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Who's Managing Your Money?
How do you know what mutual funds are right for your portfolio? What criteria can you use to determine if a fund is meeting your needs? When should you take your money elsewhere?
 In making these decisions, it's easy to lose sight of the human element behind every fund. Behind every fund — even index portfolios — are real people who make countless decisions almost every day that affect your money. If your relationship to the people who actually invest your money seems very remote, just keep in mind that, ultimately, they work for you. We asked Randy Burge, a Russell portfolio manager, to explain how those intangible human factors can affect a fund and what information an investor can use when deciding whom to "hire" and when to "fire" a fund manager.
WHAT TO LOOK FOR IN A MUTUAL FUND MANAGER
Define Your Objectives
When considering whether to buy a mutual fund, one of the most important steps is to clearly understand the role you want the fund to play in your portfolio. Of course, performance is likely to be your primary interest, but it may not be your only concern. If you invest some of your money with a value-oriented fund manager as part of an asset allocation strategy, for example, you can't necessarily fault him or her for remaining focused on value stocks even when they're out of favor. Funds that at the moment have disappointing results may nonetheless serve a long-term strategic role in your portfolio. So if you hire a manager with expectations that they are simply unable to fulfill at all times, you are likely to be disappointed.
Zero In
Determining what role you want a fund to play in your portfolio is just the first stage of the decision-making process. That initial step may help you narrow down your choices to a category of funds or style of investing. Then you need to determine which of the fund managers and funds in that category would be best suited for the goal. How will the manager work with others in your portfolio? Does his or her strategy complement or merely duplicate the approach of one you already have in your portfolio? Some strategies are more prone to overlap than others: Two momentum-driven fund managers are more likely to hold the same stocks than, for instance, two value-oriented fund managers. So buying a momentum-driven mutual fund simply because the fund manager has produced incredible returns may not make sense if you already have a significant share of your assets with another momentum-driven fund manager.
Give Credit Where Credit Is Due
Another thing you need to know is who generated the fund's past performance and who is going to be responsible for it in the future. Are the investment professionals who produced the fund's historical returns still making the day-to-day decisions? This is an especially important consideration right now, because the market's strength over the past few years has led to an increase in investment houses "poaching" talent away from other firms. If the manager who generated the fund's historical performance is no longer at the helm, will the current manager carry over the strategy that drove the fund's returns? More importantly, do you believe that he or she will have as much success with it?
What incentives are there to keep talented professionals with the firm? Besides the continuity-or lack thereof-in a fund's management team, try to get an idea of what else motivates the managers and analysts. Russell favours managers whose compensation is linked not to the amount of assets they attract but rather to how well they serve the needs of shareholders. That arrangement aligns their interests with yours.
Look for Truth in Advertising
Besides the qualitative aspects of a fund's management, there are important quantitative factors that can give you clues about its future performance. Do a detailed analysis of the portfolio. Does it reflect what the managers say its goals and scope are? Or does it depart significantly from the fund's charter or-intentionally or unintentionally-have a tendency toward style drift?
For example, a small-cap fund with a policy of holding onto its winners may end up a de facto mid-cap fund with a larger average market capitalization than its competitors.
At Russell, we have access to detailed historical information on the portfolios, so we can review a fund's performance and characteristics over time and catch trends as they're beginning to emerge. Russell has more than 50 research analysts who conduct thousands of face-to-face interviews with portfolio managers each year. Russell then uses these insights to select teams of money managers that we believe have the experience, talent, and resources to best meet clients' investment goals.
Other questions you should ask: Does the firm have a clearly defined approach to investing? Is its strategy thematic, top-down, or bottom-up? If bottom-up, the strength and size of the research team can be just as important as the abilities of its portfolio managers.
For further information about these contents, please contact Russell Investments Canada Limited.
Copyright© Russell Investments Canada Limited 2008. All rights reserved. Important Legal Information. Date of first use: July 2000.
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have.
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