Management TeamMutual Funds
All mutual funds have managers, but the purpose of the management team changes for index and active funds. An index fund has a management team that fills more clerical roles. These funds track and exactly emulate indexes, benchmarks, or exchanges. Management simply records the index’s changes and applies those same changes to their index fund. Active fund management teams must research, identify, track, and invest in various firms qualifying the objectives of the fund. They determine when to buy or sell each investment. Your return depends entirely on the ability of the fund’s managing team.
Actively managed investments are only as good as their managing team. A professional management team will become a negative if the manager is incompetent. The majority of funds can’t even beat their own industry averages, or index funds from the same category. Some of this downside comes from fees, but it also comes from ability. In all cases you should be careful against betting too heavily on one fund manager, or just one fund.
Check the manager’s competence level by reviewing their history, performance, and reasoning skills. A fund’s documentation contains this information and delivery is required on request. The Prospectus lists the fund’s previous returns. The Annual Financial Report contains a write up of the manager’s input on financial decisions. The Statement of Additional Information lists the fund’s directors, officers, and managers. It might list information about past experience, but it will always list the manager’s time currently at the fund. Their managing time at the fund is known as their tenure. The mutual fund industry switches managers constantly, but the manager should only be judged for their current time managing the fund. Between all three documents you should become well informed about the fund’s managing team.
A manager’s performance should show a record of stability and returns. If the industry or sector allows, lower volatility with above average performance is preferred. This is somewhat difficult to find. Identifying funds is as simple as comparing a fund’s standard deviation, beta, and returns versus their closest comparable index. Identifying the fund manager’s investment style will also assist you. Use the fund turnover to determine if a fund manager has a rapid trading style of investing or a slower holding strategy. A higher turnover results in more commissions charged and results in higher costs. This increases the drain on earnings and slows performance.
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