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Has your fund manager been through a bear market? Research Team | Posted On Wednesday, April 08,2009, 05:57 PM

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Has your fund manager been through a bear market?



Securities indexes in the U.S. and in many other countries around the world are on track to record their fifth consecutive year of positive gains in 2007. These gains come on the heels of the terrible equity returns experienced during the dotcom bust from 2000 through 2002. You always should try to enjoy gains while you can, keep in mind that bull markets do not last for the foreseeable future. As a result, if you are looking to add a mutual fund to your portfolio, it will be harder to find a manager with experience in a down market

The Shrinking Supply of Fund Managers

The past shows that the most successful fund managers are those who perform well in down markets as well as in up markets, but although there are many fund managers with terrific three- and five-year performance records, many have inadequate experience during market corrections.

Regrettably, not all funds have managers with real-world experience in how to do this. This is compounded by the reality that not all investment strategies experience bear-market performances at the same time or in the same magnitude. For an instance, funds investing in large U.S. companies experienced a major downturn from 2000 through 2002, the worst rectification since the 1974 to 1975 period, which almost destroyed the mutual fund industry.

The Quest for a Large Cap Fund Manager

According to Morningstar, there were 5,579 domestic large cap mutual funds in 2007, some with outstanding returns over the precedent three and five years. Nevertheless, within this universe, only 1,356 of the funds have managers with experience going back as far as the beginning of the year 2000 – that cuts out almost 76% of the unique universe of available funds. These 1,356 funds echo like a lot, but if you were to narrow the universe down to, say, no-load mutual funds with reasonable minimum investments that are available to the average investor, then the list would contract down to about 150.

Small Cap fund managers are even harder to find

To observe the small cap universe, we need to broaden the time period back to 1998, which was the last period of deprived relative performance for small cap stocks. According to Morningstar Research, there were 2,011 domestic small cap funds in 2007, some with fantastic performance records over the past three and five years, especially when compared to large cap funds. On the other hand, within this universe, there are only 260 funds that have managers with experience that dates back to 1998 - eliminating 87% of this universe. Of course, if we were to purify the small cap universe to no-load mutual funds with reasonable minimum investments that are available to the average investor, the universe would contract to about 40 funds, leaving you with very little choice.

The search for a high-yield fund manager

Some fixed-income categories have also experienced very superior fortune over the past several years, making it increasingly complicated to find a manager with experience in choppy waters. For an instance, high-yield funds experienced a difficult period in the era 2002, when some of the telecommunications companies like WorldCom defaulted on their debt. In 2007, there are 575 high-yield funds, generally referred to as junk bond funds, compared to only about 230 after narrowing the universe to managers that endured the 2002 debacle. Additional, this universe is substantially reduced to about 15 when exclusive of load funds and other funds that most investors cannot purchase.

The shortage extends to International funds

The deficiency of managers extends to international mutual funds also. International markets also last tumbled significantly during the 2000 to 2002 period. At present, there are 1,318 large cap diversified international funds versus 263 funds with manager navigation his or her ship since 2000. That reduces the list by about 80%, in addition to this, if you were to narrow the criteria to include only no-load mutual funds that are normally available to the average investor, your list would shrink to only about 20 funds.

The noteworthy reduction in international funds with managers who have experienced a bear market is partially related to the recent growth in the number of funds in international investment categories. International markets have soared over the precedent several years, which have lead to fund companies launching more international funds.

What are your other options?

Preferably, you would want to find and invest with a manager that has effectively guided his or her fund through downturns in the market. If this investigate yields no results to your liking, you have a few other options also :

  • First of all, you could invest with a manager who has steered another fund at his or her current company during a down market. This may be a reasonable alternative if the fund company employs a team approach, in this manner making portfolio managers more interchangeable.
  • Secondly, you could invest with a manager with bear market experience at another firm. Be careful if you prefer this option because fund managers do not always bring their resources with them to a new company. A different environment with a new research staff may result in a very diverse performance record.
  • Lastly, if you still cannot find a suitable fund, you could just hire the manager with the best overall investment background.

Other factors to consider

Bear market experience is not the merely factor to consider when investing in a mutual fund. You should, of course, evaluate how the manager performs in a tough market. Be careful here because sometimes unusually positive returns can point out that the fund is much more aggressive than it peers and may not offer much downside protection.

After you have evaluated performance, both good and as well as bad, you should consider a portfolio manager's academic experience and other qualifications also. Nowadays, fund companies tend to be very selective when it comes to hiring portfolio managers. If many of the major fund companies value strong academic identification, they should also be important to you. Further, you do not necessarily have to pay more for a fund manager with a strong academic background.

In the same way, many fund companies regularly require that managers be CFA charter holders. The CFA program is very wide-ranging and is usually considered to be the gold standard for investment professionals. Yet again, if mutual fund companies value the CFA designation, it makes logic that it should also be important to anyone who is searching for a fund to add to a portfolio.

Another aspect you may want to consider before making a new investment is whether a portfolio manager invests in his or her own fund. This in sequence, though, is not always easy to obtain, but sometimes can be found in a fund's statement of additional information. This is not a precise science, but it can be supportive to know that your manager's interests are in line with yours.

Wrapping it up

Finding a fund manager with experience in a bear market is probable to continue to be a challenge as long as a band of good mutual fund returns continues. This is not mean to say that it is impossible to find a manager competent of weathering the next downturn, but that mutual fund investors will have to work harder to find experienced managers. There are other alternatives, but none as reassuring as investing with a fund manager who has successfully managed a product in both good and bad times.

" Big Bear Market Rally "

Earlier: In spite of a confirmed deal in pharma and rumors of a second, the stock market drooping to yet another round of multi-year lows Monday.

Yet, the cadre of formerly steadfast bears who are turning bullish like Doug Kass and Steve Leuthold, continues to add members.

Stocks jumped in the early hours of Tuesday with the Dow recently up about 3.5% while the S&P and Nasdaq were each up more than 3.8%. The gains are being extensively attributed to a leaked memo revealing Citigroup had operated at a profit during the first two months of the year. But the actuality is the market was due for at least a short-term technical bounce after its recent disorder, as discussed in the accompanying video, taped Monday afternoon.

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