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What Is The Biggest mistake Investors Make When Evaluating A Fund ?
Ted, seems that all of them forgot how a fund does in a bear market or maximum drawdown as one of their factors in evaluating a fund, but otherwise very helpful info. Thanks for posting it.
This was only hinted at and not really mentioned at all, and it's something we tell our clients all the time: "We are NOT buying FUNDS. We are HIRING MANAGERS!" I think most fund investors really know very little about who is running their funds. This is the most important aspect of due diligence. Yes, other things are important, too. But if you do the research on the manager(s), their history, their style, their views (long and short-term), how they have reacted to sell-offs, how they protect value, etc., you will be more than half-way home.
I want to especially thank Ted and BobC for this thread.
The article that Ted referenced is excellent. It provides numerous expert perspectives on the art of mutual fund decision making.
I totally agree with BobC’s observation that "We are NOT buying FUNDS. We are HIRING MANAGERS!"
That positive assertion is spot on-target. I would only amend it slightly.
Decisions are not made in a vacuum. The final decision maker in any mutual fund does not work in isolation regardless how dogmatic he holds tightly to his biases, perceptions, and preferences. His people-to-people interactions and his research staff must influence and impact his decision making process and his final decisions.
Therefore, I would modestly expand BobC’s excellent observation as follows: "We are NOT buying FUNDS. We are HIRING MANAGERS and their organizations!"
We all remember fund managers who delivered superior results with a firm, and with great hubris decided to go it alone. Some succeeded (Jeff Vinik), others ate dust.
I think a great example of how an organization can enhance or detract from a manger’s performance is provided by the history of the Masters’ series of mutual funds designed by Litman-Gregory Fund Advisors.
Their overarching plan is to only hire a diverse team of superior managers and permit each manager to choose only his “best ideas”. That means the portfolios are guided by folks who have established great records and combine their limited selections to form a rather focused portfolio.
The concept is attractive, and I bought several funds from the Masters’ stable since their inception. Over time, my enthusiasm has eroded, and so has my percentage of holdings in their products. The results have been uninspired. Something has been lost in the translation.
I suspect the star managers do not really fly solo; they are substantially aided by organizational talent and rules that remain under the radar screen.
Sometimes it is true that an individual makes prescient decisions by himself. But it is more often true that the final decision has been strongly influenced by group contributions that are largely not acknowledged. Organizations matter too.
Reply to @VintageFreak: This was said many times here as well as M* forums. I agree with your statement for the funds, where mgrs invested their lifetime savings in it. There are a few funds/mgrs like that. However, many mgrs invest upto a million or a bit more and that is nothing in terms of what they earn and their savings are. So, we should treat it is one of the good signs but not THE sign of good mgmt.
Reply to @MJG: Good post. I think we are in agreement. I understand BobC's point. But, I'll assume Mom & Pop investor have stumbled into one or two houses loaded with top managers (like Price). All the other stuff is really a very good "101" crash course on choosing funds. And, I do think the way the question was worded (in a negative fashion) may make it appear they are skirting the issue. They likely had the question far in advance and wrote - I think - some pretty comprehensive responses, if not as pointed or direct as some would prefer.
There is a 2% drag on most people's portfolios due to behavioral issues (eg attempts to time the market).
"Investors expend much energy searching for low-cost funds and trying to decide between an active and passive fund strategy in building a portfolio. The larger issue may be investor behavior – whether an investor can stick with a strategy and stay invested in order to earn the long-term equity premium in the stock market. Too many investors fail to stay the course with their investment strategy, and instead tend to sell funds when they underperform, or rush in when a manager has been performing well. In doing so, investors can be their own worst enemies. So perhaps a better question to contemplate than whether you can do better with an active manager or a passive one is, do you have a sound long-term investment strategy, and do you have the discipline to stick with it?" --source: http://wealthtrack.com/site/wp-content/uploads/2013/08/GF_Rsrch_ActivePassive.pdf
Beware of not sticking with a strategy and moving in and out of funds based due to behavioral issues. One unintended consequence of MFO that I have to be careful of is that exposure to information about funds that appear to be new and better may result in portfolio turnover based on emotion--resulting in lesser rather than better performance!
Reply to @BobC: As a new subscriber to MFO, I found these comments interesting and helpful. I am familiar with M* analyst reports on fund managers, but often the M* information doesn't include any perspectives on fund managers. Aside from reading the fund prospectus, are there any other easily accessible sources of information concerning fund managers? Thanks. barpor1
Comments
I think manager investment in my mind is the TOP indicator. This is not about outperforming. This is about trust.
I want to especially thank Ted and BobC for this thread.
The article that Ted referenced is excellent. It provides numerous expert perspectives on the art of mutual fund decision making.
I totally agree with BobC’s observation that "We are NOT buying FUNDS. We are HIRING MANAGERS!"
That positive assertion is spot on-target. I would only amend it slightly.
Decisions are not made in a vacuum. The final decision maker in any mutual fund does not work in isolation regardless how dogmatic he holds tightly to his biases, perceptions, and preferences. His people-to-people interactions and his research staff must influence and impact his decision making process and his final decisions.
Therefore, I would modestly expand BobC’s excellent observation as follows: "We are NOT buying FUNDS. We are HIRING MANAGERS and their organizations!"
We all remember fund managers who delivered superior results with a firm, and with great hubris decided to go it alone. Some succeeded (Jeff Vinik), others ate dust.
I think a great example of how an organization can enhance or detract from a manger’s performance is provided by the history of the Masters’ series of mutual funds designed by Litman-Gregory Fund Advisors.
Their overarching plan is to only hire a diverse team of superior managers and permit each manager to choose only his “best ideas”. That means the portfolios are guided by folks who have established great records and combine their limited selections to form a rather focused portfolio.
The concept is attractive, and I bought several funds from the Masters’ stable since their inception. Over time, my enthusiasm has eroded, and so has my percentage of holdings in their products. The results have been uninspired. Something has been lost in the translation.
I suspect the star managers do not really fly solo; they are substantially aided by organizational talent and rules that remain under the radar screen.
Sometimes it is true that an individual makes prescient decisions by himself. But it is more often true that the final decision has been strongly influenced by group contributions that are largely not acknowledged. Organizations matter too.
Best Regards.
I agree with your statement for the funds, where mgrs invested their lifetime savings in it.
There are a few funds/mgrs like that. However, many mgrs invest upto a million or a bit more and that is nothing in terms of what they earn and their savings are. So, we should treat it is one of the good signs but not THE sign of good mgmt.
"Investors expend much energy searching for low-cost funds and trying to decide between an active and passive fund strategy in building a portfolio. The larger issue may be investor behavior – whether an investor can stick with a strategy and stay invested in order to earn the long-term equity premium in the stock market. Too many investors fail to stay the course with their investment strategy, and instead tend to sell funds when they underperform, or rush in when a manager has been performing well. In doing so, investors can be their own worst enemies. So perhaps a better question to contemplate than whether you can do better with an active manager or a passive one is, do you have a sound long-term investment strategy, and do you have the discipline to stick with it?"
--source: http://wealthtrack.com/site/wp-content/uploads/2013/08/GF_Rsrch_ActivePassive.pdf
Beware of not sticking with a strategy and moving in and out of funds based due to behavioral issues. One unintended consequence of MFO that I have to be careful of is that exposure to information about funds that appear to be new and better may result in portfolio turnover based on emotion--resulting in lesser rather than better performance!
As a new subscriber to MFO, I found these comments interesting and helpful. I am familiar with M* analyst reports on fund managers, but often the M* information doesn't include any perspectives on fund managers. Aside from reading the fund prospectus, are there any other easily accessible sources of information concerning fund managers? Thanks.
barpor1