We hear it all the time. “Put your money where your mouth is,” “Skin in the game,” and, “Eat your own dog food.” All phrases that talk about the one thing in the investing world that many fund managers try to avoid. Accountability. When you hear the word accountability these days it usually refers to CEO’s that are on their way to jail or Club Fed as the locals like to call it. Accountability is, however, now starting to creep into the vernacular of investors who wonder whether or not the person that is supposed to be managing their investment believes in it enough to put his own money into it. A recent Morningstar study of approximately 6,000 fund issues showed that 46% of the stock funds reviewed were managed by fund managers with none of their personal money invested in their own funds.
Think about that in realistic terms. You have about a 50/50 shot that the person you are trusting to protect and grow your investment doesn’t trust himself to protect and grow his own investment. That is not only a serious problem of accountability but what about performance? During my formidable years at USC, I took a Business Development class that was being taught by a former Controller of General Motors (I don’t remember his name and it was during the cheap gas good times at GM). He devoted an entire semester to what he felt was the one thing that made people perform at their best. Motivation. Motivation derived from doing well in the eyes of others is a pretty good source, but it’s nothing compared to the personal motivation derived from something like the well being of your own investment account. Some of the arguments we may hear from fund managers are that the types of investments that they manage don’t fit well in their portfolio because of variables like age, risk tolerance, etc. This argument could be made for fund managers in their 30’s and 40’s that don’t invest 30% of their portfolio into the super conservative fixed income fund they are managing like a bond fund, but there is really no excuse for investing zero.
I have seen a few articles on this subject lately and I thought investors would like to hear about this from a fund manager’s perspective. Being a fund manager myself I can tell you that it is personally stressful for me every time we make a decision that will affect the fund and the investor money we are using. I think any fund manager that doesn’t feel this way is either too detached or on prescription medication. Besides the stress of investing someone else’s money, the thought that also goes through my mind like a hammer is how much money I will lose personally if the investment goes bad. This thought is present for the simple reason that I am heavily invested in our fund and any bad decision will affect me personally. I don’t have the option of having a deal go bad, and say “Well Mr. Investor, we’ll try harder for you next time and I am sure glad it wasn’t my own money that was lost.” I think this kind of accountability is the last and most important check in a system of checks and balances that lead a fund manager to a prudent decision.
The other large problem associated with fund managers and their investors is the lack of accessibility to the fund manager.
Now I can totally understand how fund managers of large multi-billion dollar funds can’t speak to the multitude of people investing in them. However, I think the comfort level associated with being able to pick up the phone and speak with your fund manager is absolutely irreplaceable. I say this not only so you can ask questions about your investment or get their perspective on the market, but more importantly to get an overall feel of the type of person that is investing your money. So I think we can all agree about the benefits of speaking with your fund manager, but with accessibility, there is a flip-side check in the check and balance system. If the fund manager knows you, there is a feeling of personal responsibility that is created, and that responsibility helps create some caution when he is investing your money.
I realize that we live in a virtual world, but some of the age-old principles of life need to still apply. Being personally tied to a result creates the motivation for good performance, so make sure your fund manager is personally invested. Lastly, there is still an awful lot you can learn about someone in a five-minute conversation. If you have the option, call your fund manager, or prospective fund manager, and talk to him about his investment philosophy and just try to get an overall sense of him/her as a person. The same five minutes wasted while waiting for your computer to boot up, could be five minutes with your fund manager that, in the end, can make or save you an awful lot of money. So stop reading and start calling and find out who is managing your money.
Why We Use Fund Managers
If you were extremely rich, you’d be able to afford a team of private money managers – people who would watch the markets daily and seek out investment opportunities for you.
The good news is that you don’t need to be rich to access this – it’s what fund managers do.
A managed fund is an investment that consists of a pool of funds – $20,000 from you, $50,000 from someone else etc. These funds combine to be in the millions and are invested by professional money managers.
What we’re good at
Financial Planners are good at being financial planners. We’re not funding managers. Our job is to recommend financial strategies that will help you achieve your long-term goals. It’s what we’re good at.
We choose to outsource the actual managing of your money to professional fund managers. It’s their job and it’s what they’re good at.
What a fund manager does
A good investment company has a team of staff who manage your money. Let’s consider a fund that invests in Australian shares.
The fund employs a team of investment analysts. Each analyst may have a different field of expertise i.e. resource stocks, telecommunications companies etc. They have access to a wide range of research on the companies they’re looking at. Due to the size of the funds, they’re able to meet with the key staff of the companies and visit their offices. They’re able to react quickly to company announcements and market movements.
Due to the size of the funds, they’re often able to obtain some cost reductions. For example, the stockbroking rates they’d pay will be far less than what the average investor pays.
The fund invests your money across a range of companies. Some share funds may have a concentrated portfolio of around 20 stocks, others may hold over 100.
Most funds management companies have a disciplined investment structure in place that takes the emotion out of investing. If you or I bought a share and it declined in price, we may be reluctant to sell because we like to think we can always pick ‘winners’. If we sell at a loss, that would be losing!
A fund manager has a process that removes the emotion. They have defined reasons for buying (or selling) a share. If the price declines, they’ll want to see why and if they still believe in the company they’ll generally see the price decline as an opportunity to buy more shares at a cheaper price.
Cast a wider net
There are managed funds available for investments all around the world. Australia has a relatively small share market compared to the rest of the world – we’re less than 2% of global share markets.
It makes sense to invest offshore. You’re able to invest in companies and technologies that aren’t available in Australia. Companies like Nokia and Google are only available on overseas stock markets.
A professional fund manager makes it easy. They usually have analysts all around the world and they’re able to react quickly to market movements and investment opportunities – even when you and I are sleeping.
Different fund managers have different ideas on how to invest your money. A company that may be considered too expensive to buy by one fund manager may be seen as a bargain by another.
Which one is right? They both are.
You may know about the importance of diversification. Even within an asset class, we can diversify. Different share managers have different approaches to managing your money. We’ll generally pick managers with different ideas so that when you combine the different portfolios, you have a good mix of investment ideas. They’ll all be ‘right’ at different times – that’s the point of mixing them up.
Of course, you could choose to manage your money yourself, investing in shares etc.
But that takes a lot of time, and it’s a big risk. You’re betting that you can invest better than a bunch of professionals.
Many of our clients tell us they’re time poor. If they had the more free time they’d spend it with family and friends, they’d use it to indulge in a hobby, they’d take better care of their health and fitness.
So to us, trying to manage your money yourself carries a high amount of risk. We believe there’s value in outsourcing it to professionals. Let us advise you on the right strategies, and let fund managers invest your money. As a result, you can have more free time to do the things you enjoy.