A JPMorgan survey shows that 27 percent of mutual fund managers are underperforming the S&P 500 by 500 basis points this year. So what will they be doing in the fourth quarter to ensure that money stays in house next year? And what strategies will they put in place if relative performance catch up is simply what it's about?
Brian Gaffney, CEO of Allianz Global Investors Distributors, says everyone is still watching the benchmark, but when deciding whether your fund manager is adding value, there's much more to it.
"Everybody still is looking to the benchmark, and when you find people that are on a relative basis off the benchmark, you've got to understand what they're doing," Gaffney said. "Did they do what they said they were going to do?
"If you're investing in a dividend-paying mutual fund, and you find out it's the speculative dividend stocks that have taken off but the high-quality consistent growers have not, you're going to underperform the peer group, but is that the best choice? We would say no. Stay with the investment manager and the fund that consistently does what he says he's going to do."
So keep an eye on style drift and also capacity.
Some investors will look at the best performing mutual funds for a given period without realizing that they should also pay attention to the asset base.
"There's two dynamics that happen," Gaffney explained. "As you start to get very successful, the flows are coming in and you have to figure out how to put the flows to work. But at the same time the marketing demands pick up dramatically. Everyone wants to hear what you're doing.
"The requests from advisors and clients take up a tremendous amount of time unless you built the infrastructure to do that," he said. "But many fund managers get caught off guard by the influx of flow and miss the opportunity to figure out how to put that flow to work effectively."
So should investors try to monitor funds themselves?
"This is a day and age you have to have professional advice, and it's a problem we're running into today — you've got 79 million baby boomers racing to the retirement doors and one of two outcomes is going to occur, they're going to retire with dignity...or they're going to wake up, and they're going to grab a cup of coffee and pick up the stack of bills and wonder if they're going to keep the house."
"The fundamental change that's occurred is the decision now falls with the individual. It's not going to be your pension plan, it's not going to be the promise of social security, and that shift to the individuals having to make those decisions requires them to get professional help."
Investor Moves Into Fixed Income From Equities
"It's been a phenomenal move into fixed income, we've never experienced anything quite like it and of course we're the beneficiaries of it," Gaffney said. "It concerns us that it continues to feel like the herd mentality."
"I lean back to are they getting the right guidance, or are they following the herd mentality," Gaffney said.