While I am not a fan of active management, David Swensen outlines some characteristics of truly outstanding managers in a chapter titled “Winning the Active Management Game”. These principles are in turn sourced from a 1998 report of Longleaf Partners funds. A winning mutual fund will:
- Treat investor’s money as their own.
- Have managers invest significant portions of their wealth in their own fund.
- Invest for the long-term and exhibit low turnover.
- Have a clear investment strategy.
- Concentrate their portfolio in their best ideas.
- Have low costs, recognizing its importance in earning attractive returns.
- Limit assets under management by closing the fund to new investors.
The vast majority of mutual funds fail to meet these criteria and Mr. Swensen notes that perhaps a few dozen out of the 9,000 or 10,000 funds in the U.S. would merit consideration. He adds a few words of caution for a hopeful market beater:
Even after identifying an extraordinarily talented team willing to act in investor interest by pursuing superior returns, a harsh reality intrudes. The standard prospectus boilerplate language defines the problem: “Past performance provides no guarantee of future results.” People change. Markets change. Circumstances change. Even with all the stars properly aligned, the most carefully considered decisions sometimes prove wrong.
