Mutual fund managers are in the capital-acquisition and retail-client-retention business. The first job of these fund managers is to acquire as much capital from retail clients as possible. That means they need to create lots of different funds for all that money to go into. The retail equity fund management industry has been quite creative in building countless funds distinguished by geography, style or sector. You can find U.S. growth funds, European income funds, global technology funds, etc.
As an investor, you’re lured into buying lots of funds, with the promise that you’ll be more diversified that way. More funds of course means more fees. This is not always in the best interests of the investor. You overdiversify and overpay in fees which results in poorer performance.
Second, mutual fund managers have to retain clients as any business does. It’s in their interest to minimize your losses, not maximize your returns. This means they will try to lock you into investments for the long term. The typical recommended minimum holding period many mutual funds promote is 5 years!
When you put your money in a mutual fund, you have no control over what is bought, how much is bought, whether it overdiversifies or whether it is too little risk for you. Your individual needs and goals are left unmet.
Mutual funds consistently underperform. According to S&P Indices Versus Active (SPIVA) Scorecard for funds, most equity fund managers fail to beat the market. The last SPIVA Scorecard showed that 69.33% of U.K. equity fund managers underperformed the S&P United Kingdom Broad Market Index over the past decade.
In the U.S. market, the situation is even worse: 87.2% of all actively managed funds underperformed their benchmark between 2005 and 2020.
Asset management firms like Fidelity create so many funds, each fund they create, by definition, can select from only the geography and style they have set. So they can’t pick the best stocks in the market but only the best stocks from the small list they are allowed to look at. They are not selecting from a large universe and can easily suffer if the style or sector they target is out of favour.
Don’t leave your investing decisions in the hands of these underperforming fund managers. Don’t give these people power over your money. When you’re in control, you can make better decisions about your portfolio. This will ultimately lead to better returns, cost savings and empowerment.
Sven Franssen