Index Funds versus Multi-Manager Funds

When a fund has only one manager, shareholders can tell whether a decision to replace the manager is in their best interest.

When a fund has more than one manager, it is hard to know how concerned shareholders should be when one of the managers is replaced.

Since mutual funds with multiple managers do not disclose the track records of their individual managers, shareholders cannot be sure if the manager who is leaving is the one who dragged down performance, or if it is the manager who delivered all of the performance who is leaving.

Mutual fund companies largely expect shareholders to accept these changes without asking questions, and most of the time that is exactly what happens.

Index Funds versus Multi Manager Funds

There are index funds and exchange traded funds, which charge very low fees in part because their managers don’t pick stocks.

Instead, these funds buy all of the stocks that make up a benchmark such as the S&P 500.

When it comes to investing in broad market segments, index funds are generally preferred over mutual funds because of their low cost, unless the mutual fund’s manager has a great track record that justifies a higher management fee.

If you are not able to tell whether the manager of a mutual fund has a great track record, it is hard to justify paying a higher fee.

In this case, you are almost always better off choosing an index fund or ETF that invests in the same broad market segment.

By using multi-manager teams without disclosing the track records of the individual managers, many mutual funds have largely removed the best reason to choose them over an index fund.

In short, it is simply not worth paying a higher fee for managers who won’t disclose their track records.

If you own a fund that is changing managers, it is always a good time to reevaluate your investment.

Whatever reasons you originally had to invest in the fund you may need to consider your strategy anytime the funds’ portfolio managers, investment strategies and perhaps even fees are changing.

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