This paper examines the role of the mutual fund manager, beginning with a definition of the position and its major responsibilities — from implementing investment strategy to portfolio trading activities. It surveys current issues affecting fund managers, including debates over manager performance persistence, regulatory constraints on cash holdings, fee transparency, and prospectus disclosures. The paper also covers valuation tools such as net asset value (NAV) calculations, the challenges of pricing illiquid securities, and the use of derivative products for hedging, speculation, and arbitrage. Finally, it discusses how fund managers pursue diverse investment objectives — growth, value, aggressive growth, and equity-income — while managing risk across different stock fund types.
The paper effectively uses synthesis across multiple sources to frame a professional role comprehensively. Rather than summarizing one source at a time, it weaves together regulatory guidance (SEC), empirical research (Baks, 2003), and practitioner commentary to construct a multi-dimensional portrait of the fund manager's responsibilities and challenges.
The paper is organized into five sections: an introductory definition of the role and its core duties; a survey of current issues (performance debates, regulatory constraints, fees); an explanation of valuation tools including NAV; a focused discussion of derivative products and SEC oversight; and a final section detailing investment objectives and fund types managed. The conclusion briefly recaps the paper's scope.
The U.S. Securities and Exchange Commission defines a mutual fund as a company that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, other securities or assets, or some combination of these investments (U.S. Securities and Exchange Commission, 2008). Mutual funds are in turn operated by professional money managers — fund managers — who invest the fund's capital in accordance with the fund's stated objectives, with the intent to produce capital gains and income for fund investors. This paper examines the role of the mutual fund manager.
Also known as an investment manager, the manager of a mutual fund is responsible for making all investment decisions on behalf of the investors. The fund manager is tasked with implementing the fund's investment strategy and managing its portfolio trading activities. For these reasons, investors look for specific attributes in fund managers, including long-term consistent fund performance by a manager whose tenure with the fund matches its performance time period. Because the whole point of investing in a fund is to leave the investment management function to professionals, the quality of the fund manager is one of the key factors for investors to consider when analyzing the investment quality of any particular fund (Investopedia, 2011a).
The mutual fund manager or management team earns money from commissions paid by investors, as well as from a percentage of profits made by the fund. The fund manager's salary depends on the size of assets under management and on the performance of investments he or she initiates (Infotec-forums, 2011).
Given the amount of number crunching and analysis that a fund manager performs, he or she should also be well versed in accounting, economics, and market research. A typical background for a fund manager includes an undergraduate degree in economics, an MBA in finance, Chartered Financial Analyst (CFA) credentials, and an apprenticeship under experienced fund managers (Infotec-forums, 2011).
Along with other members of the team working in equivalent or subordinate capacities, an investment manager must decide where to invest money. Tasks the mutual fund manager must carry out include market research, analysis of investment options, completing transactions, regularly monitoring the performance of existing investments, adjusting investment strategy in response to market movements, and researching industrial sectors for investment opportunities (Infotec-forums, 2011).
There has been some debate within the mutual fund community about how much impact the fund manager has on mutual fund performance. Baks (2003) determined that although manager performance for domestic diversified equity mutual funds was somewhat persistent over the course of their careers during the years studied — 1992 to 1999 — that persistence did not necessarily imply that managers were the primary determinant of a manager-fund combination's performance. Baks concluded that managers were less important than the mutual fund itself, stating that "as a rule of thumb, the results in this study indicate that performance is mainly driven by the fund." He concluded that while mutual fund companies will undoubtedly continue to create star managers and advertise their past track records, investors should focus on fund performance (Baks, 2003).
On the other hand, Russell (2011) argues that the evidence indicates that superior past professional performance among mutual fund managers tends not to persist and is not a reliable predictor of future performance. He posits that if superior money managers actually exist, "then there should be dozens or hundreds of them who prove their superiority year after year." As it happens, "the scientific finance literature indicates this is not the case" (Russell, 2011).
Other concerns that affect fund managers involve regulatory constraints. By law, funds are required to be "fully invested," which typically means that a mutual fund holds only 2–3% of its assets in cash at any one time. Mutual funds are prohibited from holding more than 10% in cash. This requirement means that mutual funds are severely limited in their ability to protect shareholders during a market crash or bear market (Skousen, 2006).
Mutual fund fees and expenses are another topic of importance to fund managers. As the SEC (2010) points out, fees and expenses are an important consideration in selecting a mutual fund because these charges reduce investor returns. The SEC suggests that investors comparison shop to review mutual fund fees and expenses, even providing a link to FINRA's Mutual Fund Expense Analyzer on its website. The SEC justifies the importance it places on researching fees and expenses by citing independent studies showing that these costs can be a reliable predictor of mutual fund performance (U.S. Securities and Exchange Commission, 2010a). A diligent fund manager will be appropriately concerned with keeping mutual fund fees and expenses reasonable.
There is also a relationship between fund manager performance and the information investors glean from reading the fund's prospectus. Many investors use the fund's prospectus and accompanying Statement of Additional Information to inform their investment decisions. Roth (2009) quotes Certified Financial Planner Neal Frankle's advice: "If you invest in mutual funds and you want to understand what you are about to buy, you'll have to thumb through the prospectus and Statement of Additional Information. These two documents tell you what the fund managers intend to do with your money — and how much they're going to charge you for doing it" (Roth, 2009). Investors also find information on risk, returns, investment objectives, and strategies in these documents — all considerations that the fund manager is directly concerned with.
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