Monday, January 9, 2012

Does Total Freedom Boost Returns

Does Total Freedom Boost Returns?

Interesting article in the WSJ this morning about tactical mutual funds. The author correctly points out that they are hard to evaluate because there is no "tactical" category and funds with freedom have completely different methodologies. Readers of my book "How Harvard & Yale Beat the Market" know that we favor these "skill based" mutual funds vs. the "style box" based funds that are basically closet indexers. However, buyers still need to beware, when a mutual fund is just mirroring an index the manager doesn't need great skill, but when they have flexibility to invest in anything anywhere, then they need to be better. A lot of these funds will come out due to the marketing sizzle with managers who are not up to the job.

There are also many definitions of tactical. Most of the mutual funds that we have seen that claim to be tactical make moves based on prediction, which is problematic at best. It is also highly unlikely that they will move to 100% cash if there is nowhere else to invest. To us, true tactical is being in harmony with market trends, moving based on verification, not prediction, and the willingness to be in cash for as long as you need to be.

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