[caption id="attachment_1444" align="alignright" width="192" caption="Chart by Health and Wealth"][/caption] Fund Manager need 2 skills to outperform the market.

1. The skill of forecasting price movements of selected stocks. It is best described as "Security Analysis" or simply "Stock Picking"
2. The skill of forecasting future economic conditions and adjust portfolio systematic risk. This is best described as "Market Timing"

Many people only looks at the returns of their fund to gauge if they are investing well and not comparing this returns to anything else. I think this practice can be improved by looking into some technical aspect of the fund. So what are the technical areas we can look into when we analyse fund managers? With my limited knowledge, I can share 5 simple and more reader friendly ones. 1) The Annualised Returns

• The absolute returns of a fund above 1 year are first annualised and compared with the benchmark and peer funds.
• If the fund outperformed the benchmark, we can say that it had generated excess returns over the period. 1,3 and 5 years of returns are normally used.
• Thereafter, we use the figure to compare between fund managers. Its like a soccer league table where we see who top the table for each category.

However, by knowing returns alone are not sufficient, we have to know the type of risk the fund manager is taking in order to generate this excess returns. 2) Fund's Beta

• Beta is the primary measure for market risk of an investment. It measures the volatility of an investment in relation to the overall market. The overall market has a Beta of 1. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.
• For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Read more...