What is your investment philosophy? Managers should have an overall philosophy and one for each individual fund. Before you invest, make sure that their philosophy is what you are looking for. Beware of anything that sounds too good to be true - it probably is. Most investors' ideal fund is one that consistently performs a little better than its competitors. Too big a performance difference might mean that the managers are taking much greater risks and such risks may not always pay off.
What is your view of market opportunities and the stocks and shares that you hold? Just because a fund manager talks a good story does not mean that success will follow, but it can indicate that the managers are doing their homework and are choosing their investments with care. Overall fund performance is a combination of the performance of all the stocks held, so taking care with individual selections and keeping their number under control can help ensure that performance meets the managers' aims.
What are your charges? PEP managers may charge an up-front charge (the bid/offer spread, usually 5 to 7 per cent), plus an annual management fee, and some charge an exit charge too. Most ISAs will only have one price, which makes comparisons easier, but may charge a higher annual management fee.
Those which meet the Government's CAT (charges, access and terms) standard will not charge you more than 1 per cent a year to manage stocks and shares. Charging structures are complex, so take expert advice when comparing companies. Tracker funds, which have little investment management involved, should always have lower charges than active funds that rely on the expertise of the fund manager to make money.
Can you raise your charges if you want to? Have you ever done so? In falling markets, managers may have the right to adjust their pricing to take account of the fact that more people are likely to be selling than buying. With some funds, such as property funds, the managers may be able to delay repayment as the underlying investments may take time to sell. Managers may have the right to raise charges, so keep an eye on what you are actually being charged or get a professional adviser to do that for you.
What is your investment track record? You will not find a fund manager that does not claim good investment performance. Instead, look for independent evidence of investment performance and only compare like with like. If your managers claim good investment performance over oddly chosen time periods, it may be because their performance over other periods is poor. Out-of-date figures may indicate that recent performance is poor. How does your fund performance compare to similar funds elsewhere? If you have a tracker fund which tracks or follows the stockmarket by investing in the same proportions in leading stocks, compare its performance to similar tracker funds, not to a more specialist fund. If you invest in, say, special situations, the Far East or corporate bonds, compare to similar funds that also invest in those areas.
How big are your funds, and are they growing in size? Investment funds that have a net outflow (more sellers than buyers), or are not currently being promoted or are too small to manage economically may get little attention from their managers and performance could suffer as a result. If the investment managers are losing money, they could spend more time fending off their creditors than looking after your investments.
What are the penalties if I switch or sell my investments? Some insurance- linked investments and some PEPs impose a charge if you surrender part or all of your investment. Some fund managers allow you to switch between their funds on preferential terms or, in some cases, without charge. That can be useful if you like to play the markets. Be cautious about any investment adviser who tells you to switch funds, though, especially if they earn money if you do.
Is your key staff turnover low? The loss of a top fund manager or two should not be a cause for concern, but consistently losing top fund managers could mean that the company has lost its way.
Switching individual fund managers between funds or buying-in new managers may help to turn around a dull fund, but the cost of selling off poorly performing shares could further dent performance, at least in the short term.
Would I be better off in a tracker? Tracker funds are easy to run because they follow major indices such as the FT-SE 100. If your fund manager has consistently been beaten by tracker funds yet has higher charges for active fund performance, you may just be paying for hot air. If you do decide to go for a tracker, choose the right index to track, and remember that performance will be close to the index in bad times as well as in good. If that is not what you want, an actively managed fund may be a better choice.
Andy Couchman is publishing editor of `HealthCare Insurance Report'Reuse content