Joel Dresang: Kyle, once you narrow down what categories of investments you want to make for an investor’s portfolio, how do you narrow down all of the thousands of funds that are available?

Kyle Tetting: It is so important to really understand that in an investment world that has literally thousands, as you mentioned, of investment options that we find managers who are doing an excellent job of filling some kind of objective for clients. And ultimately, the goal is to look at how they are doing at fulfilling that objective in order to determine whether or not they should be in the portfolio.

Joel: Why do you focus on the managers?

Kyle: We talk a lot about the index investing, or passive management, and it gets a lot of press. But active managers have something that the index doesn’t have and that is the ability to add some value. You know that index is going to be very rules-based in construction. And if a particular stock or a particular investment opportunity fits into that rule, it’s going to go into the index.

Joel: Is that to say that the active managers don’t have rules that they follow?

Kyle: They certainly do have rules that they have to follow. But I think the difference is that they can say, ‘Okay, this isn’t an area I want to be investing in right now.’ And so those rules generally aren’t as restrictive. And the other piece is you have someone actually looking at those rules – as opposed to a very set-it-and-forget-it approach.

Joel: So how do you find out what rules they have to follow?

Kyle: We have a couple of different ways that we can talk to managers and read about what managers are doing to get an idea of maybe what a particular fund is trying to accomplish.

First and foremost, we can look at the prospectus, which is something that every investor gets when they’re investing in a mutual fund. What the prospectus will tell us is what kinds of things the manager can and can’t do, what kinds of things are going to show up in the portfolio, what kinds of things aren’t. It also gives you an idea of what the objective of the investment is.

I think the other thing that really is very helpful for us, once we have an idea of whether or not we may be considering an investment, is to have a conversation with the portfolio manager.

So, whether we have them in the office, or whether we have them on the phone, talking about their approach to investing, talking about where they’re finding opportunity, where maybe they’re finding some pitfalls or some potential risks. And that gives us a better idea of how they fit into what it is we do.

Joel: You can also get third party evaluations of the managers?

Kyle: It’s good to also get an outside opinion. And so, there are resources like Morningstar, as well as others, who write pretty extensively on the mutual fund world and who can give you a better idea of what a manager is doing and how they’ve done relative to what they’re trying to accomplish.

Joel: So, what are you looking for when you’re looking at managers?

Kyle: I think one of the big things that we focus on is whether that manager is trying to build a portfolio from the bottom up – really looking at what the best available stocks are.

Or whether they’re trying to build a portfolio from the top down with broad themes, suggesting that this economic condition is going to create an environment that should be favorable for a particular sector, or a particular type of company.

And then ultimately those are the kinds of things you don’t get from just reading a prospectus or you don’t get from just looking at performance numbers. You really have to dive in and talk to the manager about what it is they’re doing and how that fits into what’s going on in the world.

Joel: So, it sounds like a lot of work. Once you find managers that you like, do you just sort of stay with them?

Kyle: Certainly, when you find someone you like it’s great to use that fund as long as you understand what’s going on. I think the concern is relying too heavily on any one particular approach.

We’ve talked for years about building a balanced portfolio, and that’s balance not just among stocks and bonds, but within stocks and bonds as well. So one of the things that we really focus on is having a couple of managers with maybe competing strategies. One where very focused on building it from the top down and one where they’re very focused on building it from the bottom up.

Certainly, there are going to be environments where one is rewarded more than the other. But long-term, that idea of balance is to build a portfolio that is going to move in different ways for different reasons.

Kyle Tetting is president of Landaas & Company, LLC.

Joel Dresang is vice president-communications at Landaas & Company, LLC.

Money Talk Video by Jason Scuglik

(initially posted Sept. 29, 2015)