How To Calculate If Your Fund Manager Is Cheating You

Do his lips move when he talks? (LOL OMG)
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NOT EVEN NECESSARY! By Christian Jansky (User:Tschaensky) (Own work (own photo)) [CC BY-SA 3.0], via Wikimedia Commons

NOT EVEN NECESSARY! By Christian Jansky (User:Tschaensky) (Own work (own photo)) [CC BY-SA 3.0], via Wikimedia Commons

There are three four easy ways. First: Are you invested in a hedge fund? Then yes, you are being cheated.

Second, take a look at the tracking error between your fund and its benchmark. Little to none? You’re paying a human to actively manage an index fund. Shut it down.

Next, go to this handy website run by a Notre Dame finance professor and check out just how different your fund’s holdings are from its benchmark. Not different? Buy the ETF.

Here’s the thing, though: While determining tracking error and active share is a good way to figure out whether your fund manager is lazy or a coward (the technical term is “closet indexer”), they don’t tell you much about how the fund will do in the future. So, you could go the full John Bogle and just, you know, buy the index funds your fund managers are aspiring to become. Or you can just sort by fees and buy whatever’s cheapest.

If you want to pick an active fund that will beat its benchmark, fees are a better place to look than active share. Kinnel found that cheap funds are more than three times as likely to outperform than high-cost funds.

Find out if your fund manager is a ‘closet indexer’ [CNBC]

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