Choosing your own investment funds
Peter McGahan
Monday 25th May, 2026.
CHOOSING a fund for your ISA or pension or investments is no easy task.
Peter Lynch put it better for shares: understand what you own and the specific reason for owning it. “It is really going up” does not count. In fund selection, “it was top quartile last year” is of the same sort of nonsense.
A fund should have a job. It may be there to give broad global equity exposure, provide UK dividend income, diversify away from shares through bonds, add smaller-company risk, or act as a specialist satellite holding. Fine. But if neither investor nor adviser can explain that job in plain English, the fund has already failed the first Lynch test.
This is not just good housekeeping. It sits neatly beside the Regulator’s (FCA) Consumer Duty, which came into force for open products and services in July 2023 and requires firms to act to deliver good outcomes for retail customers. The FCA’s own language is about customer needs, characteristics and objectives, not about stuffing portfolios with funds which look clever in a quarterly review. If we as an adviser cannot explain why a fund belongs in a portfolio, what client need it serves, what risk it brings and what would make it unsuitable, that is not a small gap. It is the hole in the boat.
So where do you start? Not with the brochure. Brochures are where inconvenient facts go to be placed beside photographs of bridges, harbours and people looking thoughtfully at laptops. Start with the current product disclosure document, historically the KIID or KID depending on the fund structure. These documents are where the objective, policy, risks and charges should begin to show themselves.
Then read the prospectus, or at least the relevant section. I know. I would rather chew cardboard too. But this is where the legal mandate lives: what the fund can buy, what it cannot buy, how much it can borrow, whether it can use derivatives, and what limits sit around concentration and investment powers. FCA rules require an authorised fund manager to manage their scheme in line with the investment objectives and policy stated in the most recently published prospectus.
After that, read the factsheet. Not for the little arrow pointing upwards or downwards. Read the top 10 holdings. That is where the manager’s words meet reality. If the mandate says UK equity income but the fund is stuffed with overseas growth companies, ask why. If the benchmark is the FTSE All-Share but the largest holdings look suspiciously like the index with a slightly different haircut, ask whether you are paying active fees for passive behaviour.
This takes us to closet trackers, one of those financial practices which manages to be both boring and outrageous. The FCA’s work following its Asset Management Market Study reviewed 96 funds which had the potential to be closet tracker or closet constrained funds. In 2018, asset managers paid about £34million in compensation after FCA action on closet trackers, according to contemporaneous specialist reporting. Further FCA action then focused on clearer fund objectives and better benchmark presentation because vague objectives make it harder for investors to make sensible choices.
Lynch would not have needed a 200-page consultation to smell the problem. If you cannot beat the market, buy the market cheaply. A closet tracker does the opposite. It offers the emotional comfort of active management, takes the fee for active management, then hugs the benchmark like a nervous child at a school disco.
Active Share can help. It measures how much of a portfolio differs from its benchmark. What is its Active Share - the percentage of the portfolio which differs from the benchmark? A credible active fund should have Active Share above 60 per cent - Below 40 per cent is textbook closet tracking.
A low Active Share plus high charges deserves a hard stare.
The practical Lynch test is simple. What is the benchmark? How is the fund supposed to beat it, or differ from it? What are the top holdings? What are the charges? What role does it play beside everything else you own? What would make you sell it?
Owning a fund without those answers is not investing. It is collecting wrappers. And wrappers, as every child learns eventually, are not the sweet. That is why I consider fund research to be the most important skill in an independent financial advisers’ skillset.
I will be creating a guide to investing, so, if you would like a complimentary copy, please email info@wwfp.net.
If you have a financial enquiry, please call 01872 222422. Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning.
Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
