Investors typically will choose to put their money in a fund that's ranked a top performer, but if that fund subsequently fails to deliver, they are quick to withdraw their investment.
This in-and-out behavior not only has negative consequences for the fund and the manager, it's detrimental to all the investors involved, says Bill Mann, chief investment officer of Motley Fool Asset Management and portfolio manager of the firm's Independence, Great America and Epic Voyage Funds.
"So many people focus only on star ratings, and if they see a manager doing great, that's where they'll put their money," Mann says. "But ultimately, that's a very short-term way to invest that's detrimental to everyone."
In order to counter proven investor behavior for a better overall outcome, Mann believes that responsible fund managers must provide investors with more frequent and more detailed information on their product, its investment goals and its holdings. Greater portfolio transparency is key, he says, to helping people make wiser long-term investment decisions based on deeper, more pertinent factors than a fund's star rating. It also allows fund managers to do their job properly.
To that end, Motley Fool has joined the list of fund companies providing investors with a detailed monthly disclosure letter. Written by the Motley Fool portfolio management team, the letter provides details on shares, dollar amounts invested and cash holdings, as well as (to the extent possible) information on the companies the funds are invested in.
Increased portfolio transparency is a natural extension for a company whose "DNA is grounded in the belief that people are best qualified for handling their own investments," Mann says.
However, the undeniable truth is that investors are prone to certain kinds of behavioral patterns, so mutual funds' destinies "are controlled by the decisions of the people who invest in them in terms of the money that they put in and the money that they pull out," he says.
To the extent that Motley Fool can help its investors make better decisions by providing them with greater transparency and more detailed information, the outcome will be better all around.
