Mutual Fund Performance – Why Do The Bulk Perform So Badly?

Mutual Fund Performance – Why Do The Bulk Perform So Badly?

In the 1940’s Fred Schwed and posed a simple question in his famous book – Where are the customer’s yachts?

He noticed that all the stock brokers, investment advisors, and fund managers had yachts, but what about the customers? Where were their yachts?

If you have ever wondered why your broker or mutual fund manager never makes you money this article is for you!

As applicable today as it ever was!

Both humorous and entertaining, this book exposes the folly and hypocrisy of Wall Street. The book gives brutally honest view of a world, in which brokers get high while customers go broke and it’s nevertheless true to day!

90% of fund managers under perform

So why do the bulk of investment managers make money for themselves when the reality is 90% of mutual funds cannot already out perform the stock index?

The answer is simple and just as true today as in the 40s when the book was published:

1.Investment managers are great salesmen and convince you with clever marketing material about their skill and how they can do better than you and most investors simply think they know best.

2.The bulk of investment managers simply present the best fund they have they forget to tell you about all the ones that don’t make money. They simply pick the best and ultimately that one dives and they move to the next one.

3.They don’t make money from making you money in most situations. They earn money from fees and their sometimes very large. Dealing fees and making money are a conflict of interest!

Most of the time the desire to make fees is detrimental to client profits – These fees pay for the brokers yachts.

Choosing a manager to perform

That’s not to say you can’t find good managers there are some around but you need to hunt them out and there are many who do make money by taking a different approach:

instead of paying dealing fees they have confidence to be paid on performance, they deal in derivative products and they give representative track records of ALL Funds under management.

The traditional way doesn’t work as this quote neatly sums up the problem:

“It’s amazing how well Schwed’s book is holding up after fifty-five years. About the only thing that’s changed on Wall Street is that computers have replaced pencils and graph paper. Otherwise, the basics are the same. The investor’s need to believe somebody is equaled by the financial advisor’s need to make a nice living. If one of them has to be disappointed, it’s bound to be the former.”

John Rothschild, Author, A Fool and His Money, Financial Columnist, Time magazine

There are many hungry managers around who see an opportunity to charge performance fees and put their interest as the same as the clients – Making money.

They may not do so, but at the minimum they are showing confidence and taking an approach that can rule to big gains for clients instead of average performance.

Targeting 30 – 50% annualized gains

Many of these managers are producing 30 – 50% annualized gains. Simply follow the above advice on seeking them out and read – Where are the customer’s yachts?

Its remains an investment typical and is as true today as it ever was and will inspire you to look beyond traditional sales led asset management groups.

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