only measurement we have is only our own total capital. If our total capital is shrinking, we are failing in our investment.  That’s why we cannot afford to fall with any funds that are just measured according to its index, especially in a long bear market.  When our capital or investment is falling in a bear market, the fund manager’s salary is not affected in anyway and their future will still be secured, because they are regarded as doing a good job if their funds fall the least among all the other funds.  That’s why we as retail investors have to be very discrete as this aspect.

4. Management team interpersonal problems

Every fund employs a team of professional to execute daily fund management in various activities, like market visitations, data gathering, stock research or analysis, risk profile formulation, policy or strategy decision discussion etc. Like any business running, good performing fund requires a good working relationship among the members of the team.  If any team experiences any unpleasant working relationship, the ultimate performances of the fund will be affected.

For this respect, we as outsiders will never have any glue to any relationship discord going on within any fund house. But we can only see from the performance of a fund.  In this perspective, it is not wise for us to stick with a fund if its performance is deteriorating while other funds are performing as usual. We therefore, cannot leave our fund invested for too long un-attained. We have to constantly check and evaluate the performing condition of every fund invested as times go along.  We as investors cannot leave our responsibility totally to unit trust fund managers.   We need to stay vigilant for whatever instrument we use in our investment.

5. Fund size

Just like the game of juggling balls with 2 hands, it takes more skill in handling 2 balls than 3 balls. And from 3 balls to 4, it takes the person to advance from one stage to another.  The more the number of ball, the more the advance of stage it becomes.  It will finally come to an end when the maximum number of ball anyone can handle.  This holds true to the size of cash in any fund house.  The larger the fund size, the more the skill it takes to handle.  It will finally come to a limit when the fund house finally admits it cannot handle any more “ball” added into it. This will appear when a fund house finally announces “soft closure”. They would not take in anymore new cash investment until fund size to their comfortable level.

ball juggling
Juggling of balls with 2 hands

Investors have to be very discrete in hearing this kind of official release.  This is sometimes exactly opposite to what investors or the public thought to be good.  The fund house is actually telling loud and clear that they are having a fund size that is too large that they have reached a limit to their ability.  That means they will have hard time if they don’t stop the on pouring of new cash.  How do they know they have a hard time unless they are now experiencing it? Just like someone juggling balls, how does anyone know he had hard time handling 6 balls? It is when he has tried to reach 6 balls and failed most of the time.  Therefore, he prefers to handle 5 balls instead.

Therefore, we have to be extraordinary cautious for whichever fund house announces soft closure, because fund size really affects a fund performance in a long run. In this case, more often than not, the performance of this fund will go down for at least a period of time.  (More discussion on this issue will be covered in future article.)

6. Changes of fund house leadership

Fund performance whether good or bad is largely depending on a fund house leadership. Just like any business operation, leadership takes prominent role in any successful endowment. Even though all fund house operations are closely guided by its operational and investment policies, all fund houses would like to portray that fund performances will not be affected by any change of management leadership. But somehow, every individual leadership style and preferences are uniquely different from one another; any changes in fund house leadership will be somehow affected for better or for worst.

However, we as retail investors do not have any access to know whether there are any changes in any fund house leadership. They don’t have the obligation to make public declaration on any such changes neither. This is one of its disadvantages ~ lack of transparency, as retail investors using unit trust as investment instrument. However, we can come to know from the performance of the fund in recent trend. That’s why if any fund do not perform as good as before with no valid reason, we should take immediate response.  “Do not fall in love with your stock”, as the saying goes, it holds true with your mutual fund investment as well.

7. Seasonal dressing

Every fund house will have to do half yearly and annual report to their investors.  No single fund house wants to post a very negative report out there. Therefore, when the time getting nearer to reporting reason, these fund houses will do many artificial price jacking activities temporary.  This is what we heard of the term “window dressing” activities.   This will also happen when some seasonal political activities or campaigning are about to launch out. This is manipulated by related fund houses influenced by or favoring the ruling power.  These factors will bring about fluctuation of fund prices temporary. It will fall back to normal when these seasonal activities are over.

Looking at those above factors influencing fund pricing, would you choose to stay invested in any fund for long term without any monitoring?  I guess any investor, regardless whether unit trust or stock investment would realize there is no free lunch available on earth, as the saying goes…

Our effort in attaining to our investment will pay at the end of the day.  More discussion in unit trust or mutual fund investment will be released soon.. Please stay tune by subscribing to this web blog. If you have any opinion, do drop a few words at the comment section below, so that we can learn from each other and grow together.

Happy investing!

 

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2 thoughts on “7 Major Factors Affecting Performance of a Fund

  1. Nice article. Thanks for sharing your knowledge in this. Your mention of “seasonal dressing” got me thinking about the upcoming election in the country. What do you think about its effects on funds focussing on local markets? Has the same effect been observed in the last few general elections? Thanks!

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    1. Thanks for commenting. Yes, I do believe the next general election will push KLSE higher. Recent economic data is not so bad also. Besides, while many other markets have gone beyond their all time heights due to global recovery, but KLSE has much more head room to go. So I am in a position to keep invested too… Cheers!

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