There are some things you just don’t want to hear from your mutual fund manager.
Unfortunately, it seems some managers just can’t help themselves. They can’t bear to say a simple “I messed up and here’s why,” so they give elaborate reasons for underperformance.
Of course, we’re entering the “silly season,” the time from Thanksgiving through mid- February when managers tend to be most communicative. It starts with annual “outlook conferences” where some firms schmooze the media and trot out endless cliches about their funds and the future. It ends in the fund’s annual report, where management sometimes says something worth reading.
But as year-end numbers come into focus, you can expect a lot of verbal tap-dancing.
That being the case, I have come up with a list of things I don’t want to hear from my fund managers, along with my explanation of why these words are such a turn-off. It’s a list compiled from things I have actually heard managers say during television interviews and in news conferences.
If your fund manager appears on television, goes online (many firms post regular manager commentaries these days), or is quoted this way in newspaper columns or magazine stories and tries to pass this drivel off as insight, it may be time to reconsider your confidence in their abilities.
1. “We underestimated the risk. ...”
This is one way a manager explains how he or she blew it, most often by concentrating the portfolio in one area (say, technology or financial services). It’s the manager’s job to take risk into consideration appropriately; any manager whose fund is hyped for protecting and growing your money should overestimate risks.
2. “We’re cautiously optimistic. ...”
Even at the height of the bull market, this hackneyed phrase described most fund managers. Why? Well, if they told you they expected to lose a fortune, you wouldn’t invest with them. And if they told you they expected to make a fortune, their lawyers – fearing potential lawsuits if the fund didn’t deliver – would tell them to be more cautious.
So every fund manager is always cautiously optimistic.
3. “If you take the long view of our performance. ...”
This is never the answer to the question being asked, but rather a way to get out of talking about recent numbers. Managers who say this lean toward whatever “view” is long enough to make them look good.
What you want from a manager is what has happened recently and what they think will happen next, not ancient history.
4. “Investors can take their money elsewhere,” or “No one is forcing investors to stay.”
When managers blame investors rather than accepting some responsibility, it’s obvious that they don’t care about you. Any manager who says this about his bosses (because shareholders own the fund) doesn’t deserve your respect or your money.
5. “This is the worst bear market we’ve seen since (fill in the year of the manager’s favorite bear market story).”
This statement is allowable only from managers who actually ran mutual funds, say, back in the bear market of 1974-75, or at least through the Internet bubble of the 1990s and the subsequent downturn. That rules out most.
The problem with this statement is that the manager is trying to make you feel as if they have been through a market like this in the past. Most haven’t. That’s not necessarily bad, but reading books and charts on a subject is not the same as living through it. And while what amounts to ancient history could be worse than what’s happening now, it’s not going to help most money managers do well going forward.
6. “It’s a challenging market right now.”
Investing is always challenging, and it should have been challenging even during the boom times. This is the mark of a manager who is saying, “It’s not so easy to be lucky right now.”
7. “I wouldn’t argue with investors who want to leave.”
I’ve heard this from a few managers who have been beaten senseless by their inability to post good numbers in recent years. If the manager won’t argue with you that the asset class is worth owning and the fund represents those assets well – in good times or bad ones – get the heck out.
8. “This time it’s different.”
These are the most dangerous words in investing. We heard this a lot during the bull market, usually to justify a strategy that was not diversified and that favored the hot stock du jour.
This phrase – along with “We’re changing our take on the market” – is an alibi for strategy shifts toward bonds, small-caps, value investing, international holdings and more.
In general, every fund should have a job within your portfolio, a role it is supposed to fill or an asset class it covers. Once a manager starts seeing things differently, you can expect the character of the fund to change, at which point it may no longer be a good fit for you.Chuck Jaffe is off this week. Here is a favorite column from his archives. Chuck Jaffe is senior columnist for MarketWatch. He can be reached at email@example.com or at P.O. Box 70, Cohasset, Mass. 02025-0070.