Dangers of Managed Funds
Many investors are passive and accepting of poor fund management. When they
should make a fuss, they rarely do - even when things go horribly wrong, as they
did between 2000 and 2003 during the dotcom crash. But when investors keep their
mouths shut about bad fund management, this opens up the potential for fund
managers to take advantage of them. In this article, we'll show you why you
should play an active role in understanding and evaluating your portfolio, even
if it has been performing well.
Investors Lured by Last Year's Winners
A March 2004 study at the University of Cologne in Germany, "Family Matters:
The Performance Flow Relationship in the Mutual Fund Industry", demonstrates the
prevalence of the unfortunate but common process of investing in last year's
winners. According to the study, despite the warnings against using the previous
year's performance as a predictor of future success, investors remain impressed
by past gains, and continue to base their investment decision on this data.
This means that in order to attract new investors each year, fund managers need
to show good results from the year before. This often leads managers to take on
above-average risk, which can be fine in good times, but it can also be
disastrous in a bear market because this strategy can go horribly wrong when the
market takes a turn for the worse.
When evaluating a fund, therefore, it is important that investors remember the
adage that "past performances does not dictate future results."