02 July 2015

What does a fund manager do with your money?

Imagine you owned a football team. Would you feel more confident creating a winning side if you had a top manager to plan your tactics, organise your squad and buy and sell the right players?

There’s a value to real expertise. It’s true of football, and it’s also true of investing. One of the advantages of investing through a collective fund rather than buying and selling individual shares, is that you are effectively pooling your money with others. This means you get to invest in a broader range of investments, and it also means that you can afford the services of an expert, who manages those investments full-time. This is your ‘fund manager’, and their job is to meet the fund’s objectives, invest in what they say they will, monitor performance, reduce risk and loss, and attempt to beat the market in providing the best returns possible.

Perfecting your fund’s tactics

The fund manager’s role is to put the agreed strategy into practice in a way that makes the most of all the relevant opportunities, and mitigates as many risks as possible. On a day-to-day basis, this could involve rigorously checking share prices and company data, assessing the stock of newly floated companies to see if it aligns with the risk profile of the fund, researching company performance reports and even getting out to visit prospective businesses that the fund might want to invest in.

Fund managers have to be astute business analysts capable of getting under the skin of a huge range of companies and share performance. As such, they need to be extremely focused and utilize substantial strategic investing expertise and experience. Imagine a world-class chess player thinking 3 or 4 moves ahead, predicting how the board may change and what they need to do to react and respond1.

How much does your fund manager cost?

More management may mean more fees, but it could also increase your returns. As opposed to the lower fees of ‘passively’ managed funds – where fund managers are more ‘hands-off’ and the aim is to track the performance of a pre-defined Index or group of shares like the FTSE All Share Index – ‘actively’ managed funds require many more decisions to be made. The potential for higher gain hangs on the skill and experience of your manager. 

The term fund manager makes it easy to imagine one individual behind a desk. In fact, your fund manager could easily be a whole team of professionals working on your behalf. And that expertise and time costs more.

The amount that you pay them depends on a variety of factors. Every fund incurs a set Annual Management Charge (AMC) which is deducted directly from your returns every year within the fund. There may also be other fees that a fund manager may charge, which can include an initial charge upon purchase of the shares or fund units as well as dealing and custody charges. To understand what impact this will have on the performance of the fund it is important to understand the extent of the fund manager charges applicable and when they are due.

Agreeing the fund strategy

The judgments that fund managers make are based on the fund objectives and risk profile for that fund. Before you invest in a fund you can find out what the objectives and risk profile of a fund are in the Key Investor Information Document (KIID) or prospectus (depending on the type of fund you are investing in). The document  sets out what the fund does and what level of risk the fund manager is allowed to take on. It helps to ensure that you are investing in a fund that fits your appetite for risk, and that you have a good idea of how the fund is to be managed.

Fund managers and motivation

Fund managers live or die by reputation. Their future income and job security depends on making decisions that get the best possible performance from the fund you’re invested in.

Past performance is not a guide to future performance.

Please note that the value of investments can go down as well as up and you may not get back the money originally invested.

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1 Moneywise.co.uk, ‘A day in the life of a fund manager’, 15 October 2013: http://www.moneywise.co.uk/investing/funds/day-the-life-fund-manager

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