When market values shrink significantly, the opportunities to own quality investments at low prices "comes out of the woodwork". Many portfolio managers (PM) know that that is the time to pick up long-term bargains. But will they do it?
At the same time, a growing percentage of their fund’s holders are starting to freak out (Not the Rick James freakin out. That's fun stuff). Most holders don't understand their own behavioral biases, no matter how smart they are. They start to sell fund shares.
Selling by the fund's holders causes the portfolio manager to liquidate holdings to meet redemptions. That becomes a very hard decision for the PM. The PM needs to get enough performance to retain as many holders as possible because if they lose enough Assets Under Management (AUM), the PM's job could be at risk. So, the manager would likely sell the investment holdings that have the brightest futures, but not have the best near term prospects. They retain holdings that have short term benefits in the interest of keeping holders, but will not be beneficial for long-term portfolio returns.
These "holder induced" liquidations force the PM’s hand to what they know is the wrong move. But after all, do they want to keep their lucrative PM job or do the best thing for their holders? What do you think?
This is important point to understand when investing in mutual funds. Like school, there are theories and there is what actually happens.
Be smart, be well-read, be aware and be successful.
“You don’t have to have the kind of ability that quantum mechanics requires. You just have to know a few simple things and really know them.”
-Charlie Munger
