Who Is To Blame?

Sure, after last year’s staggering losses, it’s only natural to see many investors on the prowl trying to find someone to blame for their life changing portfolio losses.

If you were working with a broker or financial planner, and they advised you to hang on to your bullish investments while the trends changed to a bearish scenario, they certainly deserve to be fired for their lack of knowledge and responsibility.

But how about mutual fund managers? Are they really at fault for their fund going down with the bear market? MarketWatch had some words on that topic titled “When to fire your fund manager:”

If you manage a department or run a business, common sense tells you that the best way to escape from a problem is to solve it. And yet, many managers avoid the issue of a worker or employee who is not living up to expectations. The longer managers wait to do an honest assessment and fix the problem, the more the sore festers and damage gets done.

Well, no matter what you do in your professional life, you are the owner/manager of your personal investment business. And that being the case, your start to 2009 means reflecting on a lousy 2008, which should lead you to one simple question:

Should I fire my mutual-fund manager?

Under most market conditions, a 40% annual decline would be horrible performance that is immediate cause for dismissal. In 2008, that kind of loss was average for equity funds. And while an equity manager who lost 30% or 35% clearly was “above average,” it’s hard to feel really good about those results.

When investments go down 40% to 50% and the market delivers a harsh reminder that diversification doesn’t work well in cyclical bear markets, human nature wants to blame someone for what went wrong. That puts every fund manager who delivered poor results — relative or absolute — on the chopping block.

And yet investors are clearly in deer-in-headlights mode, unable to escape this problem or solve it. The market is providing no real safe havens, and even past heroes and old standbys were taken for fools by this crisis. Top long-term managers like Dodge & Cox, American Funds, Fidelity Investments and many others got gassed in 2008; they were every bit as horrible and miserable as the rest of the crowd.

There weren’t any new heroes, either. Plenty of middle-aged investors can recall 1987 and remind you that Elaine Garzarelli — working for what was then Shearson Lehman — called the valuation bubble that mushroomed into Black Monday. Never mind that Garzarelli never proved to be more than a mediocre fund manager when she tried her hand at it — she was a bright light in a dark time, and investors found solace and profits in her advice before, during and after the crisis.

Today, it looks to the casual observer like Wall Street’s emperors are naked; you’ll have a hard time finding a Garzarelli-like figure, someone who earned stardom by getting 2008 right. Some perma-bears and newsletter editors helped a small-scale audience, but most Wall Street luminaries got 2008 wrong, which makes it hard to believe in them now.

Which brings us back to the question of whether you should fire your fund manager?

Traditionally, the most crucial question for evaluating a fund has been “Would you buy it again today?” Alas, market conditions actually pollute that query, since it is pretty hard to honestly answer that you’d repurchase a fund that just lost one-quarter of your money, even if that result was above average.

A better question, according to Michael Stolper, a San Diego-based investment adviser, goes like this: “If you were 100% in cash today and decided that it’s time to put your money back to work in the market, would you give it back to this manager or look for someone new?”

If you alone made the decision to hang on to losing funds last year, you have nobody else to blame but yourself. Most fund managers are required by their charter to be always invested in equities by some 90%. The consequences of this obligation can be devastating in a bear market as we’ve seen.

The question therefore should not be whether to give your assets to a certain manager, but what methodology will you employ to avoid a repeat disaster, if the markets head south again during 2009? That alone is the key issue.

Let’s say, the markets turn around and a new buy signal via our domestic Trend Tracking Index (TTI) is generated. I can assure you that my mutual fund selections will be strictly based on current momentum criteria and will in no way be influenced by what the fund manager did last year.

A bear market does not discriminate and all mutual funds/ETFs will go down to varying degrees. Changing only a fund manager will do nothing to avoid a repeat disaster; changing your investment methodology away from the mindless buy and hold will make all the difference.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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