Mutual Funds

The Quandary of Mutual Funds

As the description suggests, this article investigates how legitimate the charges and relative performance of mutual funds are considering the $10 trillion invested in them and the approximately 90 million individual investors that have put their faith in mutual funds for their retirement. To avoid excessive explanation, I’ll outline why:

– Investment companies (typically) rely on assets under management, rather than performance to generate fees. The more assets, the greater the revenue. The problem is there is no benchmark to keep managers honest and competitive.

– Fund managers (typically) own very small portions of their own funds. Managers are not eating their own cooking. Just like with insiders of companies owning a large percentage of their stock, the same applies for fund managers to show a vote of confidence. More would be at stake for the manager and therefore he would have extra incentive to perform.

– Mutual funds under perform the S&P, which has averaged 12.3% annually since 1980, while the average equity mutual funds averaged around 10% annually over the same period.

– Fund manager profit margins come in at around 42%, not a bad take.

– Fees grow around 15% per year, and compared to the above cited performance of the S&P relative to mutual funds, is it warranted?

This is not to say that excellent mutual funds are not out there, but rare gems they are. Consider low cost alternatives like Vanguard, that charge ultra low fees, but mimic the indexes if you are conservative defensive investor. If you have the time, than a more enterprising approach can be taken to look for positives like fund managers that take a large stake in their own fund, low turnover to assure low fees and funds managers with long consistent performance records.

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