Reference no: EM131026107

Please read the following excerpt titled 'Should You Follow Your Fund Manager?'in order to answer the each of the 3 questions/statements.  Responses to the 3 questions/statements must total a minimum of 750 words.  Use at least 3 sources with APA format.  One of the 3 sources is provided below.

SHOULD YOU FOLLOW YOUR FUND MANAGER?

The whole idea of investing in a mutual fund is to leave the stock and bond picking to the professionals.  But frequently, events don't turn out quite as expected-the manager resigns, gets transferred or dies.  A big part of the investor's decision to buy a managed fund is based on the manager's record, so changes like these can come as an unsettling surprise.

There are no rules about what happens in the wake of a manger's departure.  It turns out, however, that there is strong evidence to suggest that the managers' real contribution to fund performance is highly overrated.  For example, research company Morningstar compared funds that experienced management changes between 1990 and 1995 with those that kept the same managers.  In the five years ending in June 2000, the top-performing funds of the previous five years tended to keep beating their peers-despite losing any fund managers.  Those funds that performed badly in the first half of the 1990s continued to do badly, regardless of management changes.  While mutual fund management companies will undoubtedly continue to create star managers and tout their past records, investors should stay focused on fund performance.

Funds are promoted on their managers' track records, which normally span a three- to five-year period.  But performance data that goes back only a few years is hardly a valid measure of talent.  To be statistically sound, evidence of a manager's track record needs to span, at a minimum, of 10 years or more.

The mutual fund industry may look like a merry-go-round of managers, but that shouldn't worry most investors.  Many mutual funds are designed to go through little or no change when a manager leaves.  That is because, according to a strategy designed to reduce volatility and succession worries, mutual funds are managed by teams of stock pickers, who each run a portion of the assets, rather than by a solo manager with co-captains.  Meanwhile, even so-called star managers are nearly always surrounded by researchers and analysts, who can play as much of a role in performance as the manager who gets the headlines.

Don't forget that is a manager does leave, the investment is still there.  The holdings in the fund haven't changed.  It is not the same as a chief executive leaving a company whose share price dramatically falls.  The best thing to do is to monitor the fund more closely to be on top of any changes that hurt its fundamental investment qualities.

In addition, don't underestimate the breadth and depth of a fund company's "managerial bench."  The largest established investment companies generally have a large pool of talent to draw on.  They are also well aware that investors are prone to depart from a fund when a managerial change occurs.

Lastly, for investors who worry about management changes, there is a solution: index funds.  These mutual funds by stocks and bonds that track a benchmark index like the S&P 500 rather than relying on star managers to actively pick securities.  In this case, it doesn't really matter if the manager leaves.  At the same time, index investors don't have to pay tax bills that come from switching out of funds when mangers leave.  Most importantly index fund investors are not charged the steep fees that are needed to pay star management salaries.

Source:Shauna Carther, "Should You Follow Your Fund Manager?" Investopedia.com, March 3, 2010.  Provided by Forbes.

1. Summarize the article titled 'Should You Follow Your Fund Manager?'

2. Define alpha and explain how it is used in investment management.

3. Find 2 equity fund managers with high alphas, for a consistent period of time, and explain how you think they have been able to achieve their returns.

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Portfolio Performance Evaluation. In Investments (Tenth ed., pp. 835- 881).New York, New York: McGraw-Hill Education.