For those that have sat in a conference room building out a new strategy for your company, you know that often the team leader will discuss the three P’s: Purpose, Process, and Payoff.
With well over 10,000 mutual funds in the marketplace and now a slew of actively managed exchange traded funds, picking a mutual fund manager may end up being one of the more challenging tasks for an investor in their 401(k) plan or those with a large portfolio. Is it best to pick a fund manager that is a lone ranger? Is it best to pick a fund manager that selects funds through a team approach? I have often asked investors, which is most important to win the horse race? The horse or the jockey? To be successful as an investor, I would suggest you filter them out by using the purpose, process, and payoff system.
- Purpose: Do you know exactly what outcome you are looking for with your investment dollars? Are you wanting to protect your principal? Are you looking for aggressive growth? Are you looking to buy value stocks or growth stocks? Are you specifically looking to invest in international stocks or emerging markets? These are important questions to be asking yourself as an investor because you could find a great fund manager, but they may not manage money in a fashion that is consistent with your investment goals and objectives. So, you need to be clear about your purpose.
- Process: Does the manager have a ‘repeatable’ process that they use to select the investments within the portfolio? If you are choosing a team, how much of a decision does the portfolio manager make versus the team? What is their screening process? Without a really effective disciplined strategy and process to selecting investment, it is unlikely you will find a top quality manager.
- Payoff: At the end of the day, you want a fund manager who has a successful track record. The payoff of paying a professional fund manager is to find a person who can consistently beat their competitive benchmark or index or be decisive about measuring your manager with what absolute return you would be satisfied with every year. Otherwise, wouldn’t it make sense to just index? If you invest money without having those expectations, you might just wind up with a purpose and a process but not the payoff you expected.
Consider these three important P’s before you pick a fund manager.