Selecting an Appropriate Mutual Fund

Picking a fund

• As we noted earlier when discussing the types of funds available, there are funds investing in a wide range of different asset classes.
• The great thing about this is that it opens difficult to access markets, such as the commodity markets or property market, to investors who lack the capital to invest directly on their own behalf.
• Some key decisions to take into account when selecting an appropriate mutual fund.
• What type of fund? What is the risk aversion and time horizon for you. Is it a balanced fund or collection of single asset funds? Is it an Active or Passive fund?
• What are the fees? Remember that cheaper funds generally wind up better off in the long run.
• What type of Manager do you need?
• What is the size of the fund?

Real Estate Investment Trust (REIT) and Real Estate Mutual Funds

• Direct investment in property in many countries involves hundreds of thousands of dollars, or a large deposit and a hefty mortgage.
• Increasingly in many countries, accessing the residential property market to buy a home to live in is becoming hard.
• Use either a Real Estate Investment Trust (REIT) or a Real Estate mutual fund as an access point to property investment.
• Both fund types offer investors diversification into additional asset class, a diversified investment, and a cheap way to gain property exposure.

What is an REIT?

• Essentially a company such as commercial or retail that invests in property.
• Or in property debt – owns mortgages of mortgage backed securities
• REIT is similar in some respects to a mutual fund. It is a pooled investment, run by a professional management company. The price of the REIT is linked to the underlying value of the property portfolio.
• REIT income is earned from rents, mortgage income or gains on sale -therefore do best when rental income increasing and interest rates falling.

What are Real Estate Mutual Funds?

• Real Estate Mutual Funds are funds that are invested in property management companies and in real estate investment trusts.
• Real Estate Mutual Funds are managed by professional fund managers and not property managers.

Socially Responsible Investment Funds (SRIFs)

• In our previous discussion on stocks and bonds, we noted that investors were starting to explore both financial and non-financial objectives.
• When investing in stocks, investors are paying attention to environmental, social and governance factors. They want to ensure that they are investing not only in good companies, but also companies that do good.
• In the bond space, developments like green bonds where the funds are used for a verified environmentally friendly project are becoming more popular.
• The same pressure has seen the development of so-called ethical funds, or socially responsible investment funds, who aim to invest for both good financial returns but also to ensure that investments are made into good companies, or at least not into bad companies.
• SRIFs are managed funds that combine financial returns with ESG. There are a wide range of different approaches with different impacts.
• SRIFs are rapidly growing segment of the market.
• Currently $1 in $3 managed by US funds is in an SRIF ($17 Trillion in AUM). Globally expected to reach $1 in $3 by 2025 ($53 Trillion in AUM)
• 718 Mutual funds had SRIF’s in 2020. 85% of individual investors interested in sustainable investment as of 2019

Different Approaches to SRIFs

Advantages of SRIFs

• Promoting a better society. Funding new technologies that can solve big problems such as Tesla. Engaging management of companies to force change.
• Makes you feel good about your investments
• Reduces risk. High ESG companies represent lower risk therefore less likelihood of regulatory action, legal action.
• Improves reputation.
• Companies have lower cost of capital

Risks and Costs of SRIFs

• Less Diversification. Screening removes companies and industries from investment universe. It can restrict diversification and increase risk
• More expensive. SRIF requires additional scrutiny of companies, especially true for more intensive strategies. Additional research requires more resources.
• Do you homework! Figure out what are the issues that are important to you for example, human rights, animal welfare etc. Assess any SRIFs on how it matches with your concerns. Different funds have different focuses.