Management Risk - BlueCollarDollar.com

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Management Risks

Back in January of 2006, Barbara S. Poole (Roger Williams University), Candy A. Bianco (Bentley College) and Craig Giroux (Investors Bank and Trust) attempted to answer the question that has plagued investors since the beginning of the mutual fund industry: "how do we determine the performance of the fund manager?"

They wrote: "Investors believe that the mutual fund market is far from efficient and that they need to pay a great deal of attention to who is managing their money. While mutual fund investing provides the benefit pf professional management, the effectiveness of the professional management is not consistent across all funds." It is this the authors suggest, keep mutual fund buyers looking for "clues that suggest that a mutual fund manager will exhibit superior talent or ability".

And as we continue our discussion about risk, we look at the management.

Some folks have studied the level of education and come up with no discernible differences in how one manager performed compared to another with a greater degree of education. Tenure was ruled out as a deciding factor and eventually the size of the fund under management. What did stamd out was the relationship between tenure and risk. A manager with greater degree of time spent at the helm was likely to take greater but more calculated risks.

What you should know is that investment loss is just that, a loss. You are unable to lay claim against the fund for losses the management may have incurred. But the same rule for picking a fund manager seem to apply.

1)The longer a fund manager is at the helm, the greater the chances the fund will perform as promised.

2) Risk cannot be eliminated and the manager of the fund will be held accountable with the published performance reports. In many cases, try to look back about ten-years but if the fund still doesn't compare to its peers, drop last year from your decision.

3) The reason short-term managers do less well is the readjustment of old portfolios. That doesn't mean you should avoid a fund with a new manager but look judiciously at how well the fund does in terms of turnover. Not everything needs to be sold to create a winning year.
Next up: market risk.