Fund picking

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Fund picking (also fund selection ) is the process of the individual selection of investment funds that, according to personal assessment, can expect a better return than the market.

Critique of the term

The term is a French made-up word of German origin (Fonds = French, picking = English). It has meanwhile found its way into the German vocabulary. In the English-speaking world it is known as "fund picking".

background

Over 6000 investment funds are approved for distribution in Germany. The selection of suitable funds is therefore also a volume problem. Actively managed equity funds achieve a poorer return than the relevant market in 2/3 of the comparison cases . For this reason, while a small number of investors rely on index funds , the returns of which are closely related to the respective market segment, the majority of investors hope to generate an excess return by carefully selecting those funds that beat the market . To what extent this is at least theoretically possible is a matter of dispute in science. The random walk theory, at least, is based on the fundamental impossibility of predicting future performance. It is undisputed that the past performance of a fund is not an indicator of future performance.

General

Fund picking is a structured selection process as part of portfolio management . It describes an extensive search process to find the most promising investment fund at a given time. The aim is to achieve an efficient division of the entire fixed assets into individual asset classes - in accordance with portfolio theory - and, in addition, to select those funds within the individual asset classes that generate the best return within their segment.

Fund picking sees itself as an individual, i. H. Selection based on the investor's goals and willingness to take risks .

Various approaches can be used to select the funds. You can advance the selection process with either ranking (quantitative) or rating lists (qualitative). Ultimate investment decisions are made by individuals or by a team.

Details

The aim of fund picking is to optimize the return of the entire portfolio of purchased funds at the investor's maximum risk ( volatility ) given (by the risk appetite of the investor) in accordance with the portfolio theory and to spread the inevitable risk. Ideally, this is done through analysis in advance, as broadly as possible across many nations, multinational regions, investment styles, market capitalizations and industries divided into monetary and material value. Here, funds from different investment companies have to be compared, as there is no investment company that is the leader in all investment categories.

First, the various investment categories are defined. Such an investment category is defined by the fact that its performance is statistically as independent as possible of the performance of other categories. In a further step, the presumably best funds per category are determined. Fund pickers aim to determine the best fund for each investment category.

The task is to make the entire portfolio as insensitive as possible to the benchmark index by setting it up correctly using individual funds, in order to prevent any loss in value of the overall portfolio. For this purpose, volatility and correlation are taken into account. In addition to studying rankings, macroeconomic reports and monthly fund reports are also used. The focus is on the historical key figures of the funds.

The historical performance is only taken into account last in the decision-making process. There is no statistical correlation between past and future performance.

Clear risk management is essential . The focus is not primarily on possible future profits, but on recognizing and managing the risk, e.g. B. Avoiding the risk of lumps . In addition, greed and mistakes are countered by defining the minimum and maximum number of individual investments and these with a max. percentage weighting of the total volume.

Meta level

Correct fund picking is labor and time consuming. In contrast to this, short-term fund selection processes are generally feasible, but only with a high level of specialist knowledge and long investment experience. Furthermore, fund picking is also intended to make the investor as independent as possible from a single investment company . Fund picking also means making the investment decision permanently traceable by documenting / archiving the messages found and generated. In return, a properly carried out fund picking should make itself felt with a higher profit. Therefore, fund picking can also be equated with managing a fund of funds.