In today's article, I will be doing a simple fund selection exercise to demonstrate my thought process when selecting fund. The first step to fund selection is always to identify the geographical sector or industry which you want to invest in. For demonstration purpose, I will choose 5 geographical sectors and select one unit trust from each sector. The geographical sectors that I choose are Australia, China, Indonesia, Southeast Asia and Emerging Markets.
Australia: Fidelity Australia A AUD
The reason for choosing Fidelity's fund is due to the lack of a better alternative. There are only two funds investing in Australia available at FundSuperMart, Fidelity and Legg Mason. Legg Mason's fund size however, is only at 1.24 million AUD. Choosing a fund with such a small fund size is considered risky as there is a risk of the fund manager having insufficient resource to manage the fund, resulting in the closing of the fund. It is thus safer for us to avoid funds with such small fund size.
It is important to note however that Fidelity's fund is actually under performing when compared to its benchmark. Therefore, unless you are really keen to invest in a fund investing in Australia, it might be more advisable to hold your investment for now.
China: Blackrock China Fund A2 USD
There are several reason for choosing Blackrock's fund. Firstly, as compared to other funds with comparable performance, Blackrock has outperform its benchmark significantly while the other funds have not. Furthermore, Blackrock's expense ratio is also the lowest among all the funds with comparable performance. A lower expense ratio means that less of your investment will be lost to management and other administrative charges. Lastly and most importantly, Blackrock's 3 year annual return is the highest among all the funds. With the odds stacked so heavily in Blackrock's favor, it is easy to see why we will choose them.
Emerging Markets: Neuberger Berman EMD Hard Ccy A USD Acc
The reason for choosing Neuberger's Fund from the Emerging Markest is largely due to its good performance. Neuberger's fund has the highest 3 year annual return among the Emerging Markets funds. Neuberger's fund is also the only fund to perform above benchmark, as the other comparable funds are all performing under benchmark.
There's one downside to choosing Neuberger however, as its expense ratio is higher than other funds in the sector. However, given how well Neuberger's fund is performing over the others, we are willing to accept this higher expense ratio.
Indonesia: Fidelity Indonesia A USD
There are two reasons for choosing Fidelity's fund. Firstly, Fidelity's 3 year annual returns is the highest among every other fund. Secondly, other funds with comparable performance all have small fund size. As mentioned before, we try to avoid investing in funds with small fund size due to the risk of them closing.We will therefore, be selecting Fidelity's fund for Indonesia.
South East Asia: JPM Asean Equity A (Acc) SGD
The reasons for choosing JP Morgan's fund is exactly the same as the reasons for choosing Neuberger's fund from the Emerging Markets sector. Firstly, JP Morgan's fund is the best performing fund with the highest 3 year annual return. JP Morgan's fund is also performing above benchmark while other comparable funds are performing below benchmark. Similar to Neuberger's fund, JP Morgan's fund also has the same downside of having the highest expense ratio among the South East Asia's funds. However, we are willing to accept this higher expense ratio due to its significantly better performance over the other South East Asia's funds.
In conclusion, when performing fund selection, it is important for you to first have an opinion on which industry or geographical sector that are going to do well. There are an overwhelming number of funds available for you to choose from and by focusing your efforts on only a few sectors. you will have a much easier time when performing fund selection.