(Sooner than later I will have the lighting right on these videos.)
Think twice before buying that top performing mutual fund
- When funds are successful it makes the fund managers all the more attractive to other fund companies. Therefore, it’s not uncommon that a successful fund manager leaves his/her previous company’s fund to manage another company’s fund. This means you’re looking at a fund that has succeeded in the past without the captain led the ship.
- As a fund become more successful more investors and fund flock to the fund. This makes managing the inflows more difficult because they cannot be left in cash to earn next to nothing in returns. The fund manager is forced to buy stocks without regard to timing, news, marketing conditions…
- With more funds that must be traded, the transaction costs often rise. Finding buyers/sellers for an ever increasing amount of shares will cause the transaction cost to rise for the fund.
- Sometime success causes more timid behavior amongst managers. Herding is a term that is often thrown around when you end up having similar funds all pursuing the same group of investments. It’s not good for investors, especially when funds that have had success increase their fees.
What to look for when choosing a fund…
- The fund manager(s) has a significant amount of money invested in the fund. When you have some skin in the game you tend to look out for yourself, which in this case means also looking out for you the investor.
- Low fees means less money eaten away for management and other expenses. When the fund outperforms the market you benefit to a greater degree than you would if the fund’s fees are set at a higher level.
- If you see a previously closed fund that is now open, it may be a good opportunity for you to get into a fund that will soon close again. A number of funds that had significant amounts of cash withdrawn in the last few years have opened their doors again. I take this as an opportunity because it’s not has if the fund manager(s) made a blunder that caused investors to run. The market made investors run for less risky investments.
- Funds that don’t spend much money advertising are typically a good sign for two reasons. First, it means less expenses that you the investor will have to foot the bill for annually. Second, the ones advertising probably have created slick marketing materials that will attempt to entice you with their amazing past performance. I am always suspicious of this sort of behavior. If you’re really that good, shouldn’t your results be all the advertising you really need?