Mutual Fund Site

Ask nearly every professional mutual fund manager what they do for a living and their response might surprise you. While normal people like the rest of the world see (many) mutual funds as fine examples of investment strategy, security picking and so on, the professionals who pull the trigger on trades actually see their roles in the investment management quite differently. In fact, they see their jobs more as risk managers than investment managers.

Their view makes perfect sense, of course. They are risk managers, no question about that. Take the AIM Diversified Dividend Fund, a 5-star fund as measured by Morningstar. That fund has $1.5 Billion worth of other people’s money… you bet they are risk managers! If Meggan Walsh, who has been managing this big fund since 2003 thought otherwise, the fund would not have made the investments it has made, it would not have achieved the high returns it has enjoyed and it would not have done so with average or below average risk.

Risk is the investor’s greatest consideration when throwing money at a security.

Consider that — average or below average risk while achieving high returns. This is key because returns can be quite easy if one is willing to take the risks. And that risk is loss of capital. Which sounds simple in many ways, but how many of us felt that taking on risk was a reasonable thing to do before the market correction of 2007, 2008 (ouch) and the first quarter of 2009?

Even though higher risk is frequently synonymous with higher returns, we often forget that higher risk often means higher probability for loss. And those losses are very real when they happen.

So the recommendation is really to shift our thinking from high risk = high rewards to one where we aim to achieve above-average returns by taking on less than average risk for those returns. The idea is to achieve more than the risk levels dictate. That means earning 10% when the Beta or assumed risk suggests we should only enjoy returns of 7% or 8%.

To illustrate, consider high-risk derivatives. While it might be nice to achieve 5% returns, if you could achieve these returns with guaranteed and insured term deposits, why bother with the high risk derivatives? It makes little sense, right? But if we could achieve 10% returns with those same term deposits, why not give up the excitement of the market? (Of course, this rarely happens, so we have no choice but to accept that higher risk).

Mutual funds help us achieve above average returns while enjoying below average risk. This is because mutual funds so something many of us fail to do on our own — they diversify. (They also measure risk better than we do because they have the staff to analyze financial statements, perform site visits, call up management and so forth). Ultimately, diversification saves these mutual funds when risk rears its ugly head more than anything else — after all, no amount of analysis and over-management can eliminate market risk; but diversification can surely reduce all other risks.

While individual investors might opt for a dozen or so investments, mutual funds like the AIM fund quoted here, hold over 75.  And with 78% of those assets as large cap or giant cap, they really are achieving better returns for less risk. And this is important especially when markets sour. Again, referring to the AIM fund, its performance has outpaced the S&P 500 for its YTD, 1-year, 3-year and 5-year periods. The performance speaks for itself.

And this is just one fund. Most properly managed funds will evaluate risks and trade accordingly. The result? Those total returns outpace the broader market and, just as equally, other funds in its category. For investors this means less losses in market downturns and greater returns when the markets turn around.