Choosing great fund managers is the key to creating wealth for anyone who does not enjoy researching stocks. Yet, the single biggest mistake many people make is choosing funds whose managers are not yet proven.
Mutual Fund Managers
Out of nearly 7000 U.S. equity mutual funds in Morningstar's database, only about 3% have fund managers who have beaten the S&P 500 by enough to make a difference and outperformed their category benchmark over the past 10 years. In other words, there is no compelling reason to choose 97% of mutual funds over an index fund tied to the same benchmark.
Why do people invest in these funds? I think its because they choose funds that have performed well not realizing that in many cases the manager responsible for those returns has been replaced. When a mutual fund has changed managers, only the portion of the fund's track record that occurred under the current manager is relevant to deciding whether to invest in the fund. If you don't know when the fund's current manager took over, it is easy to select a fund with an impressive track record only to have your money end up in the hands of a fund manager who is just starting out.
In my research for Forbes, I looked for mutual funds whose managers have been at the helm for at least 10 years so I could use the fund's 10 year track record to assess the manager's skill. The 3% that topped my analysis all have managers who have proven themselves with superior returns over the long-term.
I have long believed that there are more great investors outside of the mutual fund industry, and I have devoted a great deal of effort to find them.
In addition to the greatest fund managers I selected from Morningstar's database, I would add Wayne Himelsein, Tony Mitchell, and Robert Frazier to the list of managers worthy of consideration. Each of them has outperformed the S&P 500 and their own benchmarks for over 10 years by a wider margin than even the greatest mutual fund managers, wide enough to create wealth for investors.
The Bottom Line
A manager’s track record is like a student’s grade point average. The student with the highest GPA is not guaranteed to be the best student next year. But, if you had to bet on a student to do better than average next year, it would be smart to bet on the one with the highest GPA.
The managers who have good track records have proven that they have some skill at identifying and taking advantage of investment opportunities. I would bet on them to do a better job over the next market cycle than anyone else.