By Richard Loth (Contact | Biography)
A long-term fund performance record, preferably over a 10-year period, provides the best indicator of a manager's investing abilities. Accordingly, one of the critical mutual fund investment qualities is to have a match of managerial tenure and this performance period, or at least one that covers a meaningful time span.
To illustrate this point, let us compare two different funds. The XYZ Fund has an annualized 10-year total return of 11% and has been run for those 10 years by the same manager. In the case of the ABC Fund, it has the same 10-year annualized total return of 1%, but it has had two different managers. One's tenure covered the first nine years and the second has only been on the job one year. (To learn how annualized returns are calculated, read All Returns Are Not Created Equal.)
On our Fund Investment-Quality Scorecard, the XYZ Fund's current manager and performance would have a highly favorable 10-year match. We know that past results are no guarantee of future performance, but that experience is infinitely better than a crystal ball! In the case of the ABC Fund, the manager who produced 90% of the fund's excellent results is gone. Will the second manager be just as good? We hope so, and oftentimes that's the case - but things can also go in the other direction.
Common sense tells us that the more closely matched a manager's tenure is with a solid fund performance record, the better. Nevertheless, because managerial change is a fact of life in the mutual fund business, the free FundAlarm website can be very useful. This site puts fund manager changes in perspective by providing views on whether the change will be positive or negative for the fund's future performance. (For more on this topic, see Will A New Fund Manager Cost You? and Should You Follow Your Fund Manager?)
If a fund is run by a management team, the tenure issue becomes moot. There is always someone in the driver's seat that knows the road. And, while index funds have managers, their role is simply that of a technician making sure the mechanics of the index are working efficiently. In the case of a fund run by co-managers, it is assumed that, if there is a departure, there still remains a manager with experience at the helm. If that is not the case, the co-managed fund will have to be looked at as if it were run by a single manager and judged accordingly.
Scoring Fund Management Data
The solo fund manager is still much esteemed in the mutual fund industry, with some of them even reaching celebrity status. However, the trend in fund management is toward multiple managers. In some cases, co-mangers or team management can give a mutual fund higher investment quality than it would have with a single manager. Having said that, it must be recognized that there is a mutual fund managerial elite with outstanding long-term performance records. These managers are highly regarded, and deservedly so.
The Fund I-Q Scorecard includes an entry for a fund manager's personal investment in the fund being managed. Obviously, if a manager has a healthy amount of his or her own money invested in a fund, it would certainly have to be considered a confidence builder by the other fund investors. As alluded to previously, this information is not yet universally available and, admittedly, is not easily obtained by the general investing public. However, oftentimes, comment in this regard appears in the financial press and in Morningstar's commentary. And, if an investor considers it materially important to his or her investment decision, there's no harm done in putting the question directly to the fund's management.
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