frankly about stretches of bad performance without losing the respect of
investors. They know that
investors won’t flee their funds because of a poor stretch.
Jaffe observes that "not every manager has that kind of tenure, record or self-confidence." He outlines some clues to look for to see if your fun dmanager is "coming clean or covering up."
Beware the following five phrases:
1. ‘It’s a challenging market right now’(variation: "It’s a stockpicker’s market")Duh. Investing is always challenging, even when the market is booming. You buy a fund for the
manager’s expertise. A manager who
blames the stock market effectively is telling you that "It’s not a good time to
be relying on luck."2. ‘We underestimated the risk …’
The manager’s job is to take manage risk appropriately.
Better to invest in a way that is consistent with the fund’s
long-term mission than to fail to properly consider risk — and blow up taking too
many big chances.3. ‘We’re cautiously optimistic …’The most overused phrase in the fund manager lexicon — and it is essentially, meaningless. All fund managers are cautiously optimistic; it’s
the nature of the beast. No Managers say they
expect to lose a fortune; No corporate lawyer will let them say they
expect to make a fortune.4. ‘The long view of our performance shows …’The quarterly letter is really designed to talk about recent
results and future prospects. Managers should acknowledge when they’re
struggling, not gloss over it.5. ‘We’re taking steps to improve returns’This is another statement that managers should make regardless of
market conditions or recent performance. It’s also a
warning sign: look
closely to see if the fund is engaging in "Style Drift."
Interesting set of rules — good stuff, Chuck.
Loser lips: Five phrases that signal a fund manager is covering up
MarketWatch, 6:32 PM ET Aug 6, 2006