Sack your fund manager

While we're still talking about investing in funds, the Business Times published a very interesting article by Larry Haverkamp, who is perhaps better known as Dr Money of the New Paper.

Larry did a study on some 325 funds in the CPF Investment Scheme (CPFIS).

He found that, not surprisingly, fund returns are random from year to year. And regardless of how "smart" fund managers are, they can't even generate above-average returns consistently.

Er, you ask, so why are fund managers still doing well? Simple. It's all thanks to slick marketing.

Funds distributors will always advertise only their top performing funds with lots of publicity. They don't tell you about the underperforming ones, which unfortunately form the majority in their basket of funds. Come next year, when the previously hot-selling funds become losers, the distributors will pick other winners to market and sell.

Larry's conclusion is that past performance doesn't matter. It's costs that matters, which is why he also recommends buying index funds and exchange traded funds (EFTs).

Here's perhaps the most important extract from the BT article:

"... it helps to diversify. Then, hold for the long run. What about stock picking and market timing? Forget it. They contribute practically nothing to returns. Why? Because studies show that it can't be done. Not even by super-smart fund managers."

http://www.salary.sg/2007/sack-your-fund-manager/

Usually they invest in blue chips. Less likely to take risks.