Finance & Algoritm - Portfolio

A Paradox about the managers who manage our money

PART 3 – Our Investment Managers: Not So Consistent

In this article, I will discuss a little-known part of the investment world. It is true, to be honest, I have never been an investment manager. I have not even managed a portfolio other than my own. But I am sure that what I will write will make you think twice.

Fear of Losing Their Jobs

There are very few investors who do what they think is right and follow through with all their actions. They are afraid of the consequences of betting on the wrong horse, and they are also afraid of long-term investing. Money managers who manage money on behalf of others are afraid that behaving courageously will cost them their jobs. That’s why they take actions that are considered to be cautious and uncontroversial.

Portfolio Size Determines Manager

In fact, fund senior managers assign more or less professional managers depending on the size of the fund that you, as an investor, give them. If your investment amount is low, the least qualified fund manager will be assigned to you.

Benchmarking Lover

This is why they prefer to hug the index. By making their indexes more similar to the index, portfolio managers reduce the likelihood of underperforming the index / Benchmarking. The more similar the portfolio is to the index, the less likely it is to outperform it. It is important to remember that a portfolio manager who has a portfolio that is different from the comparison index is still an active portfolio manager, even if it is only by a small margin.

The Contradiction

However, there is always a contradiction. What portfolio managers do is: BUY-SELL-BUY-SELL. But what they always advise their clients is the BUY-HOLD strategy. There is a world of difference between what the fund industry does and what they tell investors to do.

Why Managers Buy and Sell Stocks Crazy Every Year Even Though They Advise Investors to BUY-HOLD?

The reason is: the internal dynamics of the industry. This also makes it impossible for managers to think long-term, they always have to think short-term. Why is that? Because the investment fund business is a short-term game where the best performance measurement is measured only by PRICE. (Not saying VALUE, I am saying PRICE. Two concepts are different.) Because there is competition in creating short-term performance figures. These figures are of great interest in the market. Every 3 months, major performance reviews are displayed in the media by major institutions (such as Bloomberg, CNN, WSJ). And these media institutions publish the 3-month performance rankings of investment funds. The fund that performed the best in these 3 months is at the top of the list. The owners of these funds are rubbed by financial commentators on TV, in newspapers, and on the internet. In the meantime, fund owners try to quickly attract new investments by publishing advertising and promotional articles that congratulate themselves. So new customers. So investors, after seeing which fund manager is more reliable and good, jump on these lists. That’s why 3-month performance periods are preferred and used by fund managers. Thus, they constantly buy and sell to keep their funds alive. (That’s why some fund institutions adjust their commission rates according to this popularity due to the fund managers they host.) But they still don’t keep what they give to their customers. But it should also be remembered that even those who implement the BUY-HOLD strategy never want to keep their eyes closed. Additional Comments In your article, you criticize the behavior of fund managers. I think your criticisms are fair. There is an expectation that fund managers will work to provide investors with the best returns. However, as you stated in your article, we see that this expectation is not always met. The factors that affect the behavior of fund managers are as follows: Fear of losing their jobs: Fund managers may avoid risky investments for fear of losing their jobs. This can negatively impact long-term performance. Short-term performance pressure: Fund managers are evaluated based on the short-term performance of their investment funds. This can lead fund managers to engage in buy-and-sell transactions to show good short-term performance. Goals set by fund management companies: Fund management companies may set specific performance goals for fund managers. To achieve these goals, fund managers may engage in buy-and-sell transactions. Investors should make investment decisions taking into account the behavior of fund managers. Awareness of the inconsistent behavior of fund managers can help investors make more informed decisions. Conclusion Investment funds are an important tool for investors. However, it is important to make investment decisions taking into account the behavior of fund managers.

Conclusion

Fund managers trade frequently to generate commissions, even though this can harm investor returns. Investors can protect themselves by choosing funds that are managed by long-term investors and by avoiding funds that trade excessively. Additionally, frequent trading can lead to higher taxes for investors ( but depends )