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HomeMutual FundsRule no. 9 - Character Counts for building a Mutual Fund Portfolio

Rule no. 9 – Character Counts for building a Mutual Fund Portfolio

A few months ago, I wrote a post on 8 rules to build your mutual fund portfolio. These 8 rules are laid down by John C Bogle, the renowned founder of the Vanguard group, in his book “Common Sense on Mutual Funds”. These rules apply to those who would want to select non-index, actively managed funds.

The 8 rules to build a mutual fund portfolio are:

  1. Select low cost funds
  2. Consider carefully the added costs of advice
  3. Do not overrate past fund performance
  4. Use past performance to determine consistency and risk
  5. Beware of stars
  6. Beware of Asset Size
  7. Don’t own too many funds
  8. Buy your fund portfolio and hold it

In the post, I had mentioned about one more rule which I had promised to share on a future date. Here it is.

Rule #9 – Character Counts.

Bogle wrote a book called “Character Counts“, which contains 25 of his speeches that he gave at Vanguard. They are an insight into how Vanguard was built to grow into the largest ‘no-load’ mutual fund group in the world.

Let’s understand why character counts in selecting your mutual funds.

What does character mean?

Character is a reflection of how you are on the inside, your intent, and the level of integrity you display in your relationship to others.

Character is one of the key pillars in building Trust.

The Trust Matrix

Looking at the Trust Matrix, while competence of a mutual fund can be determined using numbers such as performance, risk adjusted returns, etc., character is hard to quantify.

It is not something that an excel sheet or any software can tell you. You have to go beyond them to know how trustworthy a fund can be.

Warren Buffett said that he looks for 3 things when he hires people:

Integrity, Intelligence and Energy.

And goes on to say that if there is no integrity, he doesn’t even bother about the other two.

I guess that applies to any field including hiring your fund manager.

You see, integrity is a building block of character, our rule no. 9.

Can you trust your mutual fund?

Well, let me confess that using character as a evaluation factor can be very vague.

The best bet on Trust, as someone said, is – you feel it (trust) when it is there.

Having said that, here are a few tangible areas to help you evaluate character of a mutual fund:

  1. Focus on building Assets under Management
  2. Having a large number of variants with no differentiation
  3. Launching new funds on a consistent basis
  4. Deviating from the stated investment strategy of the fund
  5. Choosing convenient benchmarks over relevant ones
  6. No clear communication with investors at all times
  7. Too many regulatory misadventures

A “yes” on any of the above would reflect poorly on the character.

Character Counts and how – in the words of John Bogle

Here are some excerpts from the book “Character Counts” on what defines Character. This was laid out for Vanguard group, however, it can be safely used as a benchmark for others too.

“We believe that personal integrity and professional conduct are not only basic standards but, in the long run, they are the only sound basis on which to build a durable business.”

“We point to our asset growth as a convenient reference point from which to measure our success. But I want to undersore that asset growth is only one guide among many, and it is by no means the most important one.”

“There are today perhaps 1.5 million investors. Down-to-earth, honest-to-God human beings with real needs and aspirations who believe that we offer them sound investment programs, with clearly delineated risks , at fair prices. We must never let them down.”

“I do not believe it is hyperbole to say that success in the competitive arena depends, in the final analysis, on character. Our character will shape our future.”

“Our purpose has remained singular–to put the interests of our clients first and paramount–no matter what the issue. In an industry that tries to be all things to all people, our steadfast course may well be unique.”

“We do not have ‘customers’. Rather, we have ‘clients.’”

It’s a tough measure indeed.

Remember, you will feel it when it is there.

Which funds will you shortlist on the basis of character?

For me, today, there are just 2 funds that would best fit the ‘character counts’ bill. To PiQue your interest, I am leaving it at that only.

Which ones would they be for you?

More importantly, does character count for you in selecting investments? Or, in general?

Please do share your views in the comments.

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