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Mutual funds are an important component of family office investment holdings. Managed by experts and offering economies of scale in investing in various securities, mutual funds help to achieve portfolio diversification with specific strategies. However, principals and their financial advisors often overlook the importance of look-through analysis and understanding true diversification or concentration risk. For example, if the family has the relevant exposure to industrials sector across all its mutual fund investments, but within that sector there is an aggregate holding of one or two stocks in which the family office already has a substantial amount of direct equity investment, the family office’s portfolio risks becoming overly concentrated.
Hence, to ensure that its portfolio allocation is truly diversified, and risk assumed is in line with its investment strategy, the analysis needs to go a level deeper.
Understanding the Concept of Look-Through Analysis
Look-through analysis mean that, instead of examining the overall picture described by the proportions of equities, bonds, and other assets in a mutual fund, a drill down is available to the fund’s individual security holdings to assess true exposure. This method helps with:
Concentration Risk Management: The family office may realize that there is over-concentration in a particular sector or security because of the sum of direct holdings and indirect holdings through different mutual funds, and rebalance and diversify its portfolio promptly.
Performance Attribution: Family office advisors can match the mutual fund’s performance to a particular security holding or investment strategy by the fund manager, thereby improving the investment decision-making of the family office.
Read More: Understanding Hedge Funds and Private Equity: A Beginner’s Guide
Essential Strategies for Mutual Fund Analysis
In addition to look-through analysis, a family office also ought to deploy the following best practices for analyzing its mutual fund investments:
Comprehensive Analysis: Examine the mutual fund holdings thoroughly — without overlooking its smaller holdings — to understand the full scope of the fund’s exposure.
Regular Monitoring: Mutual fund portfolios can change frequently. Typically, quarterly monitoring of holdings with look-through analysis ensures that a family office stays up-to-date with the fund’s composition and thereby its own overall exposure.
Comparative Assessment: Conduct look-through analyses of different mutual funds to identify the best option suited to the family office’s investment goals and risk tolerance.
Independent study: Relying solely on fund performance reports has its drawbacks as the managers are prone to be biased and defend their strategy. Where possible, the family office also ought to stay updated on latest events in business to for an independent perspective on investment performance and risk. The commentary of ratings agencies and reaching out to the mutual fund representatives for clarifications is also helpful.
Technology for Mutual Fund Look-through Analysis
Look-through analysis is crucial but can be complicated. If a family office were to manually extract individual security information, map it against the latest market information, and run analysis on simplistic tools like spreadsheets, it would be an inefficient use of time and effort. Insights obtained would be limited as well.
Powerful family office software like Asset Vantage allows for efficient periodical updates for a full look-through analysis of portfolio holdings. Users can then generate highly customizable reports for a thorough analysis of their asset allocation and risk.
With such advanced features within Asset Vantage, users can confidently navigate the complexities of mutual fund investments, ensuring that your portfolio remains diversified, balanced, and poised for long-term success.
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