With interest rates on the rise, advisors might be considering alternative funds to reposition clients' fixed-income portfolios to take advantage of new opportunities and hedge against rate risk.

But when shopping for a new fund, what should the advisor look for in a manager?

“Most advisors spend 90% of their time looking at historical performance when determining whether or not to use a fund manager. This is analogous to driving down the freeway and spending 90% of your time looking through the rearview mirror,” says Samuel Miller, senior investment strategist at Signature Estate & Investment Advisors in Los Angeles.

"While it may be a successful, albeit questionable, method to win new business from performance-chasing clients, [it] is not a recipe for long-term investment success," he says.

"Instead, investors should spend 90% of their due diligence efforts on the real drivers of performance, which are people and organization, process and philosophy," Miller says.

"After gaining an understanding of each of these drivers, there should be few surprises when it comes to performance," he says.

The recent market surge and the prospect of looming volatility should also prompt advisors to take a closer look at a fund's manager, according to PIMCO's Senior Vice President and Asset Allocation Strategist Justin Blesy and Vice President and Account Manager Ryan McMahon.

Those factors "underscore the importance of evaluating core bond managers beyond their recent performance," they write in a research report. "Advisors should also consider characteristics such as the ability to diversify equity risk and tracking error compared with underlying benchmarks."

Looking back on fund managers in Morningstar's intermediate-term bond category in 2008, Blesy and McMahon found a wide swing of 45% between the best and worst performers, with fewer than half posting positive returns after fees.

"This means many core funds failed to provide equity risk diversification during the crisis and the category performance varied considerably," they write.

Another consideration when selecting a fund manager, which is overlooked by many advisors, involves the rate to which the funds are tied, says Collin Martin, director of fixed income for the Schwab Center for Financial Research in New York.

Most variable-rate funds are pegged to the London Interbank Offered Rate, but not for long. The three-month LIBOR, a favored benchmark, is expected to be phased out by the end of 2021, leaving open the question of how those funds will set rates beyond that point.

"It seems to be a risk that's kind of underappreciated by the market right now," Martin says.

So, should advisors then look for fund managers who have a game plan in their prospectus for navigating a post-LIBOR world?

"I think it could make investing in a fund more attractive," Martin says.

This story is part of a 30-30 series on evaluating fixed-income opportunities when rates are rising.