When investors look at purchasing a fund, they often review a fund’s objective and its historical performance. While both are logical to examine, it is also important to know exactly who it is that is managing the fund, since this person is, ultimately, the one to whom an investor is entrusting his or her money.
Clearly, an investor should ensure that a fund’s objective matches with his or her own goals. This information can easily be found in a prospectus or at a fund family’s web site. It is also important to review a fund’s relative historical performance, too, preferably sticking to those funds that are, over the long term, better than average. (You can, of course, find this type of information within Value Line’s mutual fund products.) But one shouldn’t stop there. Very often the person behind the curtain, to paraphrase the Wizard of Oz, is just as important.
At the most extreme level, a recent manager change could completely alter a fund’s investment approach and make historical performance numbers virtually irrelevant since the new manager wasn’t around for the fund’s previous performance. Take as an example Fidelity Magellan Fund (FMAGX). Peter Lynch rose to fame managing the fund to strong returns, but subsequent managers haven’t had the same success. If you purchased the fund shortly after Lynch’s departure in 1990, you bought a vastly different fund.
On a less dramatic note, investors are putting their hard earned and saved money into the hands of a portfolio manager and should get to know as much as possible about this person or team. Indeed, managers approach investing in vastly different ways. Some are growth oriented, others seek value. Some managers start with a broad based economic view, others build a portfolio on a stock by stock basis. And while a prospectus is a good starting ground, they often don’t provide fine detail about objectives and investment approaches. This is because a prospectus is a legal document that limits what a fund can and cannot do, providing too much detail or creating too many constraints that can limit a manager’s ability to do his or her job or, worse for the fund family, open the company up to shareholder lawsuits.
So how does one find out about a manager? It’s easier said than done, unfortunately, as most investors can’t just call up the fund managers to chat.
The first place to start is almost always a fund family’s website. Reviewing a few different fund sites should be enough to distinguish between fund families that have strong shareholder communications and those that do not. For example, Baron Funds provides a great deal of information in its quarterly reports about the family’s overriding methodologies and the goings on at individual funds. The family is one of the most communicative around. Gabelli Funds, Ariel Funds, Royce Funds and Matthews Funds are similarly shareholder friendly in this regard.
Larger fund families such as Fidelity and Vanguard, however, don’t provide as detailed information about their funds. What the larger fund families tend to focus on with their communications are broader investment topics, such as asset allocation. While beneficial, these types of discussions don’t help an investor learn about and grow comfortable with a portfolio manager. While it may seem odd that the industry behemoths don’t have the most in-depth information, the fact remains that smaller firms often do a better job of letting shareholders know about their funds and the managers behind the funds.
Another source of information about a fund’s manager are media interviews. Interviews can be found across a variety of mediums, including web sites, magazines, television, and radio stations. Some fund families, such as the Royce Funds, will archive such interviews on their websites. The problem here is that finding this type of information often takes time for those fund families that don’t provide an archived listing. It is probably time well spent, but time nonetheless.
The end goal is to understand not only what a fund manager is doing, but why. Once this is understood, it is possible to decide how well a manager’s views about investing and the world coincide with your own. If there is a material mismatch, it is probably best to find another fund.
Mutual funds are, at their core, meant to be long-term holdings. Investors who fully understand not only a fund’s goals, but also how the manager attempts to achieve those goals, will make shorter-term trading less likely.