While I have repeatedly written about my preference for passive, low-cost investing using ETFs or index mutual funds and that, in my opinion, the vast majority of mutual funds are hazardous to an investor’s wealth, a handful of active managers will be of interest to investors seeking to beat the benchmark indices. To find these mutual funds, it pays to ignore past performance, which has proven to be a poor indicator of future returns and instead look for mutual funds that satisfy a set of criteria such as cost, turnover, co-ownership etc. as suggested by David Swensen in Unconventional Success (read review).
It is easy to like Steadyhand funds. Its founder Tom Bradley counts himself among the fierce critics of the industry and constantly points out the shortcomings of the business through his blog posts and columns in the Globe and Mail. He calls the mutual fund business “fat and flabby” and is out to actually do something about the sorry state of affairs with Steadyhand:
Low cost: For a small mutual fund operation, Steadyhand’s fees are remarkably low. The fees range from 0.65% for a savings fund to 1.35% for the equity fund to 1.70% for a small-cap fund. A fee reduction program offers discounts for larger accounts and for longer-term investors. Steadyhand sells its funds directly to investors and does not pay commissions or trailers.
Concentration: Most mutual funds are bloated with hundreds of holdings and inevitably end up mirroring the benchmarks (and trailing it after fees). Active managers who construct portfolios concentrated in their “best ideas” are more likely to post returns that are also different from the index (note that the variation could be in either direction and obviously fund investors are looking for outperformance). Steadyhand’s equity funds aim to invest in 15 to 50 stocks.
Co-investment: While selecting active managers, it is important to look for ones that eat their own cooking. After all, managers are likely to be a lot more careful with the hard-earned money of shareholders if a significant amount of their wealth is invested in their own funds. Steadyhand’s sub-advisors and employees have disclosed their substantial investments in their own funds.
Low Turnover: Steadyhand’s funds do not have a long track record but the Equity Fund and Small-Cap Fund have reported low turnover for the past two years. As the Global Fund and the Income Fund seem to have remarkably high turnover, Steadyhand’s record on this score is decidedly mixed.
A word of caution: if you go the active management route, all you can do is put the odds in your favour; there is no guarantee that a mutual fund will beat the benchmark. And it is almost certain that active managers will have periods of underperformance and it is important to stick with them through thick and thin. Mutual fund investors should keep Charles Ellis’ warning in mind: if you don’t plan on staying married, don’t tie the knot in the first place.
Now, over to you: Which mutual funds, in your opinion, would be interesting for active investors? I have a few boutique mutual funds in mind but would be interested in your ideas for occasional posts on this topic.
PS: Don’t forget to enter your name in the Best of April 2009 Giveaway, which closes tomorrow at 8:00 PM EDT.
[Update: Scott Reynolds of Steadyhand Funds points out that the Global Fund’s high turnover in 2008 is attributable to cash management transactions related to a money market holding in the fund. Excluding this, the turnover is much lower at 35%. The manager of the Income Fund fund expects to have a higher turnover due to the nature of fixed income active management.]