Mutual funds can be a good choice for many long-term individual
investors as they offer diversification, which is the key to
successful investing. Mutual funds allow individuals to join with
other investors and benefit from the potential to earn higher
returns on smaller investments.
Mutual funds can be a good choice for many long-term individual investors as they offer diversification, which is the key to successful investing. Mutual funds allow individuals to join with other investors and benefit from the potential to earn higher returns on smaller investments.
Behind every mutual fund you own is a team of investment experts. As you know, they strive to help your fund achieve its stated goal — growth, income, growth-and-income, etc. — while controlling, as much as possible, the level of investment risk. Beyond this general job description, though, what do these professionals do?
Basically, a portfolio manager controls the assets of your mutual fund by buying and selling individ-ual holdings to meet the fund’s stated goals. So, if Fund XYZ’s objective is growth and income, the portfolio manager will fill the fund with some investments that offer growth potential and some that offer current income.
Portfolio managers make their buy and sell decisions based on a variety of factors, including the performance of individual investments, economic conditions and the outlook for specific industries.
Among the vast universe of investment possibilities, which stocks, bonds, government securities and other vehicles are suitable for Fund XYZ? It’s the analyst’s job to make that decision. Analysts rely on “hands-on” or “organic” research, which is comprised of the following elements:
- Numbers — Analysts thoroughly review a company’s financial statement, which provides a snapshot of how the business is doing at any given time. In reviewing these statements, analysts focus on a variety of data, including the growth rate of sales and earnings, cash flow and debt load. Analysts also compare a business’ performance with that of others in the same industry.
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People — To an analyst, a company’s numbers are important, but so are its people. By talking regularly with managers and other key personnel, analysts can gain a clear sense of a company’s mission, direction and prospects.
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Insights — It might seem that looking at a company’s books and talking to its key players and observers might be enough for an analyst to form an opinion of the business.
However, analysts like to see things with their own eyes, which is whey they spend many hours out in the field, walking factory floors, examining raw materials and scrutinizing product placement on retailers’ shelves.
By combining the numbers, the people and the fieldwork, analysts can form a complete picture of a company to determine if it’s a promising investment opportunity.
As you might expect, it takes years of training, study and experience to become a portfolio manager or an analyst.
But all this expertise is yours every single time you invest in a mutual fund.
Brad Ledwith is an investment representative for Edward Jones in Morgan Hill. His column appears every other Friday.
