Find out which successes are due to good management.
If you’re looking to find the right funds to invest in, you should make sure that you look at all the factors that affect a mutual fund’s performance. The fund manager is one of the largest factors – after all, the fund manager is the person who will be making decisions about which companies to invest in.
Attribution analysis is one method that can be used in order to figure out how a fund manager affects the performance of that particular mutual fund. Attribution analysis seeks to find out exactly what can be attributed to the manager – and which successes are based entirely on luck. A highly successful mutual fund will be evenly balanced in so that the right stocks and bonds end up benefiting the fund. These stocks and bonds should also be chosen so that short-term market failures do not have a serious negative effect on the fund’s performance.
Attribution analysis can be fairly expensive, especially if the analysis is meant to be thorough. For instance, even for less thorough analyses, every single part of the mutual fund has to be analyzed each day. If the analysis is meant to be more accurate, then it is likely that the fund will need to be analyzed every time that a transaction is carried out by the fund.
The result of this is that attribution analysis is a highly accurate method to determine just how much the success of a mutual fund has to do with the fund manager. However, this is also a very expensive method, and as such, it is not likely to be a reasonable type of analysis for individual investors.
There are also other different forms of attribution analysis available, depending on what factors are going to be analyzed in detail. For instance, it is possible to find out whether or not particular managers will do better or worse depending on the type of market they are working in. Some managers will only do well during up markets, for instance.
Even if you cannot afford an attribution analysis of potential mutual funds that you would like to invest in, you can still make sure that the mutual fund will meet your needs. The best way to do this is to check the mutual fund’s history and prospectus before buying into it.