Question

3. Do professional money managers add value by picking the “right” (profitable) investments?

4. In shopping for stock mutual funds, what are the key, listed risk characteristics?

5. In shopping for bond mutual funds, what are some the key risk characteristics that separate one bond fund from another?

6. How do mutual fund managers get paid?

Answer 1

Professional Money Managers do not always add value by just "picking profitable investments". Money Managers espeically those attached with Mutual Funds are of two types Active Fund Managers and Passive Fund Managers. Passive Fund Managers add value by indexing or matching their portfolios performance to that of a benchmark's performance. This is done by constituting the portfolio in exactly the same as a benchmark index's portfolio. This in turn ensures that the benchmark's performance determines the performance of the fund manager's portfolio. Passive Fund Managers are more often than not firm believers of the "Efficient Market Hypothesis" which states that information flow is unrestricted and the impact of the same is always accounted into a stock's price. This makes it impposible to "pick" under priced or mispriced stock in the market for a fund manager.

The Active Fund Manager are those who do not believe in EMH and instead feel that through a variety techniques investment managers can actually out perform or beat the benchmark index's performance. These techniques usually comprise of analytical research, fundamental analysis. stock investment philosophies such as the "moat theory", historical data points. economic and business cycles, manager's own judgement and experience,etc.

Such fund managers usually charge a higher fees as beating the market has been proven to be an extremely difficult task at all times. Infact the amount of expertise required to do the same has been such that funds often dedicate themselves entirely to the objective of beating the market.