If you could ask your mutual fund manager anything, would you really want to know which past winner from “American Idol” was his favorite?
It’s a silly question that I pondered after watching some of the “Media Day” festivities during the build-up to today’s Super Bowl. Media Day is when the teams make players available to the media horde, and while I appreciate a writer’s desire to find a fresh angle or coax a clever quote from a star – someone actually asked about Idol – I also recognize the missed opportunity to get real information and settle for the superficial.
When it comes to mutual funds, there is no equivalent of Media Day. While managers sometimes face reporters at a conference or speaking event, few funds hold shareholder meetings, and few investors get to ask probing questions of the person who runs their money.
But let’s say, just for a moment, that shareholders could have a sit-down with their managers. What questions should they ask?
“You’re not going to be invited to sit-down with your fund manager, but you can get answers to some of the questions you’d want to ask, either from the prospectus, the (statement of) additional information or by calling and asking,” says Michelle Smith, managing director of the Mutual Fund Education Alliance.
Here are some questions to get the conversation started, or consider looking for the answers in your fund’s documents or from its service representatives.
Funds often give complicated descriptions of what they do, speaking a language of jargon and legalese. Most managers have a simple explanation. They buy stocks with certain characteristics and sell when those traits or conditions change.
A manager who can’t describe their strategy in three sentences is either making things complicated or trying to come up with plausible excuses for when things go wrong.
The first question is answered in the fund’s statement of additional information, but the second question – which is not – provides context.
Says Frank Armstrong of Investor Solutions, a financial planning firm in Miami: “If your small-cap manager is investing in someone else’s small-cap fund, you probably would want that other fund, too.”
Some managers are compensated based on short-term results, others for long-haul performance. Some need to be at the very top of the heap to max out their pay, while others need to beat their peers or a relevant index, or to simply be consistent.
Managers want to max out their incentive pay, so they’ll manage the fund to do that; knowing their incentives helps you determine what kind of ride you’ll get from the fund.
Investing is a competitive, numbers-driven business.
If a manager – or a fund company – can’t tell you what makes them superior to the competition, you should wonder if they really are better.
Some managers worry about after-tax returns, others care only about the gross number.
A fund’s past tax efficiency – which is available information – is not necessarily a good indicator of what the future holds, because some funds limit distributions more by coincidence than by plan.
If you’ll hold the fund in a taxable account, you want to know if the manager ever thinks about the tax burden you’ll have to bear.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
