Most Mutual Funds are a Rip-off
Posted: Saturday, February 05, 2005
by Mike Turner
turnertrends.com
If your life’s savings is primarily tied up in mutual funds (and many investors have mutual funds as their primary investment vehicle), then I am sure you have been reading and watching the news about the mutual fund industry. Mutual fund scandals and illegal activities are almost commonplace.
It has been estimated that the illegal activities of some of the most trusted and well known mutual funds in the US, is costing individual investors over $400 million annually!
You see, fund managers are incented to grow their fund. That’s one way they are financially rewarded. But this is not always a good thing for the fund investor. Let's say a fund manager has several hundred million (or even billions of) dollars to invest. He takes the first hundred million and buys the very best stocks that match the fund’s investment profile.
If the market is going up, he may be under a mandate to be fully invested. So he drops down a tier with the second hundred million, buying the not-so-good stocks. And then he goes down another notch with the third and so on. Pretty soon he's sitting with a mixed bag of great stocks, mediocre stocks and more than a few stocks that you would not own under any circumstance. Remember, the typical fund holds positions in 400–500 stocks at a time.
This is one major reason that the average growth stock fund underperforms the S&P 500 almost every year.
Mutual funds expose you to more risk than you know
Each quarter, fund managers have to publish their performance, so they are financially incented to look good.
In its mildest from, the obsession of fund managers to look like they have owned the best stocks leads to things like "window dressing" -- where a manager buys and sells stocks near the end of a quarter, so it looks like he's owned the best stocks all along. Now mind you, that manager is not buying and selling stocks because it’s the best thing to do for your investment. He wants his fund to have the look of quality. He wants to report to the world that he only owns great performing stocks. Never mind, that he’s only owned those stocks for a few days. At its worst, this motivation drives managers to take bigger risks than you would ever dream of taking with your own money.
With that kind of "miss"-management of your money, is it any wonder that almost 80% of all mutual funds under perform the stock market?
Some mutual funds even engage in patently illegal activities, called pumping. Here’s how it works… Right before the close of a calendar quarter, a mutual fund manager places market orders to purchase a lot more of some of the stocks he already owns. These buy orders will most likely cause those stocks' prices to go up, especially for the least liquid stocks in his portfolio. Note that these price boosts will be only temporary. But that doesn't make them any less attractive to a fund manager intent on goosing his end-of-quarter ranking. A lot fewer investors will be paying attention on the first day of the subsequent quarter when that fund's stocks' retreat from their artificial end-of-quarter heights.
Mutual fund costs are shameful
Most mutual funds have a ton of people on the payroll, including fund managers, analysts, assistants, accountants, IT professionals, etc. These people require office space, computer equipment, insurance, retirement plans and travel expenses on a world-class basis.
So, who do you think pays for all of this?? You do the mutual fund investor. Funds sold by brokers carry loads (commissions) of 2%-5% or more. Even so-called "no-load" funds charge an annual management fee that can run an additional 1%. And how often do you think a fund manager trades those 400-500 stocks? Answer: A lot! Who pays for those high-end broker fees? Again… you do. And then, there are the administrative costs, which can run another 0.5% a year.
And that’s not all… There are the 12b-1 marketing fees that run up to 1% of total assets a year. They use this money to advertise their services to other potential investors. You are paying for all these costs, not the company who manages the fund.
We believe the individual investor is smart enough and capable enough to adequately manage his/her own stock investments. We also believe the self-directed decisions the individual investor makes, with services like The TurnerTrends Report, can generate better returns than most mutual funds.
Market Timing by doing your own research or using a stock picking service
The primary factor that makes the price of stocks fluctuate is simple supply and demand. The higher the demand for a stock, the higher its price and conversely, the less demand there is for a stock the lower its price.
The best way to take advantage of price swings is by using both fundamental analysis and technical analysis in the price trend of a single stock or a group of stocks as a result of the supply and demand for those stocks as they are traded (bought and sold) on the various stock exchanges around the world.
Most people are overwhelmed by the thought of doing this. Others relish the challenge. But whether you want assistance or want to go solo, buying and selling stocks yourself presents much better opportunities to keep your money.
Isn’t it time to take control of your own investment strategy?
Hopefully you have seen how the mutual fund industry is only marginally interested in your money and considerably more interested in theirs. If you want to fire your mutual fund and learn more about how to use market timing to enhance your portfolio, our investment newsletter is an excellent place to start.
Good Investing!
Mike Turner
www.turnertrends.com
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