Before you decide where to invest your money in these difficult times, be sure to check out the fund manager’s credentials, advises Rob Griffin, if you want to avoid the bad apples.

Choosing a fund manager is a notoriously difficult task, but it has never been more important to pick the right one — with stockmarkets so volatile, someone who can be relied upon to deliver top-drawer returns is worth their weight in gold.

Fund managers hold your future prosperity in their hands and whether your money doubles in value or vanishes overnight will largely rest on their judgements. Being in the wrong companies or sectors at the wrong time can prove disastrous, while opting for areas that soar in value can dramatically increase the value of your portfolio.

The global economic downturn has only served to emphasise this. Although the vast majority of investment funds have lost money over the past year, there has been a huge gulf between the best and worst performers.

According to the Investment Management Association (IMA), the sector with the best average percentage growth in the year to the end of April 2008 was IMA Global Bonds, with 12.5% growth. Other relatively high-performing areas of the market, including IMA UK Gilt and IMA Money Market, also made modest profits as the severe recession started to take a grip and fear resonated throughout international stockmarkets.

Investors with money in these sectors were the lucky ones, however. Anyone with money in the IMA UK Smaller Companies sector will have been staring down the barrel of a 35.5% average loss, while IMA Property has slumped 33.6%.

Even more worrying is the fact that this divide can also be seen within individual IMA sectors, even though all of the funds have to conform to the same broad guidelines for portfolio construction.

Take the competitive UK All Companies, for example. The star turn during the past 12 months has been the Ryan Hughes and James Millard duo. Skandias UK Strategic Best Ideas fund has only lost 9.7% up to 9 February, according to mid-to-mid figures compiled by Morningstar.

At the other end of the spectrum is Jamie Allsopps New Star Hidden Value. This has shed a staggering 55.4% over the same period and, not unexpectedly, sits forlornly at the bottom of a 314-strong list of funds.

So where should you begin when picking a fund manager?

With so many funds available to retail investors, theres hardly a shortage of managers to choose from, so youll need to cut this vast investment universe down to a more manageable size.

In fact, Mark Dampier, head of research at Hargreaves Lansdown, says: There are only a limited number of very talented fund managers around. But your chances of finding one can improve significantly if you take the time to lift the bonnet and find out what a fund aims to achieve.

Set your goals

The first task is to set your own investment goals and horizons, says Darius McDermott, managing director of Chelsea Financial Services. Until you know what youre trying to achieve, its pointless searching for someone to fit the bill.

You need to establish your attitude to risk and decide for how long you will be happy to tie up your money, he says. Equity investing should only be for those with longer-term horizons of at least five years, and preferably longer.

Questions to ask yourself include: do you want exposure to a particular sector, such as pharmaceuticals, or do you want to invest in the best European stocks ; and are you happy playing it relatively safe in a fund mirroring the UK index or do you want to embrace emerging markets ?

Ignore fashion and trends, advises Andrew Merricks, head of research at Skerritt Consultants; as funds may enjoy short-term periods of stunning performance but these happy times can easily come to an abrupt halt. Instead, you should opt for managers and funds with sound, longer-term investment goals that offer an acceptable level of risk.

I always annoy JPMorgan by saying Ian Henderson, the manager of its Natural Resources fund, has been the luckiest manager of the decade, Merricks says. He was in the right sector at the right time when things were going up, because hes a momentum manager. But soon as natural resources fell, his fund went down as well.

A good track record

You should always research the manager rather than the fund, adds Dampier. Fund managers switch jobs at such a rapid rate that this can reflect unfairly on a portfolios quoted performance figures.

The best way to do this is to examine the managers track record. Have they been producing the goods in different cycles or only in rising markets? How long have they stayed in their jobs? Do they enjoy the benefit of a stable team around them?

Theres certainly no point looking at a funds 10-year track record if it has been managed by half a dozen different people over that period, Dampier explains. The current managers may be eroding all the good work done by their predecessors.

Scrutinise their performance and, if its bad, try to work out what has happened. For example, are the figures based on unusual market circumstances, such as the bursting of the technology bubble in 2000? Or have there been underlying problems in the sector?

Although you cant have one-to-one chats with fund managers, you can carry out research using websites such as trustnet.co.uk, morningstar.co.uk and iii.co.uk.

Investors often use past performance as a guide, but this could be very misleading, argues Nick Pothier, manager of the HSBC Open Global Return fund.

There are very few rules in fund manager selection because there are so many variables, he says. You need to stack the probabilities in your favour as much as possible, and thats a subjective process.

You should take a number of different factors into account, 
such as the structure of the investment house; the philosophy and style of the manager; the way they are rewarded; and the quality of the research support that backs them up.

The short-term performance of a manager in isolation is virtually irrelevant, because you dont know what led to that performance, Pothier says. You need to consider all the different variables at work.

Age versus youth

You also need to consider whether to opt for a manager whos been in the same job for decades or one whos fresh in the post. This is a particularly important decision, given the number of young managers who are marketed as future stars.

The main benefits of picking a manager who has run the same fund for many years is that they will have plenty of stockpicking experience, knowledge of different economic environments, an established investment philosophy and a good team behind them.

But Andy Gadd, head of research at Lighthouse Group, warns that you shouldnt automatically dismiss the young bucks for being inexperienced; they may have spent many years training as analysts before being handed the reins of a fund.

Youll often find that new managers have followed an established career path that has given them a very good grounding, he says. 
In many cases, they will have started out in a research department and served 
their time as apprentice managers.

How long to hang on?

Unfortunately, even thorough research wont guarantee that your manager will always make you money. So when should you think about replacing them? Do you allow them a few months underperformance, or a couple of years?

Short-term underperformance can be a red flag showing that something needs investigating. But it shouldnt be the driver of your decision, says Pothier. Weve held managers who have underperformed quite dramatically; weve stuck with them and theyve come back strongly.

Managers may underperform because their particular investment style or region of focus is currently out of favour. To see if thats the case, look at how their sector rivals have performed you may find theyve lost less money than others running similar portfolios.

A prime example is Invesco Perpetuals Neil Woodford who runs both the Invesco Perpetual Income and Invesco Perpetual High Income funds. He was one of the few managers who shunned the ill-fated dotcom boom in the late 1990s, but his stance was eventually proven to be correct, says Dampier. Woodford didnt join the technology boom at all, despite being under immense pressure to do so. I can remember him banging his fist on the table, saying it was all going to end in tears.

Its a similar situation when a manager quits a fund. While it can be tempting to sell immediately, you may find the investment house replaces them with someone of an equal or higher stature.

At other times, there may be a more dramatic outcome. For example, a few years ago, Neil Pegrum announced he was moving to Cazenove from Insight Investment, less than 18 months after joining the company to launch its UK Dynamic fund. The news came as such a devastating blow that Insight decided to close the fund.

More recently, independent consultants Old Broad Street Research removed New Star UK Alpha funds AA rating following the announcement that its manager, Tim Steer, is leaving to join Artemis once the merger between Henderson and New Star has been completed.

It all depends on how a manager is operating, says Geoff Penrice, a financial adviser at Bates Investment Services. The factors I look for include someone taking too much risk to try and boost returns, or not reacting quickly enough to changes.

Call in the specialist

At the end of the day, according to John Chatfeild-Roberts, author of ‘Fundology: The Secrets of Successful Fund Investing’, it comes down to assessing the qualities displayed by fund managers and monitoring their performance.

The best fund managers will always question whats going on around them and think about companies from a number of different points of view, he says. Spotting what others havent noticed gives them an edge and enables them to make money.

So, selecting a fund and a fund manager is not an easy task. Gadd says: This is a very complex business, one thats perhaps best left to a specialist like a fund-of-fund manager who invests in a variety of portfolios. With the input of an adviser, theyll have a good understanding of your aims, and the knowledge and expertise to manage your money properly.

Five things to find out about a fund manager before investing

1. What constraints are set by the investment house?

2. How is the managers performance judged?

3. What personal investment guidelines are in place for managers?

4. How many other responsibilities do they have within the company?

5. How are they remunerated?

Warning signs that it might be time to ditch your fund manager

Three consecutive years of underperformance

Dramatic changes to the style of investing