Are Mutual Fund Managers better than us?

Are Mutual Fund Managers Better Than Us?

What is a fund manager?

Many people want to invest their money with the aim to gain a profit. Some let their capital administrate by mutual fund managers. Others try to invest their money by their own. Is it more effective to engage a professional fund manager or to do it by your own? This question will be analyzed and answered in the following paragraphs.

Fund manager are professional acting property administrators that manage the capital of the investors especially in money market funds, pension funds, mutual stock funds, real estate investment funds, balanced funds and fund of hedge funds. Moreover they should be able to augment the money of the investors above the average addition. In most cases they are measured by benchmarks. They administrate the investment asset pool by trying to invest the assets as ratably as possible. During this process they consider the chances of their own taken risks. Furthermore they do the exact decisions referring the capital assets in which a fund invests. It depends on the fund manager if the fund satisfied its investors with a good performance or if just a small performance is reached.^[1]

According to German law it can be said that there is a trinomial structure in case of mutual funds. The licensed asset management company collects money from the investors in one or more funds and administrates it with the aim to make a profit. The capital of the funds is separately from the capital of the fund manager stored as special property at the depositary bank and it is administrated according to the fund manager’s instructions. Issuance and return of the fund shares are carried out through the depositary bank. A fund must have contract conditions which indicate aim, purpose, investment strategy, accountability rules and charge fee of the administrator.^[2]

Duties

Duties are important referring to the investors. They support their aims and wishes. Furthermore they delimit selfish acting of mutual fund managers. Therefore the duties might help to reach a high performance and minimize risks. They are important to establish trust between investors and mutual fund managers.

Referring to decisions with the offered duty to take care, the fund manager has not only to consider the changes of the stock, but also he has to know about the investment conditions and the investment policy of the fund as well as about the regulations by law.

Liabilities, which violation leads to claims for damages, can be regulated by law or by the memorandum of association. They can be exactly formulated and instructed, but also they can be circumscribed in more or less opened valuations terms. The duty catalogues determine what a fund manager in details is allowed to do, have to do and what should be neglected.

Therefore some important duties are:

Duty to take care:

The general main liability is the duty to administrate the investment fund with the diligence of a prudent businessman; with solely interest of the investors and the aim of performance or to earn reliable profits. According to this process the fund manager must have an extremely wide scope for judgment evaluation (Business Judgment Rule)^[3], as far as the reliability to a careful course of action it not due to the precise decision basis, the interest of the investors to maintain the profitability or referring to certain situations like the danger to go bankrupt.

Courts are not allowed to put their own judgment in lieu of the commercial opinion of the fund manager, even though if subsequently exposes that a commercial rational and fungible decision has a negative impact. Risks are unavoidable; not to take risks, but avoiding them can be blamed under certain conditions. Therefore the damage of the funds is not important, because funds always bear for the investment risk. Moreover it is determining that the disregarding of the required carefulness in the process of preparation and control of the decisions or during the monitoring of the investments because false investments cannot be avoided, but can be reduced in their frequency and damage potential through carefulness and control.

Risk minimization duty:

The protection of the investors’ interest serves particularly the prohibition of the short sale as well as the regulations of the investment to avoid to big risks. For example in Germany it is only allowed that for all administrated funds a maximum of 10% of the total number of shares from one issuer can be purchased, so that a domination of the companies through funds can be avoided.^[4]

Information duty:

The regulation of the right and full information of the investor requires before the selling of the shares the free availability of a purchase prospect with contract conditions for the investor. Also the publishing of yearly and half-yearly results are required as well as the daily publishing of the share prices. The fees and cost have also to be published.

Liability

Liabilities are also important to support the trust-feeling of investors referring to fund managers. All in all they have similar functions as the duties.

For the damage through the duty violation of the fund vouches the contrary to duty and culpable doers. The liability for the damage always conditions a damage of the duty. The fund manager vouches not only for failure neither referring German law nor according to foreign laws.^[5]

The elements of a crime of a duty violation are indicated through a vouching of the fund manager; it means a damage of the inner carefulness is added. There is no liability easement valid for the vouching of fund managers; therefore they are responsible for negligence and deliberate intention.^[6]

Liability according to shareholder

Every investor can expect from the fund manager lawful management. The depository bank is responsible to make possible claim for damages valid. In case of failure to act a direct claim of the shareholder against the fund manager or the depository bank is possible.

Moreover the fund manager vouches if the investor had bought shares on the basis of a prospect with mistakes.

Liability referring to the state

The fund manager as a special credit institution stands under state control and has to make regularly reports. The state is able to forbid the business for a certain period of time or forever; or he can declare a monetary fine in case of violation of duty.

Insurance

Nothing is opposed to the insurance for the liability and the bonus payment for that trough the enterprises. Different insurance providers have developed a policy outline of a fund manager insurance although the insufficient claim of the depository bank against the fund manager is not insured; moreover the coverage for the deliberate intention is missing.

The recent insurance denseness is very small.^[7] This implies that there is a high risk for investors in case of damages, when the fund manager does not fulfill his duties.

Of course an abstinence of such an insurance should not have a unfavorable influence on the shareholders according to the investment law. The capital assets of the funds are kept safe at the depository bank and are protected against fraud through the fund manager. If the fund manager provokes damage through a mistake, it is not allowed to pay the damage with the fund capital. An insurance would only protect the investment company itself or its owners (the bank or the insurance) referring to the damage which would be regulated account of the joint capital of the company.^[8]

[...]

^[1] Stobitzer, C. (2009).

^[2] Mieland, M. (2006).

^[3] Strupler, C. (2010).

^[4] Strupler, C. (2010).

^[5] Strupler, C. (2010).

^[6] Strupler, C. (2010).

^[7] Kolbinger, A. (2011).

^[8] Kolbinger, A. (2011).