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Is your mutual fund on track?

Marketplace Staff Dec 6, 2008

Is your mutual fund on track?

Marketplace Staff Dec 6, 2008


Tess Vigeland:You think you’ve lost a lot of investment money in this downturn? Try $8 billion. That’s what leaked out of Harvard’s endowment over the last four months.

But it’s only a 22 percent drop. Not bad given that many of us are looking at losses of 30, 40, even 50 percent. Maybe we should fire our mutual fund managers.

Dan Culloton is an analyst with Morningstar. How do you know if it’s your fund manager’s fault?

Dan Culloton: We try to focus on what we call the five Ps: People — who is running my fund? Process — how are they investing my money? Price — what are the fees that this fund is charging me? Portfolio — what is in this fund? What does this fund own? How will it behave in certain markets? And then Parent — what is the culture of this fund company? Is it a share-holder-friendly fund company? Does it really believe it is a steward of shareholder capital or is it really just out to gather fee-generating assets and to feather its own bed?

Vigeland: How do you take those five Ps and do that research yourself?

Culloton: A simple way is to ask yourself, “Is this mutual fund doing what I hired it to do in the first place? Is the same manager who I was attracted to in the first place still running this fund?” There have been a number of cases where mutual funds not only have posted dramatic loses this year, but they’ve also switched managers and they’ve changed strategies in midstream too. And that’s always a big warning flag because then not only are you left with a fund that’s performing poorly, but you’re left with something you didn’t intend to buy in the first place. You’re left with a different manager, a different strategy, and probably different returns going forward.

Vigeland: How do you know who the manager is and whether than manager has been changed in midstream in your fund? Is it right at the top somewhere — it says “This fund is managed by Bill Miller,” for example, at Legg Mason?

Culloton: Not always, unfortunately. Unfortunately mutual fund disclosure varies from fund to fund and from family to family and there are some families which make the manager’s name front and center, make it very easy to find from the perspectives on the website. Other funds, it’s a lot harder. The prospectus documents are a lot more legalistic and complicated and hard to slog through.

Vigeland: You know, I mentioned one of the more famous names in mutual fund management, Bill Miller over at Legg Mason, who had a long, long, long track record of really outstanding returns, but has not had a really great last couple of years. What kind of track record should you be looking for? I mean, does two years a bad manager make or should you be looking at, you know, 10, 15, 20 years?

Culloton: I think it’s fair to judge a mutual fund manager by the holding period, by the manager’s own holding period. So, if you get a manager, say, like Dodge & Cox, Dodge & Cox Stock, where they hold everything they buy for three to five years, it’s hard to asses the quality of that fund and to the quality of their decisions in anything less than three to five years and even longer. So you have to know the strategy and you have to see if the performance lines up with what you would expect.

Vigeland: You know the mutual fund is basically saying, yeah, we’re keeping on track, we’re following our strategy, but, do you really know that behind the scenes that’s actually what they’re doing?

Culloton: You could take a look at what they own and see whether it jibes with what they claim to be doing with your money. If a manager claims that they’re going to be fully invested at all times and all of the sudden they put half of the fund in treasury bills, you have to ask, what’s going on here? Why aren’t you sticking to your strategy? Why aren’t you staying fully invested like you said you would?

Vigeland: Dan Culloton is a senior mutual fund analyst at Morningstar. Thanks so much for helping us out today.

Culloton: Thank you Tess.

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