Are Mutual Funds really dead? Today they still dominate the market. But our advice for getting the best investment returns is to watch the trends. We believe that the trends show that the funds are sick. We believe that the funds are in fact the walking dead. Here’s why.….
- Too Many & Too Large – The funds have unbelievable clout. In the US alone over 9,000 funds have over $17 Trillion to invest. Most are chasing common stocks. But there are only so many good stocks, not enough to satisfy a $ 17 Trillium hunger.
So, we have 9,000 fund managers desperately trying to outperform their counterparts. Everyone is chasing the same winning stocks. Every manager has a portfolio similar to his or her competitor. No one gets outstanding returns. No one can separate themselves from the competition.
- Fees – Why will mutual funds die? Value for money! Customers are sick of paying fees of .5% to 2% in fees and receiving poor returns of 7%. It just doesn’t make sense. Further, funds take outrageous fees regardless of the sub-standard returns that they produce.
And the cracks in the foundation are already showing. If you watch mutual fund commercials a few are now showcasing the fact that they vary their fees based on the funds returns.
The problem for the funds is that they are high cost solutions. Top fund managers and whiz kids in the research departments cost Big $$$! They charge 2% in fees because that what it costs to administer these high-end funds. They are trapped in fee purgatory.
- Returns – The real problem, however, is not the fees, its the returns. Clients would gladly pay 2% in fees if their returns were 18% to 20%. But, the real primary reason that mutual funds will die is that their returns are only 7% long-term and don’t live up to the hype and the promise.
And everyone seems to end up their – around 7%. In the short-term they may have big years and then lean years but when all the dust settles everyone’s returns are mediocre at best!
- Too Big – I know what you are thinking. With all the big salaries and bonuses that the funds pay to their hot shot staffs, surely someone can figure out how to crack this long-term 7% return ceiling. It just doesn’t make sense!
Actually, it does make sense. You see the funds are too big! Think of elephants. Big and powerful and smart but not agile. They are TOO BIG. For example – once the decision is made to dump a particular stock from a portfolio, it can take the fund manager up to two weeks to completely liquidate. Why? Well its all about size. Funds have massive portfolios in terms of invested dollars. They need to accumulate many many shares in stocks in case its a winner. Small numbers of shares don’t work because they can’t improve fund returns. When they divest in a particular stock they must do so slowly and quietly to not crater the stock price. It takes time to do this – upwards of two weeks.
Two weeks is a lifetime in stock market terms. The markets could rally and then slump all in the matter of ten trading days. The funds are too big to take advantage of near-term fluctuations in either the market or individual stocks.
- Marketing I – One effect of such a massive market with so much competition is its very difficult to get noticed.
Its very difficult to differentiate yourself from your competition. Its very difficult to market yourself to investors and attract an influx of new investment dollars. And, how do you dance around the biggest market issue being long-term everyone’s returns are mediocre and similar!
That the end of Part 1. Be sure to tune in for the last 5 of our reason why Mutual Funds are Dead.
Island Equity Systems designs and markets equity trading systems for the personal investor