Picking the right stock market or the right sector of the stock market is crucial to investing successfully. But it is also important to pick the right fund manager. They make the decisions about which stocks to buy and so determine the success of the fund.
Their employers may set certain trade limits and provide all sorts of support services but it is the manager who picks the fund's investments. Star fund managers, whose esteem is often the result of stellar returns, enjoy public recognition and often attract investors on the basis of their reputation alone.
But if you choose a fund because of the manager then you may be faced with the dilemma of what to do if the star manager leaves a fund or decides to take a back seat. With managers moving between the different companies ever more rapidly - just a third of funds investing in Britain have been managed by the same person for the past 10 years - it can be hard to keep up.
Companies are keen to poach successful managers once they have established a good track record. There have also been a lot of mergers and acquisitions in financial services, which quite often lead to changes, as managers dislike their new working environments.
If you choose to follow the manager to their next fund this can be costly and time consuming because some managers move every few months. Moving between management houses also involves a lot of disruption, and the manager may not perform so well without the team they have left behind.
There is the pressure of stardom to consider too. Companies best people are often required to give talks at conferences and to take an active role in marketing their funds. This leads to a danger that they take their eye off the ball and the performance may slip.
However, many in the industry believe that gifted managers deserve their loyal following. They suggest that the team approach, where a number of managers work together on decisions, shows a lack of confidence in individual skills and a fear that money will leave with any departing manager.
But a manager's importance will vary depending on the type of fund he or she is running. At one end of the scale there are "tracker funds", in which the manager's input is heavily limited. At the other are the "actively managed" funds in which a manager's judgment is one of the most important ingredients.
There are a string of other issues to consider when choosing a fund. Investors should think about the design of the fund, what the fees are and what sort of risk controls it has. The most important thing to look at is what the fund sets out to achieve and whether that objective suits your needs.
The cult of the star manager has also focused the spotlight on past performance figures - particularly because high returns are often attributable to one person's stock-picking expertise. In these situations, investors should beware - they may be looking at a "ghost performance" achieved by long- departed managers.
The City watchdog, the Financial Services Authority (FSA), has banned firms from "cherry picking" information to show past investment performance in a flattering light. They are concerned that firms are using the best periods of a managers past performance to promote funds and suggest that historic returns are a measure of what investors may get back in future.
All advertisements that refer to the past performance of investments must also now include a standardised table showing the annual returns for the same fund for the past five years. These figures must be expressed as a percentage, and should, the FSA hopes, "give consumers a better understanding of the volatility of the investment".
