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Getting to Know a Fund's Manager: Questions to Ask

Step 6: Where Can I Find Answers to These Questions?

If you can get the answers to most of these 10 questions, you will have a pretty good understanding of the investment approach that is being followed by a mutual fund portfolio manager.

Whether that approach is the best approach, of course, is another judgment you will have to make, but you can't make any judgment regarding this important issue if you have no idea what your mutual fund manager is doing.

Where can you get the answers to these questions?

Some funds do include at least some of this information in their marketing literature, in the fund's annual reports, and sometimes in the prospectus.

In addition, many funds send out newsletters to shareholders that provide more detailed information on their portfolio managers' approach. If you are not a shareholder but a prospective investor, ask the shareholder representative if any of this explanatory literature can be sent to you.

The Internet is another source. Most mutual funds have their own Web sites, and some of these include fund manager Q&As.

Lastly, there are magazines such as Forbes, Barron's, Fortune, and, of course, the AAII Journal, which do fund manager interviews.

Summary: What You Need to Know About a Stock Fund Manager

Ten basic questions to ask about a mutual fund portfolio manager to help you better understand his approach.

  1. What is the overall investment philosophy?
    This should go beyond simple statements such as "the focus is on capital appreciation" or "we seek income and growth." Instead, it should be a basic explanation as to how the manager believes he can make money in the stock market.
  2. What is the universe from which stocks are selected?
    This question zeroes in on the segment of the market in which the portfolio manager is concentrating, which is not always clear-cut. The answer should be tied in with the portfolio manager's investment philosophy.
  3. What are the criteria for initial consideration of a stock; are screens used to flag potential stocks?
    Funds that use different initial screens can end up with quite different portfolios, even if their investment philosophies sound similar. In addition, being aware of screens that are used will help potential investors better understand the approach and possible biases of the manager.
  4. What "conditioning" or secondary characteristics are examined?
    Initial screens may turn up potential winners, but they will also turn up certain kinds of losers. Conditioning screens attempt to weed out the kinds of losers that tend to turn up in the manager's initial screen. Understanding a manager's conditioning screens provides some assurance that the portfolio manager is aware of the potential pitfalls of his approach, and it notifies you of those potential pitfalls, as well.
  5. How are stocks valued?
    Another very revealing indication of the manager's approach—and it should be consistent with the portfolio manager's investment philosophy.
  6. What non-financial characteristics are examined?
    Reveals the extent to which the manager examines "qualitative" characteristics, such as corporate management.
  7. Is market timing used; by what percentage do cash positions vary?
    A red flag question. It is difficult to predict with any accuracy the future direction of the stock market over a short time period. If you want to achieve the long-term rates of return offered by the stock market, make a long-term commitment and avoid funds that try to time the market.
  8. Is technical analysis used?
    Studies indicate that most technical analysis provides an unreliable indicator of long-term future price action, with the exception of measures of relative strength. Avoid funds that rely heavily on technical analysis to the exclusion of an examination of fundamental factors concerning potential stock investments.
  9. How is risk reduced?
    Portfolio managers view risk very differently—for instance, some managers consciously try to assure diversification, while others consider overweighting or underweighting certain industries to be a risk-reduction method, avoiding the "riskier" areas. If you are going to invest in a fund, you need to be aware of how the manager views risk.
  10. What would prompt a sale of an existing stock holding?
    Very revealing of the portfolio manager's approach, and it should be consistent with his investment philosophy. The common thread among all portfolio managers who follow a consistent and well-thought-out investment approach is that stocks are sold whenever they no longer meet the manager's investment criteria, regardless of whether the stock is a winner or a loser for the manager.
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