How To Be A Fund Manager

Can you imagine how we would feel if we had bought a product we subsequently found that we neither needed nor lived up to our expectations?

We would probably feel a little annoyed, to put it mildly.

That was how some customers felt, when they discovered that a $400 hi-tech juicer they had bought squeezed out more hype than hip.

The machine was so trendy, in fact, that it could be connected to the internet, no less.

It has been reported that millions had been poured into developing the Juicero. It could even have been the next big Internet of Things.

Slick, sleek and slack

The marketing was slick. The design was sleek. But, sadly, the execution was slack.

It transpires that the ultra-expensive cold-press juicing machine – that uses $8 packs of mashed up fruit and vegetables – is not much better than squeezing the sachets by hand.

In other words, the machine was virtually redundant.

Eventually, though, someone had the gumption to tell the emperor that he was not wearing any clothes.

Thankfully, disgruntled customers will be getting their money back. The company has offered a full refund to buyers who are dissatisfied with their purchases.

That got me thinking…..

…..Would fund managers ever offer to refund investors, if their choice of investments had underperformed the market?

The answer is most definitely not.

We are not talking here about losing money on shares. Investing in the stock market inevitably carries risks. So shares can fall as well as rise.

What we are talking about, instead, is beating the market.

The bare minimum that we should expect from fund managers are that they, at least, beat a stock market benchmark index. They are, after all, supposed to be ultra-smart people.

But the harsh reality is that two-thirds of professional money-managers cannot even beat the market.

That is a terrible indictment of an industry that manages billions of dollars on behalf of ordinary investors.

Real dogs

The problems with the fund management industry are manifold. But a couple stand out like sore thumbs.

Firstly, most are judged on their short-term performances. Consequently, they are evaluated on how well they have done, every three months.

But nobody, especially fund managers, ever likes to hand in a bad report card.

No one likes to admit that they have made wrong investing choices or picked some real dogs. So, they window-dress their portfolios before they have to own up to their mistakes.

They do that by weeding out the howlers, and replace them with market outperformers. Unfortunately, buying and selling shares cost money, which adds to investors’ expenses that, in turn, eat into returns.

Pesky fees

Secondly, there are those pesky fees.

Fees erode investment returns. And up-front fees erode investing returns before investors have even had a chance to start putting their money to work in the market.

A 2% upfront fee, for argument sake, might not seem like a big deal to some people. After all, it only amounts to $2 on every $100 invested. But it can quickly mount up.

It means that investors who hand over $10,000 to their money manager will only have $9,800 invested in the market, at the outset.

If the investment should grow at 8% a year, say, then $10,000 could have grown to $46,609, after 20 years.

But with the 2% upfront fee deducted, the remaining $9,800 would only grow to $45,677, after two decades.

So, the $200 that the money manager had trousered at the start could mean that the investor was $932 worse off.

I can think of a lot of things I could do with $932.

What is investing?

Investing is about putting our money to work in wonderful companies that we have identified through painstaking research.

It means sticking with those companies as long as they remain wonderful. It also means reinvesting any dividends we receive into more shares that, in turn, could generate even more dividends the next time around.

It should not be about jumping in and out of the market. Constantly buying and selling inevitably incurs unnecessary fees that eat into our returns.

By the way, I have no intention of buying a Juicero. I don’t believe in paying for something that I can do myself. Check out what I mean here.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.