How do fund awards influence investment recommendations?
They're a hook for clients and a badge for advisors who recommend them, but that doesn’t make award-winning funds a lock
For better or worse, awards are a fixture in the investment space, with asset managers and portfolio management teams being recognized for how well their strategies have turned out over time.
In an industry where players compete fiercely for every dollar of AUM, an award win is certainly valuable social proof for clients and advisors alike. But as one top professional points out, that’s just the tip of the portfolio-management iceberg.
“A lot of times clients would bring up fund awards after seeing the marketing around them, whether it’s on a commercial or in a publication,” says Jason De Thomasis, certified financial planner at De Thomas Wealth Management. “It’s a very good conversation-starter.”
According to De Thomasis, clients may come to his practice after reading an article with a rundown of top-awarded funds. In those cases, the first question they ask is whether they own any of those funds … And if they don’t, why not?
“A lot of times, it’s us advisors trying to educate clients and provide recommendations,” he says. “It’s nice when clients bring up some of their own questions, because we’re handling their money and their livelihood … They trust us with this.”
What makes an award-winning fund?
For De Thomasis, those questions create an opportunity to have in-depth discussions about investing and portfolio management.
As best-sellling author Simon Sinek counsels, it’s best to start with “why” – “Why did the fund win an award?” – and then follow up with solid “how” questions, like “How consistently has it performed?” and “How well does it fit your investment objectives and risk tolerance?”
“We might be talking about a Canadian-based investment fund that was overweighted toward one sector, which would have affected its performance and therefore impact the award,” De Thomasis says. “I try to dissect the internal details of the investment, and then come from there to show how the award was given and why.”
As a level-setting exercise, he also looks at the fund’s benchmark index, as well as the performance of other comparable funds. In the case of balanced funds, it’s crucial to look at the underlying portfolio’s asset allocation. The key point, he says, is to make sure the fund isn’t actually just hugging a benchmark on one hand, or taking undue risk by concentrating in specific areas or subsectors on the other.
Importantly, De Thomasis says fund awards are often judged based on three-year historical performance. Because his investment approach focuses on the long term, he has to look back at how award winners have fared over a longer duration.
“I’m a financial planner, so a lot of what I do on the investment management side is tailor financial plans and investment plans to very specific needs of each individual client,” he says.
‘It’s free marketing’
Over the years, De Thomasis has recommended several funds for client portfolios that went on to reap accolades like five-star ratings or awards for consistent outperformance over time. He acknowledges awards can be a factor in investment recommendations, but he also emphasizes that they’re not the end all and be all.
“A lot of investments I have weren’t award-winners before, and over time they were recognized. I take pride in that, to be honest. … When clients see an award for an investment they own, it makes you look good. It’s free marketing,” he says. “But at the same time, I know awards are very backward-looking.
“Some awards do factor in quantitative elements like risk-adjusted returns,” he says. “I’m very true to my philosophy of investing for my clients, focusing on risks and their objectives.”
Fund awards are also a valuable data point for De Thomasis. If a fund that wasn’t previously on his radar wins an award, it’s a cue for him to take a closer look.
“I try to focus on core offerings for my clients. I want to be an expert to my clients, so I can’t be an expert on every investment out there,” he says. “When I see a fund that I wasn’t aware of win an award, I’d be naïve not to look at it. … It catches my initial attention, and then I do my own research after the fact.”
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