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Ignorance Is Not Bliss in Client Portfolios: Motley Fool

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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.

“It makes perfect sense for us to disclose information as quickly as we can and more often,” Mann says. “By definition, a mutual fund can do no better than the companies included in it. Even if it’s at the margins, if we can get people to better understand the companies they own and think like business owners, the better off we’ll be.”

The monthly letter has been going out to investors for 10 months now, and thus far, the feedback has been extremely strong, Mann says.

In addition to thinking of a fund’s holdings as businesses and not just as stocks that go up and down, it’s imperative for investors to understand how a manager operates so that they get away from the eternal cycle of putting money into a fund when it performs strongly and pulling it out when its performance drops, Mann says.

A fund’s performance results may indicate that it has been affected by market volatility — a typical instance at which many investors may choose to withdraw — but it may be that the manager actually doesn’t care so much about volatility and has a long-term strategy. Educating investors about strategies is what’s going to ensure the long-term stability of a particular fund and will then result in better performance over time.

Although shareholders in a particular fund should educate themselves about its investment strategy, Mann also believes that a portfolio manager should go the extra mile and be responsible for that education.

“It helps a fund manager to take on this responsibility. I have had people say to me ‘I’ve looked at what you do and I don’t think it’s for me.’ As a manager, that’s great for me because I can tell you that it’s no great favor to have investors in a fund if what I do isn’t right for them,” he says. “If we can help more investors not buy at highs and sell at lows, then we are going to do it.”

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