|»5 Minute Wrap Up by Equitymaster|
On This Day - 8 DECEMBER 2011
What top fund managers do not want you to know...
In this issue:
Will Italy be able to get back on its feet again?
Will Euro die faster than the Dollar?
Will China now replace US as the new superpower?
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Does that mean that star managers have always been consistently able to perform above average? Not really. If you look at the global mutual fund industry, big fund managers such as Bill Gross, John Paulson, Bill Miller among others have fared rather poorly in recent times. This has laid bare the fact that life is tough even for the most skilled manager and with markets becoming more dynamic, most fund managers are finding it tough to adapt.
During times when the fund manager does not perform, can that be pinned down to bad luck? Certainly, fund managers will not attribute strong performances to good luck but to their skill. This means that underperformance cannot be entirely attributed to bad luck but has a lot to do with human error. According to a report published by Absolute Return Partners, a survey of UK funds showed that out of 1,230 funds across 12 different strategies, only 35 fund managers performed consistently enough to be placed in the top quartile in each of the last three years. So why in recent times, are fund managers finding it increasingly difficult to outperform on a consistent basis?
For starters, much of the underperformance in the decade gone by could be a result of the over optimism in the 1990s. Indeed, many believed that equities as an asset class would always go up in the long run and are paying a heavy price for the turn of events now. The current global financial crisis has only added fuel to the fire especially since it looks like a very long time before the developed economies get back on their feet. Herd mentality has also led to funds not being able to deliver. Given the scale of the recent crisis and the uncertainty it has caused, many investors who had an appetite for risk have become risk averse and the simultaneous sell off across all share classes has rendered the technique of diversification meaningless.
At the end of the day investors, when they choose to invest in mutual funds, need to do a thorough analysis of the funds that they want to put their money into. Selecting a fund solely on the basis of its 'star manager' may not be prudent. The idea is to have your own investment strategy in place and then select those funds that meet your investment objectives. Also, the notion that funds having a high portfolio turnover tend to generate more returns does not hold true. High turnover portfolios only pile on costs without giving strong returns in the future. Moreover, it only increases volatility and that benefits no one. The days when one could just park money into mutual funds and let the fund manager do all the work without the investor having to do much are gone. Given the times that we are in, investors have to be as vigilant when they invest in mutual funds as they would be when investing in stocks of individual companies.
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