Between corporate scandals, initial public offerings and the troubled global economy, investors are facing tough issues that have raised some interesting questions. Here are some examples from my mailbag.
“I may be in the minority, but I think a problem like the ($2 billion trading) scandal at JPMorgan should get all of the management fired, and should get fund managers to sell the stock. No one else, especially my fund managers, seems to feel that way. Is there something that either corporate management or fund management could do to make you sell a fund?” – Peter in Covington
There are several issues in that one question.
Corporate scandals should get the responsible parties fired, but in giant multinational companies there are times when the problems simply don’t extend all the way to the top. In the case of JPMorgan Chase, there’s a lot left to be uncovered, and I suspect most fund managers with a long-term view will see this story as a blip; a $2 billion loss gets people talking, but this company has $2.3 trillion in assets.
For every fund manager who thinks it is best to avoid trouble, there’s another who sees a buying opportunity. If a management style of buying troubled companies makes you uncomfortable, you don’t belong in the fund; you don’t have to search too hard to find “buying opportunities” that ultimately destroyed a fund’s track record.
Functionally, Enron was the stock that did the most to tarnish the reputation of Legg Mason Value Trust, for example, where the recently retired Bill Miller held on when others were leaving.
It’s never a bad idea to see how much of a fund’s portfolio is concentrated in a troubled issue. If more than 5 percent or 10 percent of a fund’s assets are with a problem stock, you may be too uncomfortable to continue. As for whether corporate management’s action would get me to dump a fund, probably not, since the fund portfolio presumably holds a lot more than the one stock.
For most people, however, the real question here is whether they want to be a “social investor,” allowing some personal agenda to drive stock selection. If you have an agenda or an ethic that you invest by, find the right social fund to match; failing that, don’t be surprised when your fund manager worries more than you do about corporate profits rather than corporate ethics.
In the fund world, a manager deviating dramatically from the investment style I bought the fund for would be the action that drives me to look for the door. It’s not a “scandal” in the classic sense, but I have a problem with funds that promise one thing and deliver something else.
Everyone says bad things about the Facebook IPO. I can’t think of why any fund would buy it, so should I be worried if my funds do it?” – JoAnn in River Ridge, La.
Like it or not, many funds will own Facebook, in time. The stock ultimately will become a part of the major indicies, which will mean that index fund managers must go get it. As a major player based on its market capitalization, managers must consider it.
But they don’t have to buy it now, and I suspect that a lot of value-oriented managers sat out the initial public offering – IPO really should stand for “it’s probably overpriced” – but hope to pick it up later. Truthfully, that’s no different than most other IPOs.
If you trust your fund manager, let them make a call on Facebook that is in keeping with their strategy; that’s what they should want for everything they look at, from the hottest new issue to some company that never seemingly makes headlines and that average investors have never heard of.
“What’s happening in Europe scares me, so I’m selling everything international. I know that’s not standard asset allocation, where you have money in everything, but is it really so bad?” – Don in Millburn, N.J.
Actually, I’ve talked to a lot of money managers lately who are staying away from Europe, and it’s hard to blame them (or you) for making that decision.
Ultimately, if you have large-cap domestic stocks, you have multinational exposure already; for better or worse, you own players in the global economy and are affected by what is happening overseas.
That’s part of why it’s not such a big deal to move out of any asset class where the action makes you uncomfortable, so long as you are not winnowing your portfolio down to where you’re not diversified at all.
Dropping international funds may not give you the perfect asset-allocation plan that spreads money around by asset type, investment style, global region and more, but if it avoids enough trouble to allow you to stick with an investment plan, it will be a move you can feel good about.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
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