Buttner Bonus: Readers Talk About the Need for Fund Heroes

And, for the most part, they agree: We don't need heroes. We need good stock pickers.
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Geez, you'd think I was offering free tickets to

Phantom Menace

or something. My mailbox was stuffed this weekend with lots of letters from readers responding to last week's

column on hero worship. Seems I struck quite a nerve.

I did take a controversial position: disagreeing with fund fans who blame America's shift from funds to stocks in part on a lack of "heroes" among money managers. No way, I say. Another

Peter Lynch

is hardly the answer to the industry's ills, which include the inability of many active managers to beat their benchmarks. And I think it is a good thing that small investors, now more educated, skeptical and exacting, are more likely to ask for an explanation than an autograph from our fund managers.

Here's what you think:

It's the asset classes, stupid! Sometimes I can't believe it when supposedly savvy financial writers talk about managers and funds beating or not beating the "market." I don't know if it is just hot air to get some words on paper or if you are really unaware. The performance of a group of stocks in the same asset class is largely dependent on that asset class. -- Steve Maag

Yes, that is true. As far as it goes. But is that to say you can simply excuse ALL small-cap or value managers because their style is out of fashion? It's important to hold them to standards, too -- namely, their performance against the peer group. How do they do RELATIVELY? If a fund consistently bumps along the bottom of its category, that should give you pause.

And next time, Steve, please don't mince your words so much!

I'll take the personality or leadership abilities of a ham sandwich if it will deliver market-beating returns. What other function is there for a fund manager? To entertain us with charm and wit? I'll take the higher returns. -- William Utley

Exactly. But it does depend on how you judge "higher" returns. Don't become too enamored of short-term numbers. Be sure not only to look at the returns in the current environment. How did a manager do during down times? Check out performance during 1994, say. Or if a fund hasn't been around that long, how did it fare in the sell-off during the third quarter of last year? And even long-term returns can be deceiving. Is a 10-year number on an average annualized basis built during the early part of the record and does it hide less-than-spectacular performance of late? Investors these days are smart enough not to be dazzled by names, but we also have to be careful not to let numbers blind us either.

You are right on the mark. Passing an SEC exam or having a degree in finance does not equip one to look under the hood of technology companies and see which ones have that potentially winning engine. A large number of analysts that I read do not understand the technology that is driving the market. It doesn't take in-depth understanding, but some idea of what is going on and which business models are unique and expensive to reproduce. It takes insight into the technology to determine who has a chance of being a real winner in the race, and who just has a loud engine. -- Dave Neal

Yes, Dave, as you say, you don't need to be able to put together semiconductors in your garage, but some hands-on experience will help you understand the trends of the industry. What do you think of consumer service at some of the .coms, for example? (I thought it very revealing that, as we

reported earlier this month from the

Morningstar Investment Conference

, veteran manager Elizabeth Bramwell likes the "theme" of the Internet, but has never ordered a book from

Amazon.com

(AMZN) - Get Report

.)

Yet even a strong knowledge of the technology (or of a company's balance sheet) doesn't guarantee you'll grab some "Net" on a short-term basis, either. In these very volatile times -- and this very volatile sector -- you need to have a read on what other investors are thinking. Long term, it may be that good companies win out, but for now, it's not so much profits as psychology.

I don't own funds because my portfolio is too large for funds to make sense, but most small investors should own funds, not try to pick stocks. The current environment of people trading funds is just plain scary. My take is that at some point we will begin to have a spate of margin calls from the do-it-yourselfers and the bears will get control. -- John O'Donnell

You definitely shouldn't be trading funds as many investors trade stocks. The problem is not only redemption fees, etc., but the fact that this is often done with a rear-view mirror as the main tool. Yesterday's leader or most-loved fund sector will not necessarily be tomorrow's. In fact, a recent study shows that if you buy funds from the least popular (in terms of asset outflows) categories and hold them for three years, you will beat the average equity fund.

And finally, some of you pointed out that I incorrectly attributed the phrase "cult of personality" to

Living Colour

. Lest my college government teacher roll over in his grave, let me assure you that I know the rock band didn't coin the term. Yeah, I haven't forgotten about the

Stalin

years. But I deserved your hand slap -- guess I've been watching too much

VH1

these days!

Thanks again for writing! Appreciate the input.

Brenda Buttner's column, Under the Hood, usually appears Thursdays. At time of publication, Buttner had no positions in the funds mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.