Professional Management can be a big advantage. We’re continuing a series on Funds…
Perhaps, you don’t have the time, skill, or desire to pick individual securities? A fund offers professional management of one kind or another. It might be an Index Portfolio which doesn’t have an active manager, but instead simply matches the securities it holds to those of an index. Still, you go into the relationship knowing that the fund is matched to this index and you have predetermined that the sector which the index focuses on is a sector which you want to be invested in.
Most funds have active management and thus the manger or management team is using their skill to beat the benchmarks which they are measuring themselves against. In the case, you enter the relationship knowing the fund’s objectives (so as above, you know that this is an area in which you want to be invested) and you are able to look at the manager’s philosophy and track record in order to determine if you want to be invested through him.
Keep in mind that most fund managers fail to beat the benchmarks which they are trying to outperform. Because of this, more and more people are turning to low cost index funds. However, there are certain managers who have demonstrated over many years that they are able to outperform the market. It seems silly to us that worshippers of the Index fun constantly point to the fact that 80% of managers fail to beat the market as proof that you should only invest in index funds. Wouldn’t another logical argument be that you should find the 20% who do beat the market and invest with them?
We would take a good manager over an index fund every time as long as he’s investing in an area where we have predetermined that we want to be invested in. However, if we know we want to allocate into a certain sector of the economy and we don’t know an excellent manager who has a fund available for us to work in that space, then we’ll go with the index fund quite happily.
We recently began a series on asset allocation which in many ways relates to some of the purpose in funds, so you might want to check out those posts Pt 1, Pt 2, and Pt 3 can be found at these links.