The best-performing mutual fund today isn’t necessarily the right fund for tomorrow. Discover the 5 ways we evaluate funds beyond returns—from investment philosophy and manager behaviour to performance across market cycles.
Open any fund screener and you’ll find the same ritual.
Sort by 1- , 3-, 5, 10-year returns. Pick the fund at the top.
A fund that tops the charts today usually got there because a few bets worked particularly well. The more important question is not, “Who is on top today”?
It is: “Who do we want to trust our money with five years from now, when the market will look very different from today?”
That requires a very different way of looking at funds.
Here Are 5 Ways We Think About It.
1. We Start With The Market, Not the Fund List
Before we look at a single fund, we form a view on the market itself.
Which themes look attractive? Which sectors have become expensive? Where are valuations stretched? Where could earnings growth come from, over the next few years? Where is investor enthusiasm running ahead of fundamentals? This matters because a fund does not operate in isolation.A good fund manager can underperform when the market environment is against their style. An average manager can look brilliant when the sector or theme is in favour.
So we start with the broader picture.
Only then do we ask:
“Which fund managers are positioned to benefit from the opportunities we see?”
This is also why we don’t simply chase last year’s winners. A fund that has done exceptionally well because a particular style or sector was in favour may not necessarily be the right fund for the next cycle.
2. We Check Philosophy Fit Before Performance Fit
Every AMC and fund manager has an investment philosophy, whether it is explicitly stated or not.Some are valuation-driven. Some are willing to pay a premium for quality and growth. Some are contrarian. Some are more comfortable following momentum.
There is no single right philosophy.What matters is whether the philosophy makes sense to us and whether the manager actually follows it.
This is our first major filter.
We are not asking: Has this fund performed well?
We are asking:
“Do we understand how this manager invests, and does that approach fit with how we think money should be managed?”
And then we look for consistency between what the manager says and what they actually do.If a manager says they are valuation-conscious but abandons that discipline when a hot theme takes off, that tells us something. If a manager says they invest for the long term but repeatedly changes positions based on short-term market movements, that tells us something too. This process creates two lists. The managers we want to work with. And the managers , we don’t. A fund can have a very good track record and still not make our shortlist if we cannot explain the process behind that track record or defend it when the environment becomes difficult.
3. We Understand Manager Behaviour, Not Just the Fund
Performance tells us what happened. It doesn’t necessarily tell us why it happened.
That is where the real fund research begins. We try to understand how a manager behaves particularly when things don’t go according to plan.
How concentrated do they become when conviction is high? What happens when a high-conviction investment starts going against them? Do they stick with their thesis or change their mind quickly? How do they behave when their style is out of favour? What happens when the fund receives large inflows?
These things are difficult to capture in a factsheet. They emerge over time.
That means looking at portfolio disclosures across multiple quarters, studying how portfolios have changed, speaking to fund managers and investment teams, and understanding the decisions behind those changes.
One portfolio snapshot tells us very little. A pattern over several years tells us much more.
4. We Study The Good Calls. Study the Bad Ones Even More.
This is probably one of the most important parts of our research. It is easy to explain why a fund’s successful investments worked.
The more useful question is:
“Why did the unsuccessful investments fail?”
When a manager gets something right, we want to know whether it was genuine insight or simply the right exposure at the right time. Did they identify an earnings improvement before the market? Or did the entire sector go up, and the fund simply happened to own more of it? The return may look identical. The underlying skill may not be.
We apply the same thinking to mistakes. Was it a genuine investment thesis that didn’t play out? Was the manager simply too early? Was there an unexpected event? Or did they abandon their own investment discipline?
These distinctions matter a lot.
A manager who loses money because they took a well-researched position that did not work is very different from a manager who loses money because they abandoned their process chasing what was popular.
We don’t expect fund managers to get every decision right. We want to understand how they make decisions, including the decisions that go wrong.
5. We Compare Across Cycles, Not Just Years
A three-year return number tells us very little without knowing what kind of market those three years contained. Was it a momentum-driven market? A period dominated by large caps? A liquidity-fuelled rally? A sharp correction? A recovery from a bear market?
A fund manager can look exceptional when their style is in favour and ordinary when it isn’t. That doesn’t necessarily make them a better or worse manager. It tells us what their process looks like in different environments.
So, we try to look across cycles. How did they behave when markets were euphoric? How did they respond when markets fell sharply? Did they protect capital? Did they become more aggressive when valuations became attractive? Did they remain disciplined when their style was temporarily out of favor? And when their style came back into favour, did the performance return? This is where a manager’s track record becomes much more meaningful.
We particularly value managers who have experienced difficult periods, can explain what went wrong, and whose explanation continues to make sense with the benefit of hindsight.
A difficult period isn’t automatically a reason to reject a fund. Sometimes, it is the period that tells us the most about the manager.
We Aren’t Looking for the “Best Fund”
Ultimately, our objective is not to find the fund with the highest return.
There is no permanent “best fund”. Different investment styles work in different environments. Even very good managers will go through periods of underperformance.
Our job is to understand the philosophy, the people, the process and the behaviour behind a fund.
Then we ask whether that process fits the portfolio and the investor. That is why our fund research takes time.
We are not trying to predict which fund will top the leaderboard next year. We are trying to build conviction that the manager we choose has a philosophy we understand, a process we believe in, the discipline to follow it, and the ability to learn from the times when it doesn’t work.
The objective isn’t to find the best fund. It is to understand which investment process fits the objective, the portfolio and the investor and keep questioning that conclusion as circumstances change.
That, to us, is the spirit of fund research at M2W.
If you wish to reap the benefits of our time-tested fund research in your investment portfolio, enroll with us today!
