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Asset manager or fund manager which one should you pick, when investing in mutual funds?

Selecting an appropriate asset manager or fund manager will make an impact on your long-term growth. But of the two, which should take priority?

You may know that the mutual fund scheme you invest in is managed by an individual referred to as the fund manager. Fund managers are part of the asset management company or what’s known in the industry as “the asset manager”, which owns the mutual fund scheme. 

Ideally, a fund manager’s strategy and investment style reflect the strategy of the asset manager and there is perfect harmony. In reality, though, fund managers are individuals who bring a unique flavour to the practice of security selection and portfolio construction. Selecting an appropriate asset manager or fund manager will make an impact on your long-term growth. But of the two, which should take priority?

In the absence of stringent risk practices, you can lose all the return advantage very fast. The role of the asset manager goes beyond just one scheme. It has to ensure that there is a distinction in each of its products or schemes and adequate attention given to each. 

Asset managers bring processes

Asset managers define and own the processes around managing individual mutual fund schemes. Most asset managers have a documented security selection process and a portfolio construction guide; a framework within which a fund manager can operate. However, more than the process to select securities or build portfolios, it’s the risk management process that can distinguish asset managers and impact your overall experience. 

In the absence of stringent risk practices, you can lose all the return advantage very fast. The role of the asset manager goes beyond just one scheme. It has to ensure that there is a distinction in each of its products or schemes and adequate attention given to each. 

At times asset managers end up with too many schemes and unless they have an adequate team size, it gets difficult to do justice to each of the schemes. Then there are other asset managers who consciously do not launch multiple schemes and focus solely on a handful of schemes to build core competence. 

Your first level filter in choosing where to invest has to be the asset manager. The size of the asset manager and the number of schemes it manages are not the most important attributes, rather it’s the ability to manage its basket of schemes suitably with the process and team it has, which one needs to look out for. 

Fund managers bring "alpha"

Alpha is the technical term for the excess return a scheme is able to deliver above returns of the benchmark it tracks.

While the fund manager does have processes to rely on, an individual’s instinct and unique mind will always influence security selection. Not only that, it is the individual’s ability to ride market volatility which can also make a difference to the final outcome. 

Investment processes may be similar, but the final choice of what to buy or sell, when to buy or sell and how long to hold, ultimately depends on an individual fund manager. The dynamism in these factors can result in strikingly different returns even from two portfolios with the same stocks.

What this means is that the fund manager does influence the outcome greatly, despite the asset manager's processes. However, this hold of an individual and their unique preferences over mutual fund portfolios can have a detrimental impact too if they are too rigid with their choices or find it hard to admit mistakes. For this reason, the choice of an asset manager is important; strictly followed risk management processes may help manage the excesses of an individual fund manager. 

More than that, your fund manager can resign any day and move out to work with a different asset manager, leaving behind the scheme you invested in for another fund manager. 

It’s important to focus on both these variables, asset manager and fund manager, but also focus on the relationship that the two share and how well matched the fund manager’s style is with the asset manager. Blindly following an individual will sometimes yield super-normal returns and at other times can let you down sharply too. Following an asset manager with transparent and well-defined processes, more often than not will define your expectations better, and thus resulting in a satisfactory experience.

 

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