Tuesday, July 3, 2007
I'm not much of a fan of mutual funds.
For one thing, they rarely beat the market. According to a recent study by Boston financial research firm, Dalbar, the average annual mutual fund return from 1984 to 2000, a rampant bull market, was 14% a year. The S&P 500 returned 16.29% over the same period.
Even if you isolate mutual funds that focus on the largest, most profitable companies, the returns don't improve much. The Journal for Financial Planning found that only 10% of large cap mutual funds beat the S&P 500 from 1983 to 2003.
If you're going to hand over 1%-2% in fees to management, shouldn't you expect returns above and beyond that of a general index? Otherwise what are you paying for? Hedge funds are even worse. In those circumstances, you're handing over 2% of assets and 20% of profits. Small wonder that some hedge fund managers pull in more than $1 billion a year.
However, to me, the gravest charge against the mutual fund industry is that most fund managers don't invest their own money in the fund. You see, most asset managers aren't paid based on performance, they're paid based on the amount of assets under management.
And both assets under management and salaries are booming.
In 1970, there were roughly 270 funds with $48 billion in assets. By January 2006, there were more than 8,000 U.S. mutual funds with more than $9.13 trillion in assets.
Granted, if a fund manager turns in crummy year after crummy year, his assets under management, and consequently his compensation, will shrink. However, the best method to ensure your interests are aligned with management's is to look for managers who invest heavily in their own funds.
If a manager puts his own money alongside yours, you know he's going to perform well. This is case with most investing legends. Warren Buffett, Jim Rogers, Eddie Lampert, and George Soros are all guys who bet big on themselves. It's how they made their fortunes.
Same goes for investment legend Marty Whitman, who manages the Third Avenue Value Fund (TAVFX). Whitman's been in the financial industry for some 50 years. He started out in investment banking and later became a turnaround specialist for bankrupt companies. The business school at Syracuse University – his alma mater – bears his name.
Since its inception in 1990, TAVFX has shown investors an average annual return of 16%. Whitman's total return for the period is 1,200%.
Even better, Whitman's got a substantial percentage of his personal wealth in TAVFX. As of January 2004, he had over $63 million in Third Avenue's mutual funds. SEC filings reveal he hasn't substantially altered his positions since then.
Likewise, founder Ronald Muhlenkamp runs the Muhlenkamp Fund (MUHLX). Over the last 15 years, Muhlenkamp has shown investors an average annual return of 13%, beating the S&P 500 by about 2% a year – $10,000 invested in MUHLX in 1990 would be worth over $110,000 today.
Most of Muhlenkamp's personal long-term assets are invested in the fund. So is the entire Muhlenkamp & Co. pension plan. Muhlenkamp employees' nest eggs are all in one basket: the fund.
When you're deciding on mutual funds for a retirement portfolio, ask the manager if he or she has money invested in the fund... and keep in mind guys like Whitman and Muhlenkamp. They beat the market and they have plenty of their own money on the line with yours.
Why consider anyone else?
Chinese blue chips go parabolic again... iShares China up 38% since March.
Miners continue to hit new highs... BHP Billiton, Rio Tinto, Southern Copper, Seabridge Gold, and Fording Canadian Coal.
More all-time highs for Big Oil: Statoil, Repsol, Total, Eni, and Royal Dutch Shell all hit fresh highs.