November 11, 2009
The Larger A Fund Is Does Not Always Mean The Better It Is At Managing Your Money
When choosing the best performing investment funds the bigger a fund is does not mean it is better. Choosing the wrong fund because it is a big brand name can cost you money.
Investors are people to. They are susceptible to slick marketing just like everyone else. A big fund will often use their size in their marketing and associate that size with safety even if they don’t directly state this. You need to remember that this is just marketing. You should never invest your money in a fund because you are told that everyone else is doing it. In marketing, this is called the bandwagon effect. You need to look at the actual fund more than anything else.
An interesting movement has started in the UK with the rising popularity of boutique investment houses. These investment houses are very small and they specialize in just a few areas of the economy. They do not try and be all things to all people. They are more focused on their specific niche and do not care about having something to offer across every industry and sector.
Recently, boutiques have even been stepping on large firms’ toes when it comes to servicing retail clients. Last year boutiques outshone their larger counterparts in the UK, taking the top four places in the ‘best overall fund manager rankings’. Big brands such as UBS and Standard Life slipped down the rankings, while boutiques Rathbone, Neptune, Dalton and Artemis took the top spots.
The last quarter of 2006, when the economy first turned down, investors were wiped out. But even during this rapid reversal of fortunes, boutique investment houses outperformed their larger competitors.
The disappointing reality for most private investors is that neither they, nor in some cases their financial advisers, have ever heard of some of these relatively unknown smaller investment houses, and are therefore missing out on great investment opportunities.
Another big mistake most investors make is that they invest in a fund based on the star rankings of the fund manager. How a fund manager performed in the past is not indicative of how he will perform in the future. If the fund manager really is good, he will probably hop around from employer to employer as each offers him more money. So why buy a fund based on the reputation of the manager, with a time horizon of 15 or 20 years, when the fund manager is not likely to stick around for more than a couple of years?
Only 15% of fund managers stay at the same fund for 7 years. A study of the top 50 UK fund providers show that about 75% of fund managers left their fund in the last 4 years. Most of them move to different funds because of offers from competitors. You can not invest in a fund for 10 years or more based on the fund manager when statistics show that fund managers only stay at a fund for 7 years.
You should never keep your money in a fund because of an emotional attachment to the fund company or manager. The only reason you should keep your money in a fund is because of performance.
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