How to find the Best Managed Funds – Part 2

In the first part of this report we looked at how you pick the best quality managed funds.

In this part we are going to look at how you choose the best performing managed funds from your selection of quality funds.

Many of the research houses have useful analysis tools and a particularly good one to use is the Peer Group Ranking Report available with Morningstar. What this tool will do is rank all of your selected funds into a respective category. Let’s say you are looking for a geared Australian share fund as part of your portfolio. Morningstar will find every available fund that specialises in Australian shares and uses gearing in their investment strategy. Likewise, you may want to find a fund that invests into the largest international companies. Whatever type of fund you are looking for, Morningstar will have a category for it.

Within each category, the Peer Group Ranking Report will show the performance figures of each fund over 3 months, 6 months, 1 year, 2 years, 3 years, 5 years and 10 years. When looking at performance the best time frame to look for is 3 years. Many purists will tell you that past performance is no guarantee of future performance and this is true if you were looking at one fund in isolation or choosing a fund based purely on performance without looking at the quality of the fund manager.

Viewing performance over a 3 year time frame allows you to see how consistent the fund has been performing. Shorter time periods like 3 months or even 1 year are not long enough and performances could be adversely affected by volatility in the markets. Likewise, you do not want to base your selection on the longer time frames like 10 years. The quality of the fund may have changed over that time and it is likely the fund has different individual investment analysts and managers.

Looking at a specific category like large valuation international funds, you will find that Morningstar has approximately 60 funds in this category with a 3 year performance history. The Peer Group Ranking Report then shows the performance of each of these funds ranked overall and in quartiles. For example, if the peer group consists of 60 funds, then the 15 best performing funds over 3 years would be ranked in the 1st quartile. The 15 worst performing funds would be ranked in the 4th quartile.

If you looked at a Morningstar report for September 2009 you would see that the Platinum International Fund had a 5 star ranking and was ranked 1 out of 58 funds placing it in the first quartile over the 3 year period.

So, the 2nd step in the process involves selecting only those funds performing in the 1st or 2nd quartile over 3 years. I always include the 2nd quartile, particularly if you have a small peer group like geared Australian share funds, as there may not be any 4 or 5 star funds in the 1st quartile. Never pick a fund in the 3rd or 4th quartile and if a fund does not have a 3 year history then move on and find another fund. What you are looking for is proven performance history and you will only get that with at least 3 years trading. Many research houses will give a high ranking to a fund based on the quality of the fund manager even if it has only been trading for a year and has no comparative peer group performance.

So, let’s recap on the formula to pick the best managed funds.

1st Step: Pick only those funds ranked 4 or 5 stars

2nd Step: Pick only those funds ranked in the 1st or 2nd quartile.

This formula will give you the knowledge that you not only have the best quality managed funds in your portfolio, but also the best performing managed funds. It also gives you an excellent basis for conducting an annual review of your portfolio. If the fund falls below 4 stars or the 2nd quartile, then look to replace it.

If you have any questions about the system or the Peer Group Ranking Report feel free to contact me or leave a comment on my website.


Rob Bourne has been involved in the financial services industry for over 35 years. As a practising financial adviser he focuses on the need for practical and down to earth financial education. The aim is to educate people through financial education so they can take control of their own financial future. Visit Rob's website here for more information on business opportunities, investing and financial education or the complete guide to superannuation a...

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