Mutual Funds

What is a Fund Manager's Letter?

The fund manager's letter is a letter generally sent out annually to shareholders of a mutual fund.  This letter provides details about the stocks currently held in the fund and how the current market activity has affected the performance of the fund.  This letter is meant to provide more details that shareholders can use to investigate the judgment of their fund manager.  Lastly, the fund manager will detail in the letter the future strategy for the fund and how they expect to improve performance over the coming year.  Recently a hedge fund manager by the name of Andrew Lahde made headlines across the blogosphere by writing a goodbye letter to his shareholders after his fund returned nearly 1000% in one year.  This letter was filled with expletives about the trading business and how he hates it.  Check it out here.

What are Sector Funds?

Sector funds are mutual funds which specialize in investing in a few sectors within the market.  This allows an investor to focus in on one or two sectors for investing.

Winning with Sector Funds

If an investor goes out and purchases a basket of the leading funds, this is a sure method for losing money, because today's winner is tomorrow's loser.  Sector funds require more effort than investing in a standard mutual fund or index fund.  An investor must first determine on their own which sector has the greatest odds for growth over the near-term.  So, instead of investing in one stock, the speculator now has exposure to the entire sector.  The end game of investing in sector funds is to outperform the broad market, by identifying these winning sectors, while still remaining somewhat diversified.

Risks of Investing in Sector Funds

Sector funds are perceived as a good move for diversification, because an investor is attempting to locate the strongest sector within the market.  This sort of top-down approach in theory should work as a hedge against weak markets and outperform strong markets.  However, the problem with sector funds is that they are often started right before the sector peaks.  This is because much like a hot product, once the demand falters, so does its value.  Take a look at Indian ETFs and how they have fallen.  India was one of the hottest markets over recent years and from this strength has brought about great interest in the market.  But just as soon as the Indian ETFs were created and marketed to the West, these funds began plummeting.

Popular Sector Funds

There are a number of popular sectors.  In the late 90s, the technology funds were huge and in the mid-2000s, REIT and oil sector funds where huge.  Below are a list of some of the top sector funds:

• Financial Services
• Technology
• Auto
• Oil
• Telecommunications
• Health Care
• Real Estate
• Gold

What are Fund of Funds?

A fund of funds is a mutual fund which invests in a group of funds instead of picking specific stocks.  These funds of funds have a great appeal to investors, because it gives the perception of greater diversification.

Fund of Funds Strategies

The basic strategy for fund of funds is to select mutual funds which are outperforming all of their competitors.  The basic logic is that these funds will continue to outperform regardless of the changes in the market environment.

Fund of Funds Fees

Fund of funds fees can be much higher than the standard fees associated with mutual funds.  This is because investors will have to pay the fees associated with not only the mutual fund, but also the fees of the actual funds where there dollars are invested.  In essence, the investor could be paying double fees since they are actively invested in two companies.  Some of the larger mutual fund companies have found methods for getting around these fees by purchasing funds from their own company.  For example, an investor can select a fund of funds from Fidelity, which are exclusively made up of Fidelity mutual funds.