Does Tenure Matter: Mutual Fund Managers for the Long-Term

One of the single toughest problems facing any investor is research. The information we seek is mostly conflicting, mostly difficult to understand and worse, readily available for the taking. The trouble is, access doesn't make the choices we need to make about where to put our money any easier.

You might consider the grocery store analogy. You may want to cook a whole chicken for dinner tonight but when standing at the meat counter you find three perhaps four different types of whole birds to chose from ranging from the very pricey organic variety to the very cheap store brand. They look alike, perhaps even clucked alike at one time. But what they are, besides all being chickens, different somehow.

Now mutual fund managers can hardly be compared to chickens. But in some ways, we have the same sort of conundrum facing us when it comes to a mutual fund selection. How much is the fund the manager and does it matter?

Mutual fund managers do have some appeal to certain investors. The longer the term some managers have, the more likely they will remain with the same investment style. Consider the long-term managers at these funds: Parnassus Fund (PARNX) which has had  Jerome Dodson as the fund's lead for 26 years,  Richard Aster Jr. of Meridian Growth (MERDX) has also put in just as many years and the grandfathers of the industry are people like Albert Nicholas who created his namesake Nicholas Fund (NICSX) and has managed it since its 1969 inception and perhaps the oldest fund manager Bernard Klawans who at 89 years old still runs the small Valley Forge Fund (VAFGX).

But is the same investment style still in style? Yes and no. Markets have remained essentially the same since they were conceived. And although we often consider them as impersonal entities, much like a Watson, they are not. Instead they are made up of people who, for want of a better term, want you to lose. There are two sides to every transaction and good will doesn't enter into the equation. Hiring a professional such as a mutual fund manager - and this is what you are doing - offers you box seats in the battle of who will win and who will lose in the marketplace.

Understanding the nuances of the markets is a timeless venture that involves understanding the players involved. Sure, computers have made the world smaller and faster and more efficient. Companies have broaden their customer bases and in the process made the oceans that separate the world seem like nothing more than a small pond. The world is at our doorstep.  But the people at the heart of every investment haven't evolved one iota since the markets were conceived.

It is still not about chasing the next new thing; it is about finding the things that no one really sees as bright and shiny, old investment ideas that have never changed. This is what older managers bring to the conversation. So that would be yes.

On the other hand, the reason these fund managers have remained at the helm for so long has more than a lot to do with who owns the fund family., The four above mentioned fund managers can't be fired from the positions they created. They can only step aside. So too long is perhaps too long.

Each fund manager must do three things. One they must create a portfolio that is sustainable and worth holding. Fund managers generally have ideas about how this is done and new fund managers will come on board and switch things around, selling one security in favor of another. So they initial year is generally a wash in terms of comparisons. By the five year mark, they should have settled in with their strategies in place. So five years is a good judge of turnover - a term that references how much of the portfolio has changed in the previous year. Less is better.

The second thing they must do is create returns that are better than an index and enough to pay the bills. If the expenses are low, this shouldn't be too much of problem provided the markets cooperate a little bit during those initial years in the lead position. Returns are tricky though. Weighed against fees, risk and a host of other obstacles, the number the fund posts can mean the difference in whether investors stay invested or turn a look for something more suitable.

Each exiting investor, aside from a no-confidence vote is a sale which forces a sale which in turn, creates some disruption to the investment plan. Get a lot of investors headed toward the door and no matter how good you think you are, you will not be able to sell enough to make ends meet for the remaining investors. This cascade effect was seen best in late 2008 when numerous investors ran rather than staying put and allowing the fund managers to keep the level head they were hired to have. So they must contend with investors and the markets.

The last thing a fund manager needs to contend with is the shareholders in the fund company. Many mutual fund companies are publicly traded entities which puts the manager in the middle of two sets of shareholders. One demands returns and the other demands returns and both consider themselves the most important part of the equation.

There are more than a handful of mutual funds that circumvent this one manager stewardship by using teams or even people and computers, the former to take the blame should things go awry. But some rules do apply across all mutual funds. New anything is not worth buying. A new fund, a new fund manager and new investment strategy are all worth giving a little time and latitude to before you invest. Let the folks who don't know any better buy first.

Three years is barely enough time to make a performance call on a mutual fund manager; five is better but ten tends to be best. Remember, the three parts to a fund manager's skill: the markets, the investors and the shareholders. Mastery of those masters is never done in a short period of time.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com

The Old Mutual Fund vs ETF Argument or An Investment Stranger than Truth

Mark Twain once submitted an essay to a contest about the art of falsehood.  In it, he suggested that only children and fools tell the truth, citing what he thought of as an old proverb.  What really dismayed him wasn't the actual lie, he described that as: "as a Virtue, A Principle, is eternal; the Lie, as a recreation, a solace, a refuge in time of need, the fourth Grace, the tenth Muse, man's best and surest friend, is immortal, and cannot perish from the earth while this club remains" , it was instead the ability to deliver in a successful way. A noble art he called it. Which makes theETF lie all the more true.


What do we know about ETFs? We know they are low cost. But perhaps not as low cost as they might seem.  For the investor moving millions of shares, or even thousands, the costs are just as low for them as it is for the investor owning a single share.  They are basically index funds.  But they are also stocks.  And the lie that owning a single share is just as costly as owning a million or so is told so often, individual investors often become dismayed, even disillusioned by the security when they purchase or sell it.


ETFs are not meant to be a buy-and-hold investment. This is actually a truth designed to look like a lie. Folks who buy ETFs intend on selling them, sometimes at the close of the trading day only to buy them again at the beginning. You can do this when the quantities are huge.  But when they are small, you are left with some tough decisions.  Wait it out and hope that the big investors jump back in or sell on the movement?  Either way, you have bought and are left holding.


ETFs have made the market more democratic and safer. On the other hand, ETFs are responsible for the flash crash where the Dow dropped a 1000 points and regained 650 points. Perhaps not directly, but indirect selling in those ETFs and of those ETFs created more volatility than was needed. According to Chuck Jaffe at Marketwatch: "Many ETF investors set stop-loss orders — pre-scheduling a sale to protect profits if the share price drops to some pre-determined level — but that didn’t minimize their pain in the flash crash, as the market busted many of those orders, flying past the limits because there were no buyers at those prices." The truth was that just because you have something to sell, there will be buyers.  The lie: someone always wants what you have unless everyone is selling the same thing.


ETFs are not mutual funds. Except when they are. If it looks like a basket of stocks or bonds or whatever is popular and you can't afford to buy each and every company in the sector, you look to make a purchase as a group. That is a fund with a mutual benefit.  The fund goes down and everyone loses except when the smart ones get out first. And that is the peril with a fund acting like a stock and trading openly throughout the day.
Some folks just know more than you do and benefit from that. No, they are necessarily seers or prognosticators or even forecasters.  They are just intuitive and quick and you are at work and busy and about to lose more than you thought you could.


Markets are not scary, therefore ETFs aren't scary - its investors who are scary.  Investors often don't have time to be scared before they are scarred by their own inaction. ETFs create volatility because that is how they are designed. Suppose you knew that something big was about to happen in technology or pharmaceuticals. You being a smart investor wouldn't look for an individual stock; you would buy a basket. And soon as the news panned out, or didn't, out you would go.


ETFs in your 401(k) are a good idea. Perhaps one of the single biggest lies being told by retirement planners.  They tout the low-cost, the employee demand and anything else they think the poor guy or gal in HR or in the CFO's chair wants to hear.  But ETFs in a 401(k) drips commissions and fees to the plan sponsor and gives the employee the illusion of doing something they really aren't doing.


The ETF lie is true. Odysseus told numerous fictions to a wide variety of people, each crafted to the circumstance of the one receiving the falsehood. The Greeks may have given the liar his due, even their admiration of a lie well-told. But when it comes to your portfolio, when it comes to your circumstance and your willingness to hear what you need to hear, the ETF is crafty fiction indeed. Good for some who understand it. But for those who think they do, it is simply a deception.

This article originally appeared at Target2025.com and was written by Paul Petillo

Comparing Mutual Funds to ETFs

If you wonder whether the comparisons most often made between ETFs (exchange traded funds) and mutual funds are done without bias, you would be wrong.  To understand why these traded index funds continue sell their attributes based on cost alone is to miss the point.  While they do have very low fees, as all passively traded funds should, the believers in this investment tool trumpet their attributes but do so not by comparing them to the benchmarks they mimic but to a completely different type of mutual fund, the actively traded variety.

The actively traded mutual fund can be costly.  The reasons for these costs are often quite simple to grasp.  Actively traded mutual funds incur additional costs due to trading more frequently, the research required to make those trades, the assumed risk involved and of course the increased management of those portfolios.  Although it is common practice to use benchmarks as a way of determining performance of actively managed mutual funds, it is not often indicative of what the fund is attempting to accomplish and how many underlying securities are in the portfolio.

Actively traded mutual funds own only a portion of the benchmark (indexes such as the Russell 2000 or 3000, the S&P 500, or total market). More on this unfair comparison.

The Deep End of a Dark Pool

There was some speculation that the financial markets in this country would suddenly stagnate after the most recent downturn. The innovation of products that used an ever-increasing and more complicated methodology to make money would stop, paving the way for dull and boring, over-regulated markets that offered so much oversight as to slow the growth of the country. To hear some Wall Streeters talk, the end of an era was upon us.

Not so fast.
Financial markets and those that look for ever smaller ways to extract a decimal from these tough times have rediscovered a product called dark pools. These are ways to trade electronically using the money from a bank, doing so without publicizing the trade until well after it had been executed and even more sinister, allowing traders to see in advance what orders are being placed.

In other words, while we rely on live quotes, these dark pool traders are able to purchase an equity without needing to publicize what the actual quote was. These types of pools have been around for over a decade but were largely underused. There were simply too many other tools of the trade to be utilized while the Bush administration's crippled S.E.C. looked the other way. As long as the market escalated, there was little or no need to decimalize each trade.

But that has changed and the numbers of large and institutional traders that now tap this type of trading platform has increased at a frightening rate of 17% over the last year (from 58% to 70%). While you may say to yourself, what mutual funds, pension funds and hedge funds do to enhance their return is okay by you, some of which you may have an interconnected interest in, the idea that the equity markets may not be fair to all players is not right.

Individual investors have known of these disparities for some time. Beginning of the day and end of the day volumes and volatility have increased to the point that many people could never predict where the market is going to end the day. (Exchange Traded Funds have been to blame for frenzied trading as well.)

Now this subject of who and how these dark pools are being used seems to be getting a little light shed on it from the new chair of the S.E.C. Mary Shapiro. In a recent keynote address at the 2009 SIFMA Market Structure Conference, James A. Brigagliano Co-Acting Director, Division of Trading and Markets U.S. Securities and Exchange Commission wondered if "there is any compelling reason for dark pools to object to improved post-trade transparency." Acknowledging the need for these trades to be dark prior to execution as part of the success of these pools, he couldn't see why "some form of improved post-trade transparency would be likely to interfere with their business models."

The Downside of Speed.
This darkness is however not complete, coming in different shades. Often called indications of interest, these so-called messages done in advance of the trade itself, offering a look to other traders of a trade about to happen, whether it be executed or canceled may resemble a quote too closely.

Because these trades are able to get done very quickly, these "actionable order messages could create the potential for significant private markets to develop that exclude public investors" according to Brigagliano suggesting that because of this "the public does not have fair access."

Mr. Brigagliano has no real beef with the huge block trades that are conducted between institutional investor, often trading in excess of 50,000 shares. But smaller order systems could make the general investing public less likely to want to trade if they feel as though some select individuals get orders processed at a better price based on a quote the general public was unable to see. If that were to happen, the markets would essentially freeze.

He is correct in assuming that "any practice that significantly detracts from the incentives to display liquidity in the public markets could decrease that liquidity and, in turn, harm price discovery and worsen short-term volatility."

At the heart of this reform is a newly energized SEC. So far, they are looking at regulation with a realization that too much regulation would have long-range effects that we would have to live with for years to come and the lack of regulation they inherited needs revamping. Cleaning up the dark pools is one of the ways they hope to do this. Expect Wall Street to resist.

Any transparency is better than none and Ms. Shapiro is making this a focus of her approach to getting the investor’s trust in the US equity markets back on track. The "gaps" in regulation have allowed too many innovators to slip through with products that might make money for some, but threaten the long-term goals of some investors and challenging the trust of others.