When to Say Good Bye to a Fund Manager - Research Proposal Example

when to say good bye to a fund manager With the proposed combination of qualitative and quantitative methods of research, this proposal outlines its aim to identify the factors and events that would help investors to decide when to change their fund managers. From the initial research, particularly in the review of related literature, it was found that performance in fund management could be helpful since it could be measured and that variables specific to the fund manager such as education, experience, contribute to his ability to outperform or underperform. This performance evaluation, along with factors such portfolio structure, market conditions, contractual obligations, transparency, corporate governance, customer service, and risk management, among others, are proposed to be examined in order to determine or develop a specific guide for investors determine the appropriate time to hire a new fund manager. I. Problem Investors, whether they are institutional investors or individual investors, rely heavily on a working relationship with an investment management company and with the individual investment manager who handles their account. A variety of factors and a variety of events may develop over time or quite quickly that will lead investors to conclude that a change of investment management companies, a change in the individual investment manager handling their accounts, or change in both the investment management company, as well as a change in the individual investment manager may be required. Reaching such a conclusion tends to be more easily accomplished than is the case with making the determination of the optimal time to make the change. II. Research Questions Two research questions are proposed. Additional research questions may be developed. The research questions that are proposed at this time are as follows: 1. What factors and/or event types should be included as assessment to determine the optimal time for change? 2. How should the factors and/or event types included in an assessment of the optimal time for change be weighted relative to one another? III. Research Objectives The aim of this study is to determine, in a best possible way, when is the time to change investment management companies, the individual investment manager or both. In order to achieve this primary objective, the secondary objectives, which follows, would be also pursued: 1. identify and explain the types of fund management (i.e. sell-side analysts, buy-side; 2. outline and explain the concepts that are fundamental in the decision to change fund managers such as portfolio structure, market conditions, contractual obligations, and the availability of acceptable alternatives. 3. identify the various options in the change in fund management as well as their differences (i.e. change in company management vs. change in fund manager, etc.) IV. Proposed Methodology A combination of qualitative and quantitative method would be employed in this study with the idea that such approach would be able to reveal a comprehensive and credible picture that would contribute to the achievement of the study’s objectives. The qualitative approach is important because of the study’s focus on examining issues related to the performance of the fund manager in relation to the needs and interest of an investor. There is a need to deal with investors by seeing through their individual lives and investment requirements. And so, in this context, the method is the best tool to uncover weaknesses and unique strengths among fund managers and fund companies. (Frush 2006, p. 143) Quantitative method will be helpful in reviewing and assessing relevant numerical data such as fees, taxes, and other tangible information and factors that could indicate the performance of an investment cycle over a period of time. Some example theoretical models in this area are the Equilibrium models, which are said to be effective in analyzing fund flows, ex-post returns and performance persistence. (Cuthbertson, Nitzsche and O’Sullivan 2006, p. 9) In essence, this research would be descriptive in nature, with a research design that would allow data to be collected and analyzed so that they will be able validate the theses of this research. V. Summary of Related Literature One of the most insightful pieces written about fund manager was written by Eric Tyson in the Personal Finance for Dummies. In one of his important observations, for instance, he argued that there are numerous other variables involved in the fate of a fund and foremost of these are the resources and capabilities of the parent fund management company. (p. 212) Tyson’s point is that different companies have different capabilities and levels of expertise and these are reflected in the performance of their fund managers. And so, in some cases, fund managers are not entirely responsible for the poor performance or failure of his accounts. Jaffer (2004) identified several areas in a fund management organization wherein investors could examine because they could indicate weaknesses. He classified them into internal and external qualitative and quantitative factors and that these include: performance, financial strength, market share, transparency, corporate governance, customer service, risk management, market dimensions, regulatory, legal and tax environments, among others. (p. 238-241) Indeed, Rahim and Golembiewski stressed that a number of reasons for lower performance, in the context of the presence of systematic and unsystematic risk, has been due to the management of the involved firms. They pointed to the fact that the there is a consistent difference in mean alpha values between the funds managed by “involved” versus “uninvolved” firms. (p. 208) Here, the one sees that risk factors in fund management are mostly in the form of fund management practices rather than the supposed unavoidable risk factors of the market. Performance evaluation seems to be a crucial dimension in examining the capability of fund managers to deliver the best service. Although the successful history of funds managed does not necessarily guarantee healthy performance, it is an important benchmark for investors to determine the ability to outperform or underperform. In regard to performance evaluation, Brentani (2004), offered several methods. A case in point is the comprehensive explanations on benchmarks in evaluating fund manager performance. For example, there was the stock market index as a relevant benchmark portfolio against the manager’s performance; then, there is also the peer group benchmark, wherein the fund’s performance is measured against that of similar funds. (p. 38) Cuthbertson, Nitzsche and O’Sullivan also cited an interesting approach in evaluating and predicting the performance of a fund manager. They maintained that education has much to do in the possibility of success or failure in fund management. They cited a study which found that the most robust performance differential identified is that managers with higher undergraduate SAT scores obtain higher risk adjusted returns and that this is attributed to better natural ability, education and professional networks associated with having attended a higher SAT score undergraduate institution. (p. 64) The authors also cited other variables exclusive to the fund manager including experience in their effort to develop the best possible formula that would result to some statistical predictive power for abnormal returns. Adding to the body of literature on evaluating fund managers’ performances, Volkman found that fund managers demonstrate significant perverse timing ability wherein there is a negative correlation between a fund’s timing and selectivity performance. (p. 449-470) The author posited that this suggests that when managers focus on one source of performance they do so to the detriment of the other sources. Presently, the corpus of literature on fund managements, including all its dimensions, is extensive. This could be due to the fact that since the 1990s, there has been intensive interest on the dynamics and trends in the fund management field. From that period until today, the fund management experiences has been widely recorded and with it came several models and theories that had been developed out of years of examination, analysis and specialization. VI. Contribution to the Discipline The risk in fund management is high and it puts investors at a great disadvantage. One could be funneling money to a bad fund manager and not know it or withdraw funds from a good fund manager because of the immediate impression that there has been a bad decision in buying stocks that experienced a price drop. Specifically bad fund managers usually operate without sufficient information and the job is just all about gambling other people’s money. Since investors cannot screen the good managers from the bad one by sheer assumption, this study is primarily aimed to help them. While this study enlightens investors when to say goodbye to their fund managers, this also works the other way: when not to say goodbye. Instead of firing a fund manager outright based on a price drop because of the investor’s ignorance on factors such as long-run arbitrage opportunities, this study could equip him with comprehensive information that would allow him to screen fairly and correctly who is bad or good in the management of his funds. This research also aims to contribute to the wider body of literature on fund management. By focusing on the fund manager and the fund management organization, it is expected to contribute to the discipline by informing and empowering investors in making wise decisions in choosing their fund managers. I want toundertake this study because I think information is fundamental in behavioral control. Fund managers need these kinds of information in order to perform their job with vigilance while investors need them to hold their managers accountable. Reference Brentani, C. (2004). Portfolio management in practice. Oxford: Butterworth-Heinemann. Cuthbertson, K., Nitzsche, D. and OSullivan, N. (2006). “Mutual Fund Performance.” Frush, S. (2006). Understanding Hedge Funds. Mc-Graw-Hill Professional. Jaffer, S. (2004). Islamic asset management: forming the future for Sharia-compliant investment strategies. London: Euromoney Books. Rahim, M. and Golembiewski, R. (2005). Current Topics in Management, Volume 10; Volume 2005. New Brunswick: Transaction Publishers. Tyson, E. (2006). Personal Finance for Dummies. For Dummies. Volkman, D. (1999). "Market Volatility and Perverse Timing Performance of Mutual Fund Managers," The Journal of Financial Research. 22: 449-470. Read More