We’ll be covering the basics of selecting, allocating and monitoring your mutual fund portfolio in this series, including how to select a fund, what does allocating mean and how to monitor the performance results of the fund(s) you select.
Selecting your fund. The name of the fund is not terribly important because the portfolio manager/investment manager has to have some flexibility in managing the portfolio in order to adapt to changing market conditions. However, “brand” names do count. It’s assumed that an experienced manager will allocate the fund’s assets among several different companies, industries and perhaps geographical locations that they believe will produce the best performance results.
John Templeton was famous for advising investors to find a manager who has the ability to invest in companies in any industry or geographic location – anywhere in the world – simply because public companies typically do not perform in lock step with each other based on economic conditions that can and will change.
Investment Manager or Asset Gatherer? This leads us to another key question – is the investment manager’s business primarily money management, i.e., managing other people’s money? In other words, is that how they make their money? Or is the manager a subsidiary or division of a company whose primary business is something other than investment management. This leads us to the first, and perhaps most critical decision to be made.
Should you select an investment manager or an asset gatherer? Most people know what an investment manager is and it covers a lot of territory – investing for the public at large, investing for institutional accounts, or specializing in one segment of the market, i.e., municipal securities. Another manager is an asset gatherer that operates an investment management service or hires investment managers to manage its client’s monies. Asset gatherers include: banks, brokerage companies and insurance companies, all of which share the distinction of having as its primary business something other than investment management.
Therefore, the first issue to resolve is do you want a company that devotes virtually all of its time and efforts to money management, or a company that uses a subsidiary to attract business with the objective of promoting its primary business activity? That seems like a pretty simple decision to make. By taking this approach you dramatically reduce the choice of funds from which to select.
So it’s important to remember that those securities sales persons, investment advisers, financial planners and insurance salesman may not be as objective in their recommendations as they should be because their company wants them to focus on bringing in clients who might also invest in one of their other products or services. And it’s possible that they may be rewarded for selling their company’s product as opposed to other mutual funds that may have a better performance record. It’s interesting to note that if you follow reports of mutual fund performance results, you won’t often find the asset gatherer’s products consistently among the top performing funds. Sure, it does happen on occasion, but the key word is “consistently.”
So Rule #1 is to select an investment management firm that devotes its primary attention, talent and efforts to delivering a product designed to satisfy your investment goals by producing good, consistent, above average performance results over time.
Anything less isn’t good enough.
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