In this article, we will limit ourselves to one type of fund in particular: Undertakings for Collective Investment in Transferable Securities (UCITS). These are so-called “coordinated” investment funds. This means that they are subject to harmonised investment rules at European level. They constitute a category of financial products that includes SICAVs (Sociétés d’Investissement à Capital Variable) and FCPs (Fonds Communs de Placement).
These funds are designed for people who do not wish to invest in the stock market themselves, by having to choose one stock or another, know when to buy or sell… In fact, by buying units of a UCITS, management is delegated to a professional. The main advantage of investment funds is that they allow you to diversify your investments with a small amount and let a manager (ideally a talented one!) take care of investment strategies to take advantage of the best opportunities offered by the financial markets.
Like any type of investment, the choice of a fund must be based on three major elements: according to your return objectives, your risk profile and your investment horizon.
If you are looking for an investment with limited risk, opt for money market or bond funds. If, on the other hand, you want to achieve higher returns despite higher risk, turn to equity or alternative UCITS.
CRITERIA TO CHOOSE AN OPCVM
But no matter what type of fund you choose, there are many criteria to consider when choosing. Jean-François Bay, Managing Director of Morningstar, tells us the criteria to consider when choosing an investment fund.
Quantitative rating to identify the UCITS’ return
In the form of a star rating, Morningstar’s quantitative analysis identifies, within a given category, the funds with the best performance and risk-adjusted return in recent years. Morningstar only rates funds with at least 3 years’ experience.
The site selection tool allows you to sort investment funds by category, management company and performance over a given period of time. For example, you can filter funds with a performance of more than 5% over three years.
However, one small point: this quantitative notation is based on an algorithm that rates past performance. It is therefore necessary to also determine the profile for the future of the fund. This is done through a qualitative scoring system.
The qualitative rating of the UCITS to know its strengths and weaknesses
Qualitative rating complements quantitative rating.
Qualitative rating makes it possible to go beyond the debate between “good funds” and “bad funds”. The qualitative rating is obtained by combining fundamental data on 9 million financial stocks and more than 150,000 funds worldwide, supplemented by Morningstar analysts’ research.
Qualitative rating provides investors with an assessment of an investment fund’s strengths and weaknesses. The Morningstar research report accompanying the note explains in detail the reasons for the note. It also gives a clear idea of the fund’s strategy, which helps to explain the fund’s behaviour in different market environments. This allows us to understand how a fund can be integrated into a diversified portfolio.
Currently, 92 funds have the highest quantitative (five stars) and qualitative (gold) ratings.
The relative long-term performance of the UCITS to be audited
Take some height. Check the fund’s long-term performance against its peers and benchmarks. This will eliminate the worst funds right away.
Volatility to know the level of risk of the fund
Volatility measures a fund’s performance deviation from its average: the higher the volatility, the more likely a fund is to deviate from its average. Conversely, a fund with low volatility will have fewer surprises in store for you, and its performance will be more stable over time.
If you are likely to have to exit a fund at any time, prefer low volatility funds. If your investment horizon is longer, you may consider more volatile funds.
The financial strength of the fund management company
What is the financial structure of the fund management company? Is its financial structure sound? Will the company still exist in 10 years?
The financial structure of the management company, the stability of its workforce and the remuneration and profit-sharing of the managers must be taken into account. Also study the company’s culture and management philosophy.
The quality of the fund manager and his team
The assessment of the quality of the management team is an important factor in the final rating of a fund. Morningstar takes into account experience, qualifications, temperament, workload, analytical support and compensation structure.