Sunday, 15 January 2017

Your investments using Mutual Funds or Money Managers

There are various avenues individual investors may exercise in managing their investments. 

Investing properly is a full-time job, and that it would be very difficult for individual investors to manage their own money if they have other employment. 

This leaves them two options:

1) Mutual Funds
2) Money Managers

Open-end mutual funds

Open-end mutual funds offer the investor access to both liquidity and the ability to sell for net asset value. 

On the other hand, many funds are driven by relative performance and often grow to sizes where market-beating returns are not possible. 

Since managers are compensated by assets under management, they are also prone to follow short-term trends in order to avoid falling behind their peers in the near-term which could trigger a mass exodus of investors.

Closed-end funds

Closed-end funds do not offer investors ready liquidity at net asset value.

However, they may be prudent investments when they trade at substantial discounts to their net asset values. 

Money Managers

In evaluating money managers, individual investors should raise the following questions which will help select a manager:
  • Do they manage their own money in parallel with their clients'?
  • Has the size of the portfolio grown exceedingly large?
  • What is the investment philosophy of the manager? Does it make long-term sense?

In evaluating investment results, investors must look deeper than a manager's historical investment returns. 
  • For example, any manager can generate phenomenal returns within a certain period of time. 
  • Are the returns described over at least one full business cycle
  • Also, were the returns generated using leverage?
  • Or were they generated despite the portfolio holding large amounts of cash (in which case risk is much lower)?

Take Home Message

Investors who adopt a value-oriented investment approach should be able to invest safely with promise of a satisfactory return. 

If they do not have the time to manage their money full-time, find a trustworthy manager who employs this value investing philosophy.

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