This is where fund managers come in. Mutual funds, made up of a variety of stocks that fit an investment theme or strategy, are one of the most common ways to invest. When investors deposit money into actively managed funds, they rely on fund managers to make investment decisions on their behalf. One of the most notable mutual fund managers in the U.S. has been Peter Lynch, who ran the Fidelity Magellan fund from 1977 to 1990. According to Morningstar, Lynch outperformed the annual return of the Standard & Poor’s (S&P) 500 stock index 11 of the 13 years he ran the Magellan fund. That is hugely impressive given the fact that, according to research by the S&P/Dow Jones Indices, fewer than 10% of actively managed stock mutual funds outperform their indexes.
How Fund Managers Work
Mutual funds and ETFs typically follow an investment strategy that is explained in detail in the fund prospectus. Some funds have an aggressive growth strategy that exposes the principal investment to higher risk, while others take a more balanced approach. Funds may be country- or region-specific or may invest in specific sectors, such as pharmaceuticals or technology. In constructing a portfolio of investments, fund managers are expected to follow the fund prospectus (though many prospectuses state that fund managers have some leeway to stray from the expressed investment strategy). Large funds usually have a team of analysts that conduct research for the fund manager. Although one or more people may be listed as the fund manager, there often is a larger team of investment analysts working to build the portfolio. Fund managers regularly meet with CEOs and other corporate executives as part of their search into investment possibilities. They also are responsible for reporting to shareholders how the fund is performing and explaining factors that affected the fund’s performance. This is done in an annual report or more frequently.
Alternatives to Fund Managers
Because so many actively managed funds fail to outperform the market indexes they are measured against, funds that are not actively managed have become more popular over the past decade or so. Commonly referred to as passive investing, the goal of these funds is to match the market index the fund is mimicking, before fees. Because these funds do not require the investment of time that actively managed funds demand, the fees are typically a fraction of actively managed funds. Many ETFs function as passively managed investments similar to index funds. Like mutual funds, ETFs contain a pre-selected assortment of assets, whether that is stocks, bonds, real estate investment trusts (REITs), or something else. An important difference between an ETF and a mutual fund is that an ETF trades in real time just as a stock would, rather than having a net asset value calculated at the end of each trading day as a mutual fund has.
What It Means for Individual Investors
Investors who do not feel comfortable selecting their own stocks and bonds for a portfolio can use funds instead. However, that doesn’t necessarily mean that no research is necessary. Those investing in actively managed funds should read their prospectuses to make sure the fund management strategy matches their goals and the risk level they are comfortable with. It is important to remember that past performance is no guarantee of future results, even when the fund manager remains the same. However, if you are able to find a fund manager who strings together a decade or more of market-beating results, as Peter Lynch did, that fund manager’s returns will more than pay for the fees charged for the fund.
