Yesterday, I posted about why I chose against investing in most actively-managed funds. I actually do hold one actively-managed fund right now, the Bridgeway Ultra-Small Company Market Fund (BRSIX). Why did I choose this fund? It turns out that many of the warnings against buying an actively-managed fund can be flipped to find the best mutual fund managers. Here are several things to look for, as well as some of the companies that many of these characteristics.
Do They Have A Clear, Consistent Investment Strategy?
In order to beat the market, by definition they have to have substantially different holdings from the market and stick to their guns. Also, is it clear enough that you really believe in their strategy? If not, you might bail out yourself during a rough patch and miss out on the fund’s long term returns.
Do They Charge Reasonable Fees
To start, one would hope to see no front-end or back-end loads. If they are “to discourage excess trading”, then any fees should be directed back into the fund shares, not into the manager’s pockets. Otherwise, look for below-average fees, and for those fees to decrease as the amount of money under management increases. For example, the Vanguard Windsor II fund is one of the largest mutual funds available with $52 billion in assets, and has an expense ratio of only 0.33%. That’s more than many sub-par Large-Cap index funds.
Do They Limit Asset Bloat?
Depending on what the fund invests in, once they start realizing that they have more money than can be optimally invested, the ideal mutual fund manager will close to new investors until more opportunities arise again – even if this means less profit for them. This becomes more critical for funds that invest in smaller markets.
Is It Privately-Held?
While this is not a guarantee of bad management, when a financial company is publicly-held it will always be pressured by owners to put profits first (and perhaps properly so). A privately-held and smaller company, while obviously still motivated by money, at least has the chance to place other things like the fund shareholder’s value and ethics on the same level as straight profit.
Does the Manager Also Invest In the Fund?
Having a substantial amount of their own money invested in the fund will help align interests between the shareholders and the managers. It can be hard to figure out what a “substantial amount” is, though, as these figures are not required to be disclosed.
Is There Transparency With Shareholders
Do you read all the prospectuses and shareholder reports for your mutual fund holdings? I don’t either, but try it sometime. They can differ wildly. I always read the one from Bridgeway and am always impressed by their honesty and straightforwardness. When they lag, they admit it and state why. Others that I have read are more defensive or even dismissive about their losses, even though they are quick to point out good returns.
What Are Some Example “Good” Fund Companies?
I’m sure there are a decent amount, but here are just a few with brief supporting attributes. An example held in Unconventional Success* was the Longleaf Partners Funds. They only have three funds, and all of them close regularly to new investors. Right now only the International Fund is open. The Partners Fund once closed with only $1.8 billion in assets. Employees are also the fund’s largest investors.
I mentioned Bridgeway already. They have a history closing their funds early as well. In addition, according to this Barron’s article, the company donates half of it’s net profits each year to charity. The CEO even limits his compensation to seven-times that of his lowest employee. Name one large publicly-traded company that does that!
Other companies that I’ve read positive things about include Dodge & Cox, Oakmark, TIAA-CREF, Tweedy Browne, T. Rowe Price, and Vanguard. I’m actually scheduled to pick up some Dodge & Cox Stock (DODGX) this week from my limited menu of 401k choices, even though it’s closed to retail investors.
* This topic was discussed in detail in the book Unconventional Success by Swenson and is a big source of information and ideas for this post.