It no longer seems relevant to talk about
Fidelity Magellan being the No. 1 fund for the 10-year period from 1980 to 1990.
During that time, it never ranked higher than 16th on an annual basis. It ranked as low as 647 in 1987 and 988 in 1990. Today,
would be fired as a gross underperformer by the instant-gratification crowd.
Nowadays, the market seems to defy the gravity of historical lessons. Stubborn allegiance to time-proven allocation formulas and styles forfeits the immediate gratification that our society so strongly demands now. If managers cannot respond with appropriate moves, they are in trouble.
A winner today could be a loser tomorrow. Just ask former champ Bill Sams of
FPA Paramount. Huge capital gains and poor performance don't mix well for a winning portfolio. Bill Berger's protege, Ron Linafelter of
Berger 100 fame, is presumably very happy being totally out of the investment business. There are lots of other examples.
Somebody once said, "Reality is the first casualty of presumption." My reality is that I manage portfolios of mutual funds for my clients. You may do the same for yourself. In my case, presumptions have to constantly be tested.
We all have similar problems. The main issue is we all want to make money -- the more the better. To do that, we have to pick the winners. That is not as easy as it sounds. How do I go about trying to pick the winners? Let me briefly review some of the things I look at in picking a fund.
First, I try to answer the question, "What kind of fund is it?" Last year, almost anything in the small-cap, developing markets or value categories got crushed. It does not matter that outstanding managers like Mark Mobius, Marty Whitman, Jean-Marie Eveillard and Chuck Royce were managing funds in those categories. They got slammed by forces out of their control. All-asset-class managers are a rarity, but those who come the closest are Bill Miller of
Legg Mason Value Trust, Bill Fries of
Thornburg Value and Wally Weitz of
I don't stay indefinitely with a particular asset class if it is not performing. Sure, it will be back in style at some point, but I get paid to actively manage, not to discipline clients.
Equally important is the manager. I just want great managers. How do you find them? Start with a good track record. A manager creates a good track record when a fund's performance is exceptional compared with its risk. Risk-adjusted performance is an important concept. If a manager can take 50% of the risk of the
and get 80% of its return, that is a good deal! In absolute numbers it may not look so great, but it is when you consider the risk involved.
Another issue that determines great managers relates to style. It is important that you know how managers define their style. The definition should not come from
. Once a manager tells me his or her style, then I want that manager to have integrity. Integrity in this case, means consistency of style. That is the important issue, not style consistency. Sounds like a play on words, but it isn't.
Style consistency is exemplified by the Morningstar style box. The box is merely a handy tool to give an indication of where a portfolio is at during a given point in time. "Style drift" is often mistaken for movement in Morningstar's style box. It doesn't always represent a total style. Bill Miller of Legg Mason has been in several of Morningstar's style boxes. It is OK with me if a manager changes a style and tells everybody he has done it and why. It is the stealth manager that says one thing and does another with no disclosure that I'll trash in a hurry.
I also give consideration to the company and resources a fund manager has. It's one thing for a Garret Van Wagoner to form his own start-up company with no analyst or trader, but it's better to be analyst-rich like a David Alger. A company must have an efficient back-office operation to make me feel comfortable.
Simple, but insightful observation of key events coupled with some intuition also can help in picking a good fund.
For me, the process of picking funds combines the resources of high tech, low tech and no tech. I have done a no-tech mutual fund exercise every week for eight years. Every weekend, I make hand entries in an accounting book on 343 mutual funds I track. Computerizing this exercise misses the point. Any psychologist will tell you the process of writing something down is very different from looking at a screen. The mind is still the highest form of technology.
As I look each fund up in the paper and enter its year-to-date performance, I am forced to think about that fund differently than when looking at a screen. This facilitates my ability to pick up changes in manager behavior as well as trends and shifts in the market. This has become a profoundly simple exercise that is indispensable to help me pick the winners, dump or avoid the losers and know when to put somebody out to pasture.
As always, your comments or critiques are most welcome! Have another great week.
Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at