Fund analysts are supposed to be objective: I know this because I can remember the president of our firm saying so, over and over to anyone who would listen.
“This firm is completely independent when it comes to the products we use,” he would say. “We have no ties to any one fund company. If the fund that we use doesn't meet expectations, then we fire them. We don't even take pens from the funds, that's how objective we are!”
Wait, I take that back. The prez was actually accurate, literally speaking, on the matter of the pens. In my days as a fund analyst, I remember one fund company sending all of our firm's advisors pens. The thing was, I didn't pass them out because I was sure the advisors would scoff at such a low-level form of loot.
There's little use in denying the fact that wholesalers can, and often do, make the life of a fund analyst fun. I know because I was one of those analysts, and my mental list of wholesalers who could be counted upon for lunches and golf outings was a long one.
Another contributor to this column once wrote that a source of his referred to the wholesalers as her “boyfriends,” and in a way that's what they were to me too. If I wanted to, I could have gone to breakfast, lunch and dinner as well as played a round of golf every day in the summer.
Unfortunately, there was actual work to be done, so I limited myself to one or two rounds of golf a week, with my favorite suitors.
Then there were the advisors. When advisors spoke to me about my recommendations, they usually spewed some pablum like, “We don't just pick mutual funds because of their performance — we want to know the people behind the process and their philosophy.” What that really meant was, “Give me a mutual fund that's going to continue to outperform every imaginable index so that I don't have to talk to my clients about underperforming.”
It didn't matter if the fund was beating its comparable index by 300 basis points. If it didn't beat the S&P 500, there was explaining to do, and the advisors didn't want to have to do it. They could talk ad nauseum about how the Small-Cap Growth Fund X's benchmark was not the S&P 500 but the Russell 2000 Growth index, which, by the way, it was beating by 300 basis points. They could tell the clients that such investments are what make up a diversified portfolio. But they knew most clients wouldn't stomach either of these explanations, and they made the wholesalers and the analysts pay for this fact.
Geek Chic — Not
Wholesaler-sponsored junkets aside, fund analyst is a thankless job. You put your heart and soul into finding what you think is the best process and the best people doing the managing, and the work often goes unnoticed. It's a no-win situation: If you find 10 good-performing funds, you're just doing your job, but pick just one that underperforms, and look out!
Thank heavens that analysts tend to be so geeky they don't seem to need the validation. Just give ‘em some new software that shows alphas and betas compared to the correct index, or a graphing capability that shows that outperformance in down years, or the up-capture and down-capture, or the information ratio, or the Sharpe ratio. This is what gets an analyst out of bed in the morning — the selfsame statistics that put advisors to sleep.
Speaking of those advisors, I've got one last pet peeve: those who say, “My client saw Fund Y on CNN and I've looked at it, and it looks pretty good. Why isn't it on our recommended list?”
As the analyst, you look at the fund and you say, “Yep, that's fund's performing well, but I know nothing about the fund's other Ps — the Process, the People, the Philosophy. So if you feel confident based just on performance, then I say go ahead and use it.”
What such a statement means to the analyst: Keep an ear out for a wholesaler's phone call, and watch the mail for the golf balls!
Writer's BIO: Bela Houston
is the pen name of a former mutual fund analyst from a midwestern RIA firm.