InvestingHave you ever read the prospectus for an actively managed fund? While dry reading for most, they are engaging for financial professionals; not only does the prospectus detail the objectives and strategies of a fund, but they also act as marketing tools that emphasize the unique value of the fund for investors which inevitably points to the uniqueness of the people managing the fund.

For instance, the prospectus for the Gabelli Asset Fund is full of details about the company’s unique approach to investing. In its “Principal Investment Strategies” section on page 3, we get a lot of very important detail about this fund, including:

  1. The fund targets a 10% real rate of return.
  2. The fund invests 80% or more of assets in stocks
  3. The fund chooses stocks if they are cheap relative to the Portfolio Manager’s view of their real value.
  4. Portfolio Managers consider price, earnings expectations, price histories, “balance sheet characterists”, and quality of management when investing.
  5. The fund invests in common and preferred stock.
  6. The fund does not focus on dividend payers.

Of course there is much more involved at Gabelli Funds, which is why their accounts have outperformed the S&P 500 for several years. But one important point is just how restrictive these above rules are. Note how the goal isn’t to make as much money as possible, but to get a 10% return. Also note that the asset allocation is limited—a retreat to bonds during a crash isn’t possible with this fund. Likewise, the choices of which stocks to buy are made on the fundamental analysis of PMs, not short-term trades on volatility or price action that are so popular in the mainstream media and often associated with Wall Street.

This is important for several reasons. If one is looking to make as much money in the market as possible, looking at the performance of investment professionals who have a proven track record is a good idea, but understanding how their funds restrict their actions is crucial.

Much more important is the fact that these actively managed funds rely on fundamental analysis and the discovery of undervalued opportunities to outperform. While HFT has become a buzzword in the financial press on the release of Michael Lewis’s new book “Flash Boys”, the fact of the matter is that the majority of the total assets that are actively managed in hedge funds, investment banks, mutual funds, and closed-end funds rely on fundamental analysis and a focus on previously undiscovered value, not on short term statistical arbitrage opportunities or technical analysis.

Any investor, whether professional or retail, should ask themselves a question: why do the whales of Wall Street, the Gabellis and Icahns and Einhorns and Buffets of the world, depend on fundamental analysis and restrictive mandates for their funds, if short-term cash-producing opportunities exist in the market?

The potential answers to that question is controversial, but it’s a question every ambitious analyst should ask himself or herself before pursuing a career in the world of professional money management.