I recently attended the Morningstar Investment Conference here in Chicago. One of the great opportunities at this and most financial conferences is the chance to talk with other financial advisers and hear what they are doing for their clients.
I spoke with advisers who managed client portfolios in large part via the use of actively managed mutual funds. It was interesting to hear their logic and methodologies for choosing the appropriate funds to include in client portfolios.
I am generally a huge fan of index mutual funds and exchange-traded funds and use them extensively in managing my client’s money. Core funds (as opposed to some of the more exotic index products hitting the market) are generally low-cost, style-specific vehicles and fit very well as building blocks for most portfolios. However, I also use a number of actively managed funds that, based on my screening and experience, I believe can add value for clients as well.
I often read articles that say investors should use index funds exclusively. The arguments are generally good ones that highlight the low cost of such funds, a key element in long-term investing success. For many folks, especially those with more modest portfolios, index funds are a good core. It is relatively easy to diversify with just a few funds, for example a fund that tracks the total U.S. stock market, the total international stock market and the total U.S. bond market.
However, I find that certain active funds do add value when used with passive funds. While it is true that many active managers fail to beat their benchmarks, some do. Why not use these managers as part of a portfolio?
Identifying good active managers takes more work than picking index funds, however, so when evaluating an active fund I’m looking for some or all of the following:
When evaluating an index fund or ETF I look for the following:
The end goal, however, is building an overall portfolio that is consistent with your goals, objectives, and tolerance for risk. In short, a portfolio that is an outgrowth of your financial plan. The individual components of your portfolio — whether passive index products or actively managed funds — are just tools to try to achieve this objective.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.