The Role of Manager Expertise in Mutual Funds Investing

By Eric Tyson

Much is made of who manages a specific mutual fund. Although the expertise of the individual fund manager is important, a manager isn’t an island unto himself (or herself). (And if the fund manager leaves or retires from the company, you’re left holding the fund.) A star fund can flare for its moment of investor glory and then easily twinkle down to become just another average or worse-than-average fund.

Too many people want to believe that, in every field of endeavor — sports, entertainment, business — there are superhumans who can walk on water.

It’s true that in the investment world some people shine at what they do. But compared to other fields, the gap between the star investment manager and the average one, over long time periods, typically is small.

If the stocks of large U.S. companies, for example, have increased an average of 13 percent per year over a decade, the money manager focusing on such securities may vault to star status if his fund earns 15 percent over the same time period. Don’t take this the wrong way: An extra 2 percent per year ain’t nothin’ to sneeze at — especially if you have millions invested. But a 2 percent higher return is a lot smaller than what most people think they can achieve with the best investment managers.

Therefore, the resources and capabilities of the parent company should be equally important in your selection of which funds to invest in. Different companies have different capabilities and levels of expertise with different types of funds.

Avoid fund companies with little fund management experience and success. If you need surgery, you place your trust with a surgeon who’s successfully performed the operation hundreds of times, not with a rookie who’s only seen it on the local cable station. Avoid novelty funds as well. Mutual funds have been around for many decades. Yet not a week goes by without some newfangled fund coming out with a new concept. Most of these ideas come from the fund company’s marketing department, which in some companies has too much clout.

Instead of coming up with investments that meet investors’ needs, they come up with gimmicky funds that involve extra risk and that almost always cost extra in their high annual operating expenses.