How to Choose Money Managers During the Recession

Investors often judge a fund manager by his or her fund's performance record. But such numbers do not always tell you what you need to know to decide if a fund belongs in your portfolio.

Before you can make that decision, you need to understand the manager's strategy that led to the fund's gains. Then you can consider whether that strategy is likely to generate good results in the future - and whether it fits with your own investment approach.

Many mutual fund sponsors withhold information about their fund's managers. Sponsors want you to be loyal to the fund, not the manager - who may leave to go to another fund or even another company.

Fortunately, however, the financial press and publications such as Morningstar Mutual Funds offer profiles of fund managers as well as interviews with them.

Another source of such information is the AAII Journal or AAII.com, the monthly publication of the American Association of Individual Investors. The magazine, which has published more than 130 interviews with portfolio managers, recently ran a list of questions to ask about a fund manager.

Here are some of their questions, along with others that can help you gauge a manager's approach:

What is the manager's overall investment philosophy? It's useful to know if a manager is a growth investor - that is, one who is willing to pay a premium for shares of fast-growing firms. Likewise, you should understand if a manager is a value investor, who searches for bargains among out-of-favor companies.

But there are many differences between the individual managers in each of those two broad camps. For example, some value investors might prefer to invest in companies that have undervalued assets such as cash or real estate.

By contrast, other value investors prefer to buy shares when they believe that the company's earnings prospects are underrated. Still others look for turnaround situations, buying a troubled company's shares and then waiting for a recovery.

Does he or she consistently favor one or two particular sectors of the stock market?

Some managers limit their funds to specific types of stocks. For example, a fund might invest primarily in small-company shares or in stocks that pay above-average dividends. That's fine, as long as you know about the fund's focus, and your portfolio is diversified among other types of funds.

Some managers of supposedly diversified funds find their favorite stocks in narrow sectors of the market such as technology, financial services or blue-chip consumer companies. While that approach may serve the fund well in some stock market environments, it could spell trouble if the manager's favorite sectors tumble.

What's the most important thing the manager looks for in a company?

Some fund managers spend a lot of time sizing up a firm's management before they buy its stock; others would rather review the firm's balance sheet. Still others argue that the most important factor depends upon the company's business.

For example, the quality of a firm's product and its research and d evelopment efforts may matter most among technology firms, while strong management might be more important for companies that sell consumer goods.

There is no one right answer to the question. But a thoughtful or intelligent response is a good sign, while a glib retort should send you looking for another fund.

How does he or she manage risk?

Some managers give a great deal of thought to this question; others pretty much ignore it - often on the grounds that you need to take big risks to earn big returns.

A conservative manager might avoid certain sectors of the market or hold a cash reserve in his or her fund. But aggressive managers can be risk-conscious as well, taking particular care to avoid stocks that are trading on rumor or hype.

The point is not to choose managers who avoid risk, but rather managers who are aware of it and take steps to protect shareholders while pursuing their long-term