Evaluating Managed Funds

[Ed Miller]

So I'm rolling over my Microsoft 401k, and I'm thinking about trying out some managed funds for the first time. The way I've been evaluating them so far has been to go to Morningstar and look up stocks of companies I like. I look at the "Top 5 institutional onwers" and see if one fund owns the stock in a concentration much higher than all the others. Then I check the fund and see its top five holdings and evaluate them.

Then I check out the fund's website and prospectus and look at its performance and managment philosophy. Then I look at the fee structure, turnover, etc.

So far, I've found one fund that intrigues me. Fairholme seems to have their ducks in a row. Their symbold is FAIRX.

Anyone here have experience with managed funds and thoughts on my process or pick?

[Uglyowl]

I am in the same boat Ed of rolling over a 401(k). Since I invest on my own, I am not looking for a fund that invests in the same things I do. I am looking for solid performance over a long period of time.

Mutual fund managers do this for a living so I hope they know a heck of alot more than I do.

Something else to look for is if the fund is under the same management for awhile since that is what you are really buying. Morningstar is the best resource I have come accross for information on funds.

[buffett]

[ QUOTE ]
experience with managed funds and thoughts on my process or pick?

[/ QUOTE ]
Mainly these guys are my competitors, but for some of my clients (whose accounts are very small) I utilize funds instead of stocks. Most of the funds on my firm's "approved" list are the ones listed by Lou Lowenstein in his recent paper, which is a modern/updated version of a similar paper/speech written by Mr. Buffett in 1984.

As for your process, it seems like a "bottom up" approach (starting with individual stocks), whereas mine was more of a "bottom down" one (starting with investment philosophy), but it seems pretty good to me. (And, as it turns out, we ended up in the exact same place.)

You mentioned that you look for a low expense ratio, and low turnover, and both are great things. Another two points I would add to any mutual fund checklist is (1) I will never pay a load/commission, and (2) I want to invest with people who have close to 100% of their personal investments in the fund (Longleaf is the hallmark on this one--they require all employees to invest only in Longleaf products).

As it happens, whenever a friend asks me for a short list of mutual fund recommendations, I have the usual suspects like Sequoia, Dodge & Cox, Longleaf, Tweedy Browne, Third Avenue, et al. But most of these are either closed to new investors or just plain huge, so the only fund that I always recommend is Fairholme. This fund is first place in my mind, and there are 3-6 funds tied for a distant second.

Bruce, Larry, and Keith are so incredibly smart, and they have the right temperament in order to succeed. Anecdotal evidence sucks, but....in 1990/1 Bruce was profiled in Outstanding Investor Digest (when he was still with Smith Barney (?)), and he was pitching Wells Fargo. The Californian economy was in dire straits at the time (where have I heard that one before?) and most investors were down on banks in general, but Bruce said he was backing up the truck on Wells. In a short matter of months after that, Berkshire disclosed that they too had bought a large stake (of course this has since been a multi-bagger).

[Ed Miller]

Thanks buffett. I'm actually learning something about investing, I think. [img]/images/graemlins/smile.gif[/img]

Trying to pick individual stocks has been frustrating for me so far (granted, I haven't put much time into it), because every time I think I've found a good one, I catch some big red flag or fatal flaw or something in the 10-K. Who knew building a Marketocracy portfolio could be so stresful. [img]/images/graemlins/tongue.gif[/img]

I'm sure I'll get the hang of it.

Right now my Microsoft 401k is 100% in Vanguard Value Index Fund Investor Shares (VIVAX). I just let it sit there since I left the company in 2003 because I didn't know anything better to do with it.

I want to roll it over to a Vanguard IRA. I think I might move a significant percentage to Fairholme and spread the rest between some other Vanguard Index funds. Something like:

Fairholme - 40%
Vanguard 500 Index Fund Investor Shares (VFINX) - 20%
Vanguard Small-Cap Index Fund Investor Shares (NAESX) - 20%
Vanguard Total International Stock Index Fund (VGTSX) - 20%

I don't know if this portfolio is too aggressive.. FWIW, I'm 26 and optimistic about my future earning power.

Just kinda throwing this out there for a sanity check before I rollover.

[Uglyowl]

From Buffett's link that talked about 10 "great value funds" I was able to get the top 25 holdings as of 09/30/2005 of 9 of these.

These funds have very low turnover and a long-term (2+ year) philosophy so most are probably viewed as good today. Of the 9 funds here are the stocks owned by more than one of these:

Altria Group (2)
American Express (2)
Berkshire Hathaway (5)
Bristol-Myers Squibb (2)
Burlington Resources (2) NOTE: RECENTLY BOUGHT BY COP
Comcast (3)
Diageo (3)
Discovery Holding Co (2)
Freddie Mac (2)
IMS Health (2)
JP Morgan (2)
Knight Ridder (2)
Liberty Media (3)
Newmont Mining (2)
Old Republic International (2)
Pfizer (2)
The Directv Group (2)
Time Warner (4)
Tyco International (3)
Viacom B (2)
Vivendi Universal (3)
Yum Brands (2)
Zale (2)

Any thoughts on these stocks? Altria has had a nice run up recently, but other than that I don't know much about alot of these.

[Peter666]

The main reason to get into mutual funds is low volatility. They are catering to a mass market which psychologically demands this, so beware of that when selecting your fund.

For mutual fund like performance with the advantages of a stock, I would recommend getting into Berkshire Hathaway instead. That is if you can afford their B shares. Something tells me Ed Miller can do that.

[Mr. Now]

The timing on a small purchase of NEM may be ideal this week.

[Ed Miller]

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For mutual fund like performance with the advantages of a stock, I would recommend getting into Berkshire Hathaway instead. That is if you can afford their B shares. Something tells me Ed Miller can do that.

[/ QUOTE ]

Ya, I agree that BRK is attractive. I may buy some shares one of these days to go to the shareholder meeting, also. [img]/images/graemlins/smile.gif[/img]

(BTW, Fairholme's top holding is BRK.A, so if I were to buy that fund, I'd also be buying BRK.)

[buffett]

Oh, dude, we should totally have a 2+2/poker get-together at next year's BRK or WSC meeting.


(If you don't own shares, you can buy a ticket on ebay.)

[jively]

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Trying to pick individual stocks has been frustrating for me so far [...]

[/ QUOTE ]
I am in investment advisor, and as I mentioned in another thread, I feel strongly about passive, non-forecasting investments strategies.

This board may be a bad place to state my opinions, as most of you seem to trade, but I'll try anyway.

Take any stock - Altria was mentioned in this thread. 11 million shares of Altria traded today. So, pensions, mutual funds, and individuals bought 11 million shares of it today - and all of those buyers think the stock is going up. But other pensions, mutual funds and individuals sold it today - the same 11 million shares worth! - and all those sellers think it is going down, or there is someplace better for their money. So, who is right?

And, what do I or you or any individual know that is better information than the millions of people that trade that stock every day? Inside information, is of course, illegal. And all other information is basically made available to everyone at the same time. All "news" that is basically unpredictable.

I believe that, because millions of people are researching and buying and selling all of the stocks every day, there is no one that can pick stocks and beat the benchmark over a long period of time.

Hey, actually 2+2 is a great place for this tidbit. People looking at mutual funds and their past performance - how many months or years of past performance do you need to know that a funds' outperformance is statistically significant? With variance, a losing poker player can win 100 BB or 300 BB over some short periods of time, right? Well, if Morningstar says some mutual fund is outperforming their benchmark over the last 1, 3, and 5 years, does that mean that the fund company or fund manager actually has skill in picking which stocks are going to go up and which down?

Ken French of Dartmouth College said that if a fund outperforms it's benchmark by 3% a year on average, it takes 140 years of perfomance history to tell if it's statistically significant!

Think of it another way. Take 1000 fund managers and put them in a room. Ask them to flip a coin and try to get heads. After one flip, roughly 500 will flip tails, and they will be asked to leave the room. Roughly 500 flip heads and stay, and flip a second time. Do this for 10 flips. It would not be unusual for 1 of these fund managers to flip heads 10 times in a row. (Odds of that are 1 in 1024.) (If you had 2000 fund managers, you'd probably have at least one of the flop 10 heads in a row.)

So, was that fund manager skilled at flipping heads? No, they just happened to be the lucky one who happened to do it. So, if you take 1,000 US Large Cap Blend mutual funds, you can probably find 1 that outperformed their benchmark for 10 years in a row. Skill? Could just be luck like the coin flipper.

[ QUOTE ]
I want to roll it over to a Vanguard IRA. I think I might move a significant percentage to Fairholme and spread the rest between some other Vanguard Index funds. [...]

[/ QUOTE ]
Vanguard is a great company with index funds and low expenses. In fact it is a mutual company owned by the shareholders, so they are not trying to rip off their investors and earn a profit. I have used Vanguard in the past and highly recommend them. (I don't use them now, and have never worked for them.)

I'd skip that Fairholme and stick with index funds. There's a lot of good web sites and books about asset allocation with index funds. If you want to be aggressive (100% stocks) and diversified, how about something like:

20% Total Stock Market Index
20% Value Index
10% Small Cap Index
10% Small-Cap Value Index
10% REIT Index
10% European Stock Index
10% Pacific Stock Index
10% Emerging Markets Stock Index

For Vanguard IRAs I think it's a $2,000 minimum per fund, so you could do this allocation with $20,000. With a smaller amount, I could come up with a simpler allocation.

If you want to be a little less aggressive, add Short-Term Corporate Bond Fund and keep the stock funds in the same proportion.

A great book I recommend is The Four Pillars of Investing by William Bernstein:

http://www.amazon.com/gp/product/0071385...ks&v=glance

Good luck!

-Tom