Our best investment return advice – Mutual Funds are really dead. In Part 1 we shared our first 5 reasons why. Here’s the second half of the list ……
6. Marketing 2 – some funds are market specific
Have you ever tried to pick a mutual fund with your investment advisor? Its a painful process. The advisor will bring out fancy marketing charts.
Top 25 funds in 2019
Top 15 funds last 5 years
Top 5 equity growth funds 2017 – 2019
The charts are endless and all designed to showcase top funds in a particular category in a particular time period. But here’s what they don’t tell you. If you look at the performance of these funds for a different period they don’t repeat – if fact studies show that they are more likely to be on the worst performance list!
The reason for this phenomena is simple. Funds are market specific. That is to say they may perform very well in certain market conditions. Since those specific market conditions are unlikely to reappear for some time, they perform poorly in following periods.
And so the cycle continues. One year a top fund showing 14% growth while the next its at 0%. Where does that leave us? You guessed it – 7% long-term average growth.
7. Proprietary Funds – Big institutions compound the confusion.
One of the reasons for the proliferation of over 9,000 funds in the US alone, is the copy-cat logic of the big institutions. If one new trendy fund is performing well big banks and institutions will attempt to copy and replicate the formula under their own name.
These institutions want a complete array of their own mutual fund products under their own logo. The minute one fund appears to be having success, other copy-cat funds pop up to capitalize on the hype.
Of course, no one ever lets you in on the secret – Fund success is seldom repeated because of market conditions.
8. Switch to EFTs – Exchange traded funds offer similar returns at low 0.5% fees.
Since mutual funds can’t seem to outperform the market, EFT funds emerge. They ARE THE MARKET. And they don’t need proprietary management so the fees are far lower – usually in the 0.5% range.
This migration to EFT funds continues. The result won’t be higher returns but rather a host of unemployed fund managers.
Ben Johnson, director of global EFT research for Morningstar, described this as “Death by a thousand cuts” for the industry.
9. Performance based Commissions – In answer to the criticism, progressive institutions have begun to offer and market performance based commission plans.
A handful of funds have begun to actively market sliding commission plans where fund performance determines fees paid. While this is long overdue, its not good news for the high cost poor performance funds that dominate the market.
This trend is accelerating as seen in the increasing number of aggressive ad campaigns seen on television. This the beginning of the wave to performance based fund compensation.
10. Advisor Utility Ratings Declining – Advisors are not valued by the consumer.
“Much of what (our) advisors do is not valuable and not valued in the marketplace” Head of Wealth, Regions Bank.
Many pick a banker to be their investment advisor. They don’t realize that the bank may add 1.2% in fees to the over 2% you’ll pay to the mutual funds. Little wonder why the utility of an Investment Advisor continues to decline.
I think I’ve made my point. Mutual Funds are critically ill and most likely soon to be dead. For the personal investor it is therefore imperative that they learn how to manage their own investments and take control of their financial future.
Island Equity Systems designs and markets equity trading systems for the personal investor