Why do investors pour money in unit trust funds? The whole point is to leave the direct investment; stock or bond picking decisions to the professionals, as they do not have the time, knowledge, skills and expertise to manage the money themselves.
When selecting a unit trust fund, investors tend to trust and rely on the fund's track record. It is of course greatly determined by the investment managers behind the fund.
We frequently have expectations of events in our lives. We expect the traffic to be smooth because of school holidays. We also expect that when it rains heavily, the traffic will be bad, based on historical experience.
It's no different for the fund managers. They set their expectations of markets and plan their investment strategies and decisions accordingly. Expectations are constantly built into markets especially after an anticipated event (economic or otherwise) to explain why a particular stock or the stock market in general went up or down.
The explanation for this behavior is pretty simple. Investors, especially professional investors, are rational human beings. They set their expectations on how things are going to pan out and then make key investment decisions based on these expectations.
A successful fund manager must be creative, innovative and understand all the essential financial concepts like the cost of capital, price earnings ratio, dividend yields, discounted cash flows and portfolio theory. With these concepts, he supposedly can derive valuations of stock. Then, he buys an undervalued stock and sells it when it becomes overvalued.
One must have an interest in markets not only when they're hot but also when they're cold. A good fund manager has the ears of a fox and is able to figure out the huge amount of noise coming from the various markets in order to pick the right pieces of pies.
The experience of the fund manager plays a large part in fund management. Experience gives a fund manager the material with which to mix and match hypothesis. While history rarely repeats itself, as the timing may be off or the reaction may be more intense, it gives a guide with which to forecast future outcomes.
The fund manager should be rational about his view of the markets or a particular stock, draw a conclusion and essentially act on it.
In more difficult situation, a fund manager must keep an open mind; markets can go either way way and the fund manager is merely waiting for the appropriate data to confirm or deny his hypothesis.
A great fund manager can sense when they're in sync with the market; when they feel that the 'force' is with them. However, even the best fund manager can lose his hearing and sight just when he thinks he has skills down pat. A successful fund manager is one who is able to pick himself up and start searching again for the right decisions. It's an art to be able to hold firmly onto one's beliefs even through paper losses and volatility.
A good fund manager has to know macroeconomics and valuation methodologies well, but it's still not enough. He has to be able to make expectations well. In other words, he has to anticipate what the market, accounting all investors and market participants, will focus on next, extrapolate the income and position his portfolio ahead of time for that opportunity to materialize.
This must be done over and over again and often is revised because the fund manager will sometimes be wrong. Markets will always test a fund manager's conviction or expectations. A great fund manager will understand rational expectations in markets and constantly feel its pulses. Managing money successfully is purely a form of art.