Article: The failure of mutual funds

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peteyperson
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Article: The failure of mutual funds

Post by peteyperson »

"Mutual funds were designed to let the small guy invest in the market cheaply and efficiently. The system doesn't work, though, when fund investors are too lazy to comparison shop for good values."

Two out of three equity funds underperformed their group indexes over the past ten years, says Lipper Inc. Stretch the horizon to 30 years and the odds a manager will beat the market fall to 10%. If only investors were told something that useful in the piles of fund literature they receive.

"The majority of investors work 40 to 60 hours a week, check off a box and send their money into a black hole," says Representative Richard Baker (R-La.), the chairman of the House subcommittee on capital markets. "With more unsophisticated people involved in this market than ever, we need better disclosure."

In June, Baker's subcommittee drafted legislation that would have ordered funds to show investors how their fees and performance stack up against peers' and similar index funds'; and would also have required that fund chairmen, who supposedly champion investors, be independent of the advisory firms they negotiate against. This baby was smothered in its crib by the Investment Company Institute, the powerful fund company lobby.

Alliance Capital Management was charging the Florida State Board of Administration's pension 15 cents per $100 for the services of large-cap manager Alfred Harrison--far lower than the 97 cents per $100 charged to investors in Alliance's own Premier Growth Fund, which also is run by Harrison and is "a nearly identical composition of investment holdings and related percentage weightings," the company admits. On average, Alliance charges its own mutual funds 4.7 times what it charges public pensions for Alliance's stock-picking savvy--0.84% versus 0.18%. Alliance declined to comment.

Note: Can you say corrupt?!!


http://www.forbes.com/forbes/2003/0915/176_print.html

Fascinating, on the nose article about mutual fund investing. Makes you never want to invest in an actively managed fund ever again.

Petey
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Alec
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Petey,

Post by Alec »

It's nice to see the mainstream media catching on AFTER Bogle's been saying the same thing for 20+ years. :D

Speaking of misleading ads, here's an excerpt from a Fidelity add in a recent issue of Money Magazine (Sept 2003):

"...This example does not take into consideration the effect of taxes. This example does include the effect of capital gains and dividends. This example does not include the effect of any sales charges or redemption fees, which would lower these figures. This chart is not intended to imply any future performance of the fund, and your own account may earn more or less than this example..."

As to why all those funds charge such high fees to individuals and such low fees to institutions: Because they can. Institutions have bargaining power, while individuals do not. Those fees are what "the market" will allow them to charge.

What's the fastest way to become wealthy in the investing world? Start your own mutual fund. I find it extremely revealing the Bogle is only worth millions (I think), and the Johnsons (of Fidelity) are worth BILLIONS. It seems like Bogle is the only one who has read that 1940 investment act.

- Alec
Dual
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Mutual Funds

Post by Dual »

For a scathing discussion of the recent preferential treatment for large investors scandal see http://www.fundalarm.com/hilights.htm (After Oct 2003 look in the archives).

I say the h*ll with them. Either use index funds or buy and hold individual stocks. With index funds, you can compare performance to their index so there is very little room for double-dealing.

Dual
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Alec
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Steve Schurr article

Post by Alec »

http://www.thestreet.com/pf/funds/steph ... 19010.html

I think it'd be great if transaction costs had to be included in expense ratios!!

- Alec
WiseNLucky
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Post by WiseNLucky »

First, the bill would require that a fund's expense ratio include portfolio transaction costs. Including commissions in expense ratios will drive down portfolio turnover, because many funds will otherwise appear too expensive to survive. And it will put the spotlight on soft dollars.

Second, the bill requires that the transaction confirmation show how much the broker got paid for pushing the funds. Studies have shown that price transparency spurs competition. If investors saw on confirms the actual dollar amount the broker was being paid, there would be more competition. Showing sales commissions on confirms would have a strong depressing effect on sales compensation.


I like both of these ideas!
WiseNLucky

I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
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