Five phrases that signal a fund manager is covering up

Interesting article at Marketwatch advising you how to spot a Fund Manager that is not being forthcoming as to his performance.

According to Chuck Jaffe, too many fund managers “get it wrong when they get things wrong.” If their money-management mistakes lead to poor excuses, or indifference, or over-reactions — then you may have a bigger problem than an underperforming fund — you have a bum manager.

Folks like Bill Miller and Warren Buffett know they can talk 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 fund manager 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
Chuck Jaffe
MarketWatch, 6:32 PM ET Aug 6, 2006

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What's been said:

Discussions found on the web:
  1. Larry Nusbaum, Scottsdale commented on Aug 20

    6. “We’ve recently paired back our domestic exposure.”
    7. “We expect some more short-term volitility”
    8. “We still believe that Large Caps will be the place to be and that small caps will stop outperforming.”

  2. Robert Cote commented on Aug 20

    9. “However, we now find ourselves strategically positioned to…”
    10. “With the new reporting procedures in place…”
    11. “With compensation no longer tied directly to performance out managers will be free to pursue optimum…”
    12. “These results are not expected to materially impact long term performance.”

  3. Jason commented on Aug 20

    I’d say that the variation on #1 is the most overused by far.

    It’s the only phrase that makes me angry enough to be glad that these people are on the other side of the idiot box.

  4. brion commented on Aug 20

    #6. We’re moving our offices to Nassau…

  5. muckdog commented on Aug 20

    #13. Booyah.

  6. ari5000 commented on Aug 20

    When you’re really underperforming:

    #25 “We take a contrarian approach… ”

    Ah yes, when others make money, we say, “Fuck that shit. We’re not about to follow the crowd off THAT ledge… ”

  7. wcw commented on Aug 20

    ..and when you’re getting creamed so hard you should really just shutter your fund and distribute what’s left:

    #0: “What gold bars?

    (Click through for an entertaining SEC enforcement action. Well, not entertaining to the investors involved.)

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