Quality is an elusive concept. But with so many actively managed funds
competing for your investment dollars, it’s an important one to
understand because the success of your fund portfolio depends on it.
Widely agreed on components include low costs, consistent long-term
performance, distinct investment philosophy and tax efficiency.
But nine investment advisers I surveyed had other guidance on this important subject.Dan Sondhelm, partner and vice president, SunStar Strategic, Alexandria, Va.
“Strong attributes include:
An investment process that you understand. It’s tough for investors to
understand a black-box strategy where the portfolio manager doesn’t
share the secret sauce.
• A fund that communicates with investors more than the required semiannual report.
• A portfolio manager who doesn’t hide and tells you what he is doing to manage the portfolio.
• Consistent performance: Results should be consistent with what it says it will do.
• Above-average performance for short and long term.
• Low expenses: approximately 1 percent or less.”Matthew Tuttle, CFP, president, Tuttle Wealth Management, Stamford, Conn.
high-quality fund is one that is managed by a ‘skill-based’ money
manager as opposed to a ‘style-box-based’ money manager. A style-box
manager tries to match and slightly outperform an index, but over the
long-term he usually doesn’t. A skill-based manager can go anywhere and
invest in anything. If they’re any good, they’re worth paying for.”Mike Saghy, director of investments, PNC Bank, Pittsburgh
reality, high-quality, actively managed funds are funds that stick to
their discipline. That means both from the taxable standpoint of
executing trades based on their quantitative analysis as well as their
qualitative overlay, but also based on maintaining their disciplined
approach to whatever style sector concentration or other theme they
have depicted in their original outline of the fund.
over time based on the volatility of markets — especially the last 18
months — a lot of mutual fund managers have deviated from their
discipline. They get into what we commonly refer to as scope creep
outside of their stated objectives. A value manager might go toward
growth, and vice versa.
“Individual investors who have a
lot of mutual funds that they manage themselves run into a problem that
leads to increased risk with overlapping positions, higher
concentrations and having the same security within multiple funds. That
leads to more risk and more volatility than even what the active market
or index market might have.”Christine Moriarty, CFP, financial educator and president, MoneyPeace, Bristol, Vt.
fund invests in what it says it does. Many managers jump on the next
great trend to get returns for their fund. When picking a fund, an
investor needs to take into consideration their goals and strategy. If
the fund isn’t consistent, it can cause havoc on their investment
strategy. A fund’s returns also matter, although that shouldn’t be the
main decision-making point. One year of good returns is history. The
future is what matters.”Chad Olivier, CFP, Olivier Group, Baton Rouge, La.
someone looks toward actively managed mutual funds instead of index
funds for investing purposes, there are many things to look at. It’s
important not to invest totally in one fund family.
you invest all your money in American Funds, Vanguard, Hancock, PIMCO,
etc., you could have considerable overlap in certain positions. You’ll
have too many of your eggs in one basket and can take excessive losses
when you initially think you’re diversified. Instead, spread out your
investments. This will ensure that you have different investment
professionals choosing the investments instead of the chief investment
officer at one of these families.
“You want to look at how
the fund has reacted and performed in both bull and bear markets. If a
fund has historically performed very well in bull markets but has been
awful in bear markets, you might want to look at a fund with less
volatility. The less volatile the return of the investment, the better
the scenario for the investors. These returns also indicate that the
managers have a good idea of the leading indicators of the market and
can typically judge its direction and plan accordingly to create higher
returns.”Michael Edesess, partner and chief investment officer, Fair Advisors, Denver
no way to separate high-quality actively managed mutual funds from
other actively managed mutual funds except by using two criteria: costs
and tax efficiency. No statistical methodology can discern, with any
meaningful level of confidence, whether one actively managed mutual
fund is more likely than another to outperform its benchmark in the
“The higher-quality funds — in the sense that
statistical and scientific analysis can show that they’ll be more
likely than other funds to deliver better results to the investor — are
the ones that minimize fees and taxes. That is the simple and plain
truth.”Gary Hager, CFP, president, Integrated Wealth Management, Edison, N.J.
look at a handful of items that will qualify or disqualify a fund. If
it’s an active fund and basically has an essential theme, I look for an
exchange-traded fund that I can potentially compare performance to,
both the risk-adjusted performance and the volatility. The next thing
I’m going to look at is manager and tenure. In this day and age, it’s
more difficult to manage, especially with the financial crisis, so my
preference is to have a fund that’s managed by an individual who has
been around no less than 10 years.
“I don’t want any hybrid
funds. A fund to me can’t be a blend of any kind — it’s got to have one
discipline, whether it’s a large-cap growth fund or a small-cap value
one. Show me a manager who has expertise in one area. I don’t really
believe you can have expertise in more than one.
thing we’re looking for is the fund family itself. We want to know that
the fund has strong backing from a company that has been around for a
long time. We also like to look at expenses compared to a peer group.
be careful about reaching for funds that are ranked No. 1 in a
particular year because more often than not, No. 1 becomes No. 10. It’s
better to look for a sustained effort over time.”
Manisha Thakor, CFA, former analyst and portfolio manager, Santa Fe, N.M.
“My top five attributes that separate the many mediocre mutual funds from the handful of really good ones are:
• low fees
• low portfolio turnover
• 50 or fewer holdings
• long-tenured investment team
• employee-owned firm”Michael G. Knox, CFA, president, Xtract Research, Ridgefield, Conn.
think the real question is whether one should choose an actively
managed fund over an index fund once a decision has been made to
allocate money to equities. Here are some things I would consider:
many stocks does the manager own? If they own 300 stocks, then what’s
the point of paying the management fee? Just buy an index fund and pay
a lot lower fees. You’re paying a manager for their expertise and
stock-picking ability. Anyone with a larger number of holdings isn’t
really providing that value. Fewer positions create more risk if the
manager is wrong, so be prepared for that result and don’t put all your
eggs in one basket. I would discard most managers with more than 100
holdings in favor of an index.
“Read a manager’s comments in
their annual reports and look for insightful comments. Talking about
Microsoft’s sales growth or some other item that everyone knows doesn’t
show a lot of depth in the thought process. Look for something
interesting that demonstrates that a lot of research has been performed.
for comments about debt in the annual report. Equity managers who don’t
understand the debt market and the implications for rolling over bank
debt or other maturing debt are taking the risk of getting burned by
things they don’t understand. In this environment, you want a manger
who understands the entire capital structure.”