Mutual Fund Managers Don’t Attempt To Outguess The Market Mutuals Aren’t Managed To Provide You Much Protection From Broad Market Declines
Ask one of today’s top mutual fund managers for an economic or stock market forecast, and you’re likely to be disappointed.
With relatively few exceptions, a typical modern stock-fund manager may have nothing at all to say on the subject of where the Dow Jones industrial average, interest rates or the economy’s gross domestic product is headed.
Before you dismiss this as a cop-out, consider the way many stock funds are managed these days. Most modern fund managers make no effort at all to time the stock market, operating on the assumption that short-term ups and downs in the economy and the markets are impossible to predict no matter how hard you try.
Instead, they concentrate on so-called “bottom up” stock-picking, keeping their portfolios fully committed at all times to the best ideas they can find in the market. If there is any cash-reserve cushion in their funds, it is probably there only temporarily while they look for new places to put it to work.
Managers of index funds take the idea a giant step further, eschewing stockpicking as well and simply setting up their portfolios to duplicate the behavior of the index they use as a model.
These things are vital to understand in order to know what you reasonably can and cannot expect from a stock fund.
For one thing, it doesn’t make sense to think that either an index fund or an actively managed fund that emphasizes stock selection will provide much protection from broad market declines, whether they be brief setbacks or long, drawn-out bear markets. It’s assumed you’ll do your own planning against this kind of hazard, ideally by diversifying holdings and taking a long-term view of your stock investments.
If you want market-timing efforts from a fund, you should seek out only those funds that explicitly state their intention to attempt that sort of thing.
A typical scene dramatizing these points took place at a recent conference in Chicago sponsored by the research firm Morningstar Inc., when a member of the audience asked a panel of four prominent fund managers how long they thought the stock market could keep forging ahead to record highs.
At first, the question was met with silence and blank looks. Then John Laporte, manager of the $4 billion T. Rowe Price New Horizons Fund, said into his microphone, “I don’t worry about the level of the market every day. I kind of let the market take care of itself. I try to find good companies to invest in.”
Added Martin Whitman, chairman and chief investment officer of New York’s Third Avenue Value Fund and a veteran of more than 30 years in the business, “I’m certainly not worried about the market, or interest rates or GDP.”
Whitman pointed to the most celebrated investors of recent times, such as Warren Buffett of Berkshire Hathaway Corp. and Peter Lynch, the former manager of the Fidelity Magellan Fund. “Are they worried about the market?” Whitman asked. “No, they’re looking at the deals.”
Two other panelists - Michael Price, chief executive of Franklin Mutual Advisers, and Albert Nicholas, founder and president of the Nicholas Co. in Milwaukee - offered no further comments. So the question about the market outlook passed without eliciting a single prediction from anybody.
As Morningstar President Don Phillips, who moderated the panel discussion, observed, “The better managers tend to spend more time asking smaller questions,” rather than worrying about “something they can’t do anything about.”
“Smaller questions” doesn’t mean easy ones. The daunting task is to find the best stocks to own before everybody else discovers them.
As Nicholas observed at another point in the discussion, doing that job well requires “an independent spirit. If you do what everybody else is doing, you’re doomed to average performance.”
Added Price: “You have to find original sources of information and ask common sense questions. This is a very simple business, but there are a lot of distractions.”
xxxx TIPS FOR PICKING MUTUAL FUNDS The U.S. Securities and Exchange Commission offers this advice for wise investment in the mutual fund market: Mutual funds are NOT guaranteed or insured by any bank or government agency. Even if you buy through a bank and the fund carries the bank’s name, there is no guarantee. You can lose money. Mutual funds ALWAYS carry investment risks. Some types carry more risks than others. Understand that a higher rate of return typically involves a higher risk of loss. Past performance is not a reliable indicator of future performance. Beware of dazzling performance claims. ALL mutual funds have costs that lower your investment returns. You can buy some mutual funds by contacting them directly. Others are sold mainly through brokers, banks, financial planners or insurance agents. If you buy through those financial professionals, you generally will pay an extra sales charge for the benefit of their advice. Shop around. Compare a mutual fund with others of the same type before you buy.