Cresto Narang Wealthfront.pdf
Management quality. The passive nature of indexing eliminates any concerns about
human error or management tenure.
Low portfolio turnover. Less buying and selling of securities means lower costs and
fewer tax consequences.
Low operational expenses. Indexing is considerably less expensive than active fund
Asset bloat. Portfolio size is not a concern with index funds.
Performance. It is a matter of record that index funds have outperformed the
majority of managed funds over a variety of time periods.
1.1.2 Managed Mutual Funds
Well-run managed funds that have long-term performance records that are above their peer
and category benchmarks are also excellent investing opportunities. There are a number of
top-rated fund managers that consistently deliver exceptional results. Such well-run funds
will register very high on the Fund Investment-Quality Scorecard you are learning about in
It is worth remembering that despite their impressive long-term records, even top-rated fund
managers can have bad years. Such an occurrence is little cause to abandon a fund run by a
highly respected manager. Typically, managers will stick to their fundamental strategies and
not be swayed to experiment with tactics geared to improving results over the short term.
This type of posture best serves the long-term interests of fund investors.
In recent years, a number of fund management-related issues have received more public
attention in the financial press than in the past. These fall under the general heading of fund
stewardship and include such issues as a manager's financial stake in a fund, performance
fees and the composition of a fund's board of directors.
While the discussion on these issues is important, there is no universal agreement as to what
constitutes appropriate standards of conduct.
By connecting shareholder and managerial interests, having managers investing significantly
in the funds they manage seems like a good idea. Likewise, compensating managers on the
basis of performance rather than as a percentage of a fund's assets also seems like a good
thing. However, there are reasonable arguments that take an opposite point of view on both
of these issues. Less controversial is the practice of having a majority of independent directors
serve on a fund's board of directors. But here too, there continues to be differences of
opinion. The good news for fund investors is that the debates surrounding these issues
heighten public and regulatory awareness of what constitutes proper mutual fund