Syndicated columnist Chuck Jaffe writes about what an investor can do if their fund manager isn't doing a good job.

Share story

If you manage a department or run a business, common sense tells you that the best way to escape from a problem is to solve it. And yet, many managers avoid the issue of a worker or employee who is not living up to expectations. The longer that managers wait to do an honest assessment and fix the problem, the more the sore festers and damage gets done.

Well, no matter what you do in your professional life, you are the owner/manager of your personal-investment business. And that being the case, your start to 2009 means reflecting on a lousy 2008, which should lead you to one simple question:

Should I fire my fund managers?

Under most market conditions, a 40 percent annual decline would be a horrible performance and immediate cause for dismissal. In 2008, that kind of loss was average for equity funds.

And while an equity manager who lost 30 or 35 percent clearly was “above average,” it’s hard to feel really good about those results.

When investments go down 40 to 50 percent and the market delivers a harsh reminder that diversification doesn’t work well in cyclical bear markets, human nature wants to blame someone for what went wrong. That puts every fund manager who delivered poor results on the chopping block.

And yet investors are clearly in deer-in-headlights mode, unable to escape this problem or solve it. The market is providing no real safe havens, and past heroes and old standbys were taken for fools by this crisis.

Top long-term managers like Dodge & Cox, the American funds, Fidelity Investments and many others got gassed in 2008; they were every bit as horrible and miserable as the rest of the crowd.

No new heroes

There weren’t new heroes, either. Plenty of middle-age investors can hearken back to 1987 and remind you that Elaine Garzerelli — working for what was then Shearson Lehman — called the valuation bubble that mushroomed into Black Monday.

Never mind that Garzerelli never proved to be more than a mediocre fund manager when she tried her hand at it, she was a bright light in a dark time, and investors found solace and profits in her advice before, during and after the crisis.

Today, it looks to the casual observer like all of Wall Street’s emperors are naked; you’ll have a hard time finding a Garzerelli-like figure today, someone with similar influence who earned stardom by getting 2008 right. Some bears and newsletter editors helped a small-scale audience, but most Wall Street luminaries got 2008 wrong, which makes it hard to believe in them now.

Which brings us back to the question of whether the average investor should fire their fund manager.

Traditionally, the most crucial question for evaluating a fund has been: “Would you buy it again today?” Alas, market conditions actually pollute that query, since it is pretty hard to honestly answer that you’d re-buy a fund that just lost one-quarter of your money, even if that result was above average.

Best question

A better question, according to Michael Stolper, a San Diego-based investment adviser, goes like this: “If you were 100 percent in cash today and decided that it’s time to put your money back to work in the market, would you give it back to this manager or look for someone new?”

You may not be completely in cash, but Stolper’s point is that you want to own funds that are compelling buys now. If you make a change, it should be because the new manager had things right in ’08 — or your manager was all wet to the point of nullifying your faith in the fund — rather than that they did a few percentage points better mostly by dumb luck.

Your fund manager’s statement in the upcoming annual report is the employee’s chance to respond to the critical evaluation by the boss. A manager who acknowledges their mess-ups may curry favor over one who lays all blame on conditions they could not foresee or control; read the statement closely, just to see if the narrative sways you.

Tax implications could be a reason to pull the trigger. It’s too late to realize losses that ease the burden of your ’08 tax return, but recognizing a loss in taxable accounts and repositioning the money will help your future position.

And factor in your desire to be on the sidelines, and to call the shots yourself. Most managers have a mandate to be invested in all conditions, but firing a manager because you want to decide when you are in or out of the market makes sense, too.

The key thing to remember is that even if your current employee didn’t impress you in ’08, they did impress you once and its hoped over time leading up to last year.

That history counts for something. Any possible replacement must show the potential to be more impressive. Don’t sack your manager out of anger; fire them only when you believe staying put will leave you even more upset with your future financial performance.

Chuck Jaffe is a senior columnist at MarketWatch columnist. He can be reached at or Box 70, Cohasset, MA 02025-0070.