Successful executives in many businesses know that the secret to getting the most out of people is first finding great people and then holding them accountable for their results. The investment business is no different. To get your portfolio back on track, the first step is to figure out if you have great investment managers.
Hold your investment managers accountable. Shutterstock
Start by asking each of your investment managers for their returns over at least the last 10 years, whether you’ve been with them for 10 years or not. Why? Because that’s how long it takes for a track record to show evidence of a manager’s investment skill.
For Mutual Fund Managers, Tenure Is Key
As important as this information is, the vast majority of mutual fund managers won’t be able to provide it. The mutual fund will likely send you the fund’s 10 year track record. But if the fund changed managers in the past 10 years, you only want to see the track record of the fund during the current manager’s tenure.
After all, the current manager is the one who is responsible for your returns going forward. The fund’s track record under previous managers has no bearing on whether you should stay with the fund.
If the current manager’s tenure is less than three years, the track record is too short to say anything about his investment skill. In this case, the decision is easy. Sell. There is no good reason to pay for an unproven manager. If you stay, you are letting the manager train with your money and paying a premium for the privilege.
Morningstar says about 20% of mutual fund managers have less than three years at the helm. Only 393 of 1,460 of these managers beat the S&P 500 over the last three years. You can do better.
It’s hard to escape the conclusion that lots of people have put billions of dollars into mutual funds charging premium fees for managers with short track records. If funds like this make up more than 5% of your portfolio, I would seriously question whether the person who recommended them to you had your best interests in mind.