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Mutual funds are among investors’ preferred vehicles, and understanding them is essential for any investment strategy. In this article, we introduce some of the basic concepts of their functioning in order to enrich the analysis of their performances.

Mutual funds are investment vehicles that group many investors within a portfolio. That is, instead of looking for one investor with $1,000,000, this type of vehicle groups one hundred investors with $10,000 each. The starting point in terms of financial analysis focuses on the structuring and management of portfolios. The first step is having a clear investment objective, mainly focused on, for instance, U. S. bonds, emerging stocks, or commodities. Even though the asset allocation will be subject to this main objective, other elements play a part in defining the investment strategy, such as risk profile and time horizon.


How to invest in mutual funds? Mutual funds are divided into units to allow the participation of a multiplicity of investors. The number of units bought defines each investor’s participation in the fund. As more resources enter into the fund, the total amount of units grows. Since it is a portfolio, the total fund value varies with the daily movements of the markets. The value of each unit is affected by these fluctuations. Units are known as Net Asset Value or NAV.


Passive Management vs. Active Management


In this context, passive management and active management are concepts that must be appraised. One of the parties to a fund is the manager. This person handles the structure and administration of the fund, decides on the asset allocation, and on the weight of those assets within the portfolio. Once the fund has been structured, the manager determines when to include new assets and when to modify their weight in the portfolio. Such decisions are known as active management.


On the other hand, investors choose funds and managers of their preference. This is called passive management. This approach is mainly centered on a concept known as fund performance or behavior analysis and is based on indicators such as:


  • Track record: Historical performance of a fund. Even though it does not guarantee future profits, it allows us analyze the fund’s performance through time.
  • Benchmark: A standard against which the fund’s performance can be measured. It depends on the investment objective and the type of assets included. Market indexes are generally used.
  • Outperform/Underperform: Historical behavior of the fund against a particular benchmark. Outperform indicates a better behavior, as opposed to underperform.
  • Net asset value (NAV): This is the fund per unit market value. It is calculated daily and depends on the valuation of the assets included in the portfolio. It is obtained by adding the value of all assets minus liabilities and dividing the net value by the total of units.


An intermediate strategy between passive and active management consists in structuring portfolios composed of funds. This combines fund selection choices and performance analysis with elements such as allocation of weight to each fund in the overall scheme.


Some examples

As explained before, the NAV allows analysis of the fund’s behavior since it can be displayed in a chart. To do this, two different types of funds are shown: one is composed mainly of shares while the other consists of bonds, both from the United States. The first one is an ETF (Exchange-traded Fund) called “SPDR”, better known as “Spider”, which follows the behavior of its benchmark, the S&P500, and holds position mainly in large cap stocks. In chart 1, it can be seen how the NAV behaves similarly to the S&P500 over the past year: it shows the fall in March due to the beginning of the Covid-19 pandemic, and the subsequent recovery of the stock market.

Chart 1. Own elaboration. Data: Bloomberg


Chart 2 shows the behavior of the JPM US Bond Fund and its benchmark, the Bloomberg Barclays Fixed Income index. This fund focuses on the US fixed-income market, investing in both government and corporate bonds. In the behavior of this fund and its index, it can be seen the contrast with the stock market, which has shown an upward trend after the March declines. Bonds, on the other hand, show a recovery until August but have remained in a sideways trend thereafter.


Chart 2. Own elaboration. Data: Bloomberg


Undoubtedly, mutual funds will continue to be an alternative not only for retail investors but also for institutional investors seeking to broaden the spectrum of their investments as efficiently as possible. That is why, when analyzing them, understanding what their objective and composition is becomes crucial to evaluate them in the right context and to identify which are the economy and market forces and policies that could affect them.


This report was made by Gandini Análisis for SupraBrokers only as content. It shall in no case be considered as an investment recommendation.


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