Mutual funds: Who’s in charge?

A mutual fund may seem rather impersonal, but it’s not. Somewhere, behind the scenes, people are making decisions every day on:

• Which securities to buy
• Which ones to sell
• What companies look promising
• How much cash the fund needs, and more.

They’re at a computer, on the telephone, meeting with business owners, or even travelling the world in search of bargains.

They’re the fund managers, and they’re the key to any fund’s success. A good manager will consistently generate above-average returns for investors; a mediocre or poor manager will produce indifferent results.

• The manager is the key to a mutual fund’s success.
• It’s easy to find information about fund managers, if you take the time to look.
• Don’t be too quick to follow a manager who leaves a fund — wait six months and review the situation.

Finding out who’s in charge
There are a few well-known fund managers in Canada, although most toil in relative anonymity. But just because a manager isn’t well-known doesn’t mean he or she isn’t brilliant; it may simply be that the business press hasn’t scovered him or her yet.

Some funds are effectively run by committee. While one person may be listed as the fund manager, decisions are really made by a group.

You may find a few companies that refuse, for reasons of their own, to disclose the name of a fund’s manager, preferring to give only the name of the management company. In this case you’re operating in the dark about who actually runs the fund. If you encounter this, insist on more information about the credentials of the people to whom you’re entrusting your money.

A few funds actually bear a manager’s name, although in some cases the responsibilities may have changed over the years. For example, Sir John Templeton remains the guiding genius behind the Templeton family of funds, but he doesn’t actively run the funds any more. He lives in semi-retirement in Nassau, freely giving interviews to business journalists seeking the secrets of his success. But the actual decision-making is in the hands of a new generation of fund managers, who are well-steeped in Sir John’s value investing approach.

Names like Kiki Delaney, Jerry Javasky, Veronika Hirsch and Gerald Coleman are known to many fund investors.

Most managers aren’t well-known, of course. But many have well-established credentials and a solid track record. For example, few investors know the name of Ian Mottershead, but he’s been successfully overseeing the Canadian equity funds of Phillips, Hager & North for many years. He is just one example of the many little-known fund managers with excellent credentials you can find with a bit of sleuthing.

• Manager profiles now appear regularly in the business pages and in the monthly mutual fund supplements published by many major newspapers.
  
• In-depth analyses of individual funds and their management strategies have also become a business press fixture.
  
• There are several annual guides to mutual funds on the market, some of which contain profiles of leading fund managers.
  
• You can often dial in on the conference calls they hold regularly with sales representatives.
  
• Or get a free audio cassette in which they explain their current outlook and strategy.

So there’s no shortage of information, if you’re prepared to look for it.

Assessing a manager
There are two essential points to consider when assessing how a fund’s manager is likely to perform.

1. Past record. Check how the fund has done since the current manager took charge and how that performance compares with the fund’s record prior to that time. If the performance has improved or remained stable at an above-average level since the manager took over, it’s a good sign (but of course no guarantee) for the future.
    
2. Stability. A manager who has been in place for several years, producing good results, is reassuring to potential investors. A new manager is an unknown quantity, unless he or she has established a track record with another fund.

Be extra cautious in the case of a fund that was run for several years by a manager who has recently departed. This is especially true if the manager was largely responsible for calling the shots (as opposed to working within a committee). In such cases, the fund’s past record should be discounted in making a purchase decision.

Just don’t react too quickly. Generally, the evidence suggests that you shouldn’t be in too much of a hurry to follow a departing manager. Often the fund that a departing manager has left behind performs better than the fund he or she takes over, at least for a while.

The bottom line: if the manager moves, stick with the old fund for at least six months and then re-assess the situation.