What are the selection criteria of funds for the Model Portfolio and the Best of Ideas Funds?
Fund Selection Process
MeDirect works closely with Morningstar Investment Management Europe (MIME) to define a bespoke fund universe or portfolio of funds to support specific investment goals. The fund selection process is comprised of the following quantitative and qualitative phases:
- Determining asset allocation
Before selecting individual funds, Morningstar looks at the composition of the portfolio in terms of stocks and bonds (the so-called asset classes), and examines its geographical and sectorial allocation.
- Quantitative Screening
Morningstar applies a ranking process that considers the Morningstar Risk-Adjusted Return benchmark. Other factors that are taken into consideration are:
- Performance consistency – if a manager has consistently performed poorly in three out of the last four calendar years, the fund will typically be removed at this stage. Empirical evidence suggests that long term poorly performing funds will continue to perform poorly going forward.
- Manager Tenure – If a manager has been running a fund for less than three years, they will typically be removed from the selection.
- Style – If the fund displays erratic changes in style, it will typically be removed at this stage.
- Currency – If a multi-regional fund search is undertaken, those funds that do not have an offering in the base currency of the intended users will typically be removed from the selection.
The purpose of the qualitative selection methodology is to instil discipline into the manager research process by appraising critical factors that can help determine a fund’s ability to outperform. Funds are evaluated across the 5 pillars that Morningstar has identified as being helpful in predicting the future success of funds: Parent, People, Process, Performance, and Price.
The culture and structure of an asset management firm can have an impact on its ability to attract and retain talent and its penchant for serving in the best interests of fund shareholders.
Evaluating the depth and capabilities of an investment team is critical in attempting to identify funds that have a competitive advantage over their competition.
Morningstar favours managers who employ a disciplined, consistent, and repeatable investment process. Ultimately, Morningstar is looking for traits that give the investment team an edge over its competition.
The goal is to identify management teams that in the past have demonstrated skill which we define as the ability to outperform their respective benchmark/peer group on a risk-adjusted basis in a consistent fashion.
Research indicates that expenses are critical in predicting future fund performance. A fund’s expense ratio should be evaluated within the context of the relevant region and relative to its Morningstar peer group and also consider the trend in expenses and assets in the fund.
Morningstar firmly believes that asset allocation is a primary determinant of investment returns within a global fund portfolio. Hence, an important consideration for our final selection is how the fund will complement the remainder of the portfolio or select list.