Finding your match in a manager
That fund you love is run by a thinking entity. Why trust your finances to a blind date?
NEW YORK — It's mostly just cold numbers.
But investors know there's a warm human hand on the tiller of their favorite funds.
A peek at the prospectus even puts a name to that mysterious helmsman - or woman.
So how important is it to know more about the person in whose hands your retirement rests?
It helps to at least know whether they have a history of steering clear of the rocks.
Within the mutual-fund industry in recent years, a small coterie of well-known fund "superstars" has emerged, managers such as the legendary Peter Lynch at Fidelity, Tom Marsico at Janus and now his own firm, Bill Miller at Legg Mason Value Trust, Mario Gabelli with his own funds, and Philip Treick at Transamerica and now with the Hare Fund, a specialty (hedge) fund.
But alas, most mutual-fund investors do not have their assets invested with a fund superstar. Moreover, even the superstars have had down years.
What then should an average fund investor do to make certain that he or she has found the perfect match - a fund with a solid manager?
"Consider a number of variables, including the tenure of the manager at a fund, his or her experience, the manager's investment philosophy, and total return over time," says Michelle Smith, who heads up the Mutual Fund Education Alliance, a trade group based in Kansas City, Mo. "When measuring total return, remember that a fund can be affected by short-term changes in the overall economic environment," she says.
"Consistency" may be the most important factor in gauging both a successful manager and productive fund, says Lawrence Solomon, who compiles the statistical data for the No-Load Fund Investor, a newsletter published in Irvington-on-Hudson, N.Y.
"Be wary of the hotshot manager whose picture suddenly appears on the cover" of a major business magazine, says Mr. Solomon. "That manager may be very hot one year, but about to turn in sub-par performance the next year," he says.
Rather, what you want to look for in a fund and a fund manager is "steady performance," he says. Based on his analysis of thousands of mutual funds, Solomon favors funds that beat certain benchmarks - such as major stock indexes - over time, and are constantly ranked in top fund percentiles.
Also, look for a fund that has a team approach to investing - with a strong manager out front and a bench of first-rate research analysts, he says. And don't be totally turned off if a fund occasionally dips somewhat in returns, or gets a verbal snub in a report by ratings firms such as Value Line or Morningstar. Even the best of funds can have off days, or months, he notes.
Sometimes small, stand-alone funds will have extensive backup research staffs, says Solomon. But in most cases, he says, consistently successful funds with in-depth research teams, tend to be found in larger fund companies, such as Janus, Vanguard, T. Rowe Price, and Fidelity.
Alan Cohn and Stephen Cohn, founders of Sage OnLine, a financial Web site on America Online, and authors of "The Sage Guide to Mutual Funds," (Harper Business), argue that it is crucial to make certain there is a "continuity of management" with your fund. When a manager leaves, after all, the fund essentially becomes a new fund - since a new manager will likely make major changes, not only to the portfolio of a fund, but its very objectives or style.
Usually, says Solomon, fund managers that depart to a new company take their stock picking prowess with them. Of course, there have been managers who tanked at a new fund company, although they were successes with their prior firms, he says. But by and large, if they have good chemistry with their staffs, they can often transplant their stock-picking skills, or even improve on them.
Should an investor leave a fund when a fund manager leaves? Kurt Brouwer and Stephen Janachowski, authors of "Mutual Fund Mastery" (TimesBusiness), say yes, because the fund becomes a new fund.
But whether an investor should follow that same manager to another fund is a complicated issue, says Solomon. The skill of the manager is crucial; but so too is the quality of the larger research team at a fund, he says.
If the team stays in place, one may want to consider staying put long enough to see how the new manager does in his or her initial months, he says.
(c) Copyright 2000. The Christian Science Publishing Society