MohammedAmin.com
Serious writing for
serious readers

Search this site

Custom Search

Living requires making choices, and so does investing. Unfortunately when it comes to investing there are many obvious ways of making choices which are just wrong.

When faced with a choice between (say) two investment funds, the most obvious thing to do is pick the one which has performed better. (Who wants to pick a poor performer?)

I tackled this decision for my October 2024 column in the magazine "Islamic Finance News." You can read my column below.

The key point is:

Read what the manager says about the fund’s strategy and investment methodology, ensuring that you understand it and concur with it as a strategy for part of your overall portfolio in the context of the rest of your portfolio.

How do you choose an investment fund?

I have been looking at IFN Investor, which was launched in the cover story of the 17 July 2024 issue. In the past I have found it hard getting information about Shariah compliant investment funds. Accordingly, I am grateful that IFN has created IFN Investor.

There are too many resources to cover in a short article. One I found quite interesting was the "League Tables" menu item, from which I looked at the "Global Rankings."

As of 8 July 2024 the best performing global fund over three months was the PRUlink Syariah Extra Capital Fund managed by Prudential Indonesia, with a 3-month return of 79.67%, well ahead of the second place fund whose 3-month return was 32.24%.

I was able to investigate further within IFN Investor. The Fund Directory page linked to a page for Prudential Indonesia, which shows intriguing return figures for the above-mentioned fund.

The fund was launched on 1 July 2019, so I am surprised that 3-Year figures are not available. I assume that the return figures are not adjusted for the period length; if so simple arithmetic indicates that almost all of this year’s return was achieved in the last month.

My curiosity led me to download the factsheet. Unfortunately, though understandably, the factsheet is in Indonesian. I would have used Google Translate on it, but unfortunately it is loaded as an image scan of a paper copy, rather than a character-based PDF. I couldn’t summon up the enthusiasm to try optical character recognition on the image!

The wider question is how should investors choose funds?

League tables are compiled because many investors want to invest in high performing funds. It is only human nature – who wants to invest in a poorly performing fund? Unfortunately selecting investment funds by looking at past performance really does not work.

Advertisement
Click image

I repeat my 3 April 2024 article’s strong recommendation to read “The Intelligent Fund Investor: Practical Steps for Better Results in Active and Passive Funds” by Joe Wiggins, and to follow his blog ‘Behavioural Investment’ at https://behaviouralinvestment.com

I believe the most important part of fund selection is to read what the manager says about the fund’s strategy and investment methodology, ensuring that you understand it (sometimes explanations are deliberately confusing) and concur with it as a strategy for part of your overall portfolio in the context of the rest of your portfolio. (It is rash to put all your money into one strategy.)

If you don’t feel confident about your ability to evaluate the methodologies and strategies followed by active investment managers, then I recommend buying only index tracking funds, tracking broadly based indexes with low tracking error and low costs.

These comments are equally applicable, regardless of whether you are looking for Shariah compliant investment funds or conventional investment funds.

Once you have invested, stay put.

As my 6 December 2023 article mentioned, according to the independent USA investment research firm Dalbar, investors on average earn about 3% less than the actual post-charges return of their funds, because the investors buy in and out. [See Dalbar's "Quantitative Analysis of Investor Behavior."]

They buy high and sell low, because they panic when markets are falling, and get enthusiastic when markets are rising!

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.