The book "The Intelligent Fund Investor" is written by Joe Wiggins, a professional “fund selector” who advises large investors on fund selection and ESG, among other things. He also runs a fun blog called behaviouralinvestment.com.
In short, the book covers:
- Why you should avoid star fund managers
- The dangers of buying funds with "too stable" returns
- Why great stories often turn into terrible investments later on
- Why past performance is the worst criterion for choosing a fund
- Including why we can't claim that index funds will outperform active funds in the next 10-20 years (which is why the "pros" generally opt for a 50/50 index/active mix)
- How industry incentives are often not aligned with investors' best interests
Why you should avoid star fund managers
When a fund manager becomes a star and "everyone" buys the fund, there’s a high risk that performance will start to slip. This is often because the fund becomes too large to achieve the same excess returns that earned its "star" status. If the manager is already a star, the best times might be behind them.
The dangers of buying funds with "Too Stable" returns
If it seems too good to be true, it probably is. Funds with very low volatility often have poor liquidity, posing a hidden risk. This is one reason why the popular "Sharpe ratio," used to assess risk-adjusted returns, is not optimal. History has shown many examples of complex structures promising stable returns that either deliver stability or completely crash. Some of these have even turned out to be Ponzi-like schemes. Beware of returns that seem too smooth!
Why great stories often make terrible investments later
Thematic funds are often set up around compelling narratives— trends that are easy to get excited about. Unfortunately, many of these funds turn out to be short-term trends, and those that initially succeed often struggle to scale or accumulate enough assets under management (AuM) to be viable long-term. These funds frequently close, often with negative returns due to high costs and poor market performance for the theme.
Why Past Performance Is the Worst Criterion for Choosing a Fund
Referring back to star fund managers: the better a fund has performed historically, the harder it is for the same fund to outperform in the future. It’s simple math—smaller funds with a few hundred million have more opportunities to capture good deals. As the fund grows, it becomes harder to find opportunities large enough to move the needle. Moreover, funds that have performed well historically tend to be larger because most funds reinvest their returns, and these popular funds attract new money, making them even bigger.
Also, history doesn’t necessarily repeat itself. For example, even though index funds have outperformed active funds in the U.S. over the last 15 years, the opposite has been true in the UK. One reason index funds have done well in the U.S. is that the largest companies (Amazon, Microsoft, Apple, Meta, etc.) have contributed significantly to returns. But as these companies grow, it becomes harder for them to deliver the same returns in the future. In contrast, in the UK, smaller growth companies have outperformed the large established players, making active funds more successful. So, what’s the answer moving forward? Nobody knows. This is why most professional managers opt for a roughly 50/50 split between index and active funds.
How Industry Incentives Often Don’t Align with Investors' Interests
We don’t need to dwell on this too much, but fund managers are often incentivized to invest in their own funds. They usually only invest in these, meaning they are overexposed and may become more cautious than they should be. Another point is that equity funds typically require a minimum six-year investment horizon, but no fund manager has bonus schemes with such a long timeframe. As a result, they may chase short-term gains more than would be optimal under "perfect" incentive structures.
However, I would be surprised if good managers were so short-sighted that they would risk their long-term careers for a short-term bonus. The highest-paid managers in Oslo, for example, are those who have performed well year after year. Once you reach that level, there are few jobs that can compare in terms of salary and prestige relative to the effort involved. The same is likely true in London and other major investment hubs.
So, while this last point may be valid, we don’t give it too much weight. It’s also the final point in the book...
We hope this makes you a wiser fund investor, and of course, we hope you choose to embark on your investment journey with us in the Stack app!
