You and Your Wholesaler

By Ed Mazoyer
FA Market Analyst

What’s the most important thing your mutual fund wholesaler can do for you?

Far and away, it’s answer your questions.

But what if you don’t have any questions? Then there is not much a wholesaler can do for you – except sell you a product that may or may not be right for your client.

Most wholesalers are knowledgeable, upstanding folks. But they’re sales people, not advisors. They’re pushing what they perceive to be the easy sale for you at a given time, whether it’s a hot energy product or a government fund, or whatever. They’ll also push a fund their fund company wants to build up. What’s right for your client rarely enters a wholesaler’s mind.

And it shouldn’t. Knowing what’s right for your client is your job. And it starts with knowing the product the wholesaler wants you to sell. And to know the product, you have to do your homework so you can ask the right questions.

In recent years, we have abdicated a lot of our responsibility; ceded a lot of work that we should have been doing to the wholesaler and, by extension, to the fund family. Oh, XYZ fund been around for 100 years. Oh, let’s put him here; the fund’s been going up 10% for the last five years. We have become a little bit lazy and complacent. We have to become much more knowledgeable and professional again.

Make the wholesaler your business partner by asking him or her questions after you’ve done your homework and learned:

• Who is the fund manager? What is his bias? Energy? Technology? Big cap growth? Does he like financial companies? Every manager has a bias based on his own strengths and training. It may or may not be suitable for a particular client.

When a manager leaves a fund, you should ask: Do you want to stay, or should you look for something better. A new manager will inherently try to put his stamp on the fund. This takes time and during this period, two things happen: (1) The fund will likely under-perform and (2) it will generate capital gains because he’s going to be selling off positions that his predecessor had.

• What are the top ten holdings? You should stay abreast of this on a continual basis, if for no other reason to explain why a fund is performing the way it is. Is it underperforming? Why? Does it have out-of-favor stocks? Why? It is because out-of-favor-stocks are the manager’s forte? Or is the manager out-of-favor? A manager can’t be perfect all the time. Bill Miller of Legg Mason, for example, beat the S&P 500 for 15 years. But, because he kept favoring financial stocks, he’s now outof- favor. If you, by looking at the top ten holdings, had seen him still building positions in financials even with all the turmoil, you probably wouldn’t have gotten out at the top, but you would have said somewhere along the line: Maybe I should pare my position back.

Major positions (top 10 holdings) don’t change overnight. The fund has done research and made commitments; but this doesn’t necessarily make it right for you. You may see a big exposure to energy and feel uncomfortable, or positive. Either way may suggest a change is needed.

What’s the fund’s beta: its exposure to volatility? The beta number is based on the S&P 500, whose beta is 1. If a fund’s number is less than 1, say .08, it means the fund is taking less risk than the S&P 500: a conservative fund that’s good for clients with conservative postures. Over one indicates more risk; suitable for clients with a greater risk tolerance.

• What is the net redemption? Are certain funds being sold off and why? Don’t tell me the easy sell; where the money’s flowing in. I want to know where the money is flowing out. This is critical in a down market.

You’re looking at a municipal bond fund averaging 5-6 years maturity. But the top ten holdings tell you out the average maturity exceeds 10 years. The name suggests you’re buying a short term or intermediate type instrument when, in fact, you’re not.

How do you get all this information? Fund families put out regular reports that list the manager, the top ten holdings, the areas of exposure by percentage, the beta numbers, where the fund is adding or reducing its exposure. What you can’t get out of this literature, ask your wholesaler.

Your wholesaler should also be able to discuss the broad economic picture as his or her fund group sees it. Knowing the fund’s position on this helps you determine what funds within that family are best for your clients. Is the fund’s overall posture bullish, or is it doom and gloom? Specifically, where is it bullish or bearish? What components are best for your clients?

This business is not easy. You must do your homework.

FA

Ed Mazoyer is a market strategist at Vanderbilt Securties, Melville, NY. He can be reached at
(631) 845-5100.