Mirror, mirror on the wall, can a mutual fund react like me? Not poetic but truthful; we all want a mutual fund that gets skittish when we get nervous, divests itself to cash when the market looks to be headed lower but gets back into the fray when the markets look to rebound and fails to be easy to define with any sort of style box. But is what we want always good for us, our retirement plans or our investment profile?
Mutual funds offer us something we can’t do for ourselves: broad-based investing across a wide variety of opportunities, the ability to be a player in the marketplace that many of us barely understand and do so with all of the expertise a robust investment resume can offer. Yet, even with those loosely defined parameters in place, we still wonder if we made the right decision and then, wonder whether the manager we hired has made the best decision for us.
Makes for a chaotic and sleep-depriving investment experience. But suppose there was a fund style that took money out of the market when it felt as though the news would turn bad for their investments and to be able to do so before the worst occurred – would you buy into the concept? If the Osterweis Fund is any indication, the answer is probably yes.
This actively managed mutual fund allows its managers to shift from a primarily stock exposed position to one where half of the assets were in the safety of cash and even short-term bonds. If it does its job correctly, a fund like this, considered to be flexible, could serve the worrisome investor in most of us. That said, look for more funds like this one to begin to offer their services to the general investing public.
There are basically three things wrong with this approach. First, we want discipline. If a fund manager is allowed to shift their investment style based on certain information, mostly short-term in nature, even if the goal is to minimize losses, we will pay the price. Not just in fees and trading costs but also on the possibility that the fund’s style might find itself on the wrong-end of the wager.
Two: If the fund manager employs this sort of strategy, it could be due to information it may have accumulated or simply due to a miscalculation. It woud be difficult to tell for sure from the outside. Moving out of a certain stock or basket of stocks signals such an error rather than offering some sort of prescient insight into the future. Worse still for the average investor: how do judge performance or even compare this investment style to other funds?
Three: How can you possibly diversify with such a fund? While I am not a big fan of style boxes or even stars, they do give us some sort of insight into how the fund will invest. Institutional investor in particular like to see a fund manager invest where they say they will, avoiding cross-over exposure. The average investor appreciates a fund manager that does what they say they are going to do, investing in the manner we choose if only to appease our risk tolerance.
These funds will be sold to the general public under a variety of names such as flexible, tactical asset allocation or as an asset strategy. Many will be launched by large firms with good reputations. All will appeal to a certain type of investor. But for a retirement plan, it simply doesn’t seem to be a good place to put your future dollars. If they miss an opportunity you may lose more than the rest of the market and not be in a good position when the market recovers.
To read more about these types of funds, here is a report from MarketWatch by Sam Mamudi
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