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Insights into the fund selection process

Whether you're a professional asset manager or a corporate treasurer looking for a better return on investment, understanding how funds are selected will help to ensure that cash under your responsibility is well placed.

For example, ECR Research, an independent research and advisory firm, takes a three-step approach to the fund selection process, using a model-based selection process developed by VDVM Research & Investment Consultancy.

The three steps are pre-selection, peer group analysis and finally, the fund selection. The first two steps in the process are quantitative, while the last is qualitative.

Step 1. Step one takes into consideration factors such as the length of experience of fund managers (at least three years), Morningstar ratings (at least three stars) and performance. This step will provide a group of up to 100 funds.

Step 2. Step two is far more in-depth and involves 25 quantifiable criteria, which fit into the following five categories:

  1. Morningstar
  2. performance
  3. solidity
  4. cost
  5. risk

This analysis enables the funds to be listed more or less in order.

Step 3. In step three, the top decile are assessed for entry or distribution fees. Meetings may be held with a selected number of fund managers to discuss and assess working method.

The selection method is based on calculations denominated in euro. Exchange-traded funds (ETFs) are included in the selection process. According to ECR Research, the fund selection model has some aspects in common with the Morningstar methodology but it offers “a more informed answer to the question of what a good investment fund is”.

CTMFile take: This is a useful model for fund selection and corporate treasurers familiar with the evaluations involved will have a better understanding of value and risk in asset management.

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