What to look for in a Fund Manager?

Introduction to Mutual Funds

A fund manager (FM) is responsible for implementing a fund's investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as co-managers and by a team of three or more people. Fund managers are paid a fee for their work, which is a percentage of the fund's average assets under management.

To invest in a mutual fund is to make a bet on the future. Whether that bet pays off is a function of how 1) skillful the fund manager is, 2) how lucky he is, 3) how well the market does and 4) how well the manager treats you.

The first two factors are very difficult to measure or predict, and the third is impossible to know in advance. But the fourth is quite easy to evaluate. You want a fund manager who will charge reasonable fees, keep his fund from growing too big for your own good, think independently and courageously and communicate his actions and intentions clearly.

You also want someone who will invest his own money alongside yours - and who knows how much it hurts to lose it. The best fund manager, then, combines a long and convincing track record of excellent performance with a fierce dedication to treating his investors fairly.

The individuals involved in fund management (mutual, pension, trust funds or hedge funds) must have a high level of educational and professional credentials and appropriate investment managerial experience to qualify for this position. Investors should look for long-term, consistent fund performance with a fund manager whose tenure with the fund matches its performance time period.

The whole point of investing in a fund is to leave the investment management function to the professionals. Therefore, the quality of the fund manager is one of the key factors to consider when analyzing the investment quality of any particular fund.

Needless to say, a fund manager with experience is preferred. How long has FM been in the fund business? Does the FM carry any investment designations? Do you feel your FM is a smart decision maker? Just because your fund manager might be battle-tested, it does not mean they are battle-wise - in fact, a fund manager that has been burned in the past by the market might be too hesitant to act when the time is right.

In late 2004, the SEC ruled that fund managers must disclose their ownership in the fund they are running. You want a fund manager that has a financial interest in how he does and a strong ownership in the fund shows that the fund manager believes in him or herself.

Background Check - How can you learn more about your fund manager? The fund prospectus is one spot. The fund Web site is another. A good place to look up alpha, r-squared, and performance is Morningstar and Yahoo Finance. You can also find documentation on some fund managers at the SEC or National Association of Securities Dealers, Inc. (NASD), currently known as Financial Industry Regulatory Authority (FINRA), which is an industry organization representing persons and companies involved in the securities industry in the United States. It is also the primary self-regulatory organization (SRO) responsible for the regulation of its industry, with oversight from the Securities and Exchange Commission (SEC).Web sites.
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