The Wall Street Journal (yet again) discusses the probability of the slow end to the twelve trillion dollar mutual fund industry:
Mutual funds have been resilient despite rivalry from other investment options like exchange-traded funds, hedge funds and separately managed accounts, but now some investors are having their doubts.
A recent survey by consultants Cogent Research in Cambridge, Mass., suggests that many affluent investors have great concerns about the fund business. Among other things, the survey found that shareholders believe fund companies don't have their best interests at heart, citing such issues as excessive trading, lack of transparency in fees and a failure by the industry to clearly articulate tax and risk issues. The survey was commissioned by Barclays Global Investors, a giant in exchange-traded funds, or ETFs, and a unit of Barclays PLC."
We blogged about this study a few days ago (29% of People Trust the Fund Industry...), and still don't think it signals a death knell for mutual funds. Funds still offer key benefits, especially for the legions of 401(k) investors:
1) Low Minimums - investors can efficiency get active or passive management into just about any market in the world with as little as $1,000.
2) Cheap to Buy and Sell - investors can add a few bucks a week without paying commissions (which they can't do with stocks or ETFs).
3) Built In Sales Loads - O.K. this isn't really a benefit to buyers so much as sellers, but so long as funds can obfuscate such commissions, ETFs will never take over the world. There is no way to manage a client account easier and more profitably (to the broker) with more fee obscuring than with load-bearing mutual funds.
4) Fund Performance - everybody whines about how crummy fund performance is, but if you could easily compare fund performance to individual accounts at say E*Trade or even many broker managed accounts in stocks, the fund industry wouldn't look to shabby.
Other criticisms of funds noted in this article barely hold water. One source notes that funds get paid to gather assets, not perform well - and people are wising up to this fact. While nobody complains about the evils of giant funds more than we do, the reality is funds don't get big or stay big without decent performance. And what's the alternative? Performance based fees, like those most hedge funds levy, have their own drawbacks: a 20% cut of profits can be an incentive for hedge fund managers to take big risks with investors' money.
The Wall Street Journal (yet again) discusses the probability of the slow end to the twelve trillion dollar mutual fund industry:
Mutual funds have been resilient despite rivalry from other investment options like exchange-traded funds, hedge funds and separately managed accounts, but now some investors are having their doubts.
A recent survey by consultants Cogent Research in Cambridge, Mass., suggests that many affluent investors have great concerns about the fund business. Among other things, the survey found that shareholders believe fund companies don't have their best interests at heart, citing such issues as excessive trading, lack of transparency in fees and a failure by the industry to clearly articulate tax and risk issues. The survey was commissioned by Barclays Global Investors, a giant in exchange-traded funds, or ETFs, and a unit of Barclays PLC."
We blogged about this study a few days ago (29% of People Trust the Fund Industry...), and still don't think it signals a death knell for mutual funds. Funds still offer key benefits, especially for the legions of 401(k) investors:
1) Low Minimums - investors can efficiency get active or passive management into just about any market in the world with as little as $1,000.
2) Cheap to Buy and Sell - investors can add a few bucks a week without paying commissions (which they can't do with stocks or ETFs).
3) Built In Sales Loads - O.K. this isn't really a benefit to buyers so much as sellers, but so long as funds can obfuscate such commissions, ETFs will never take over the world. There is no way to manage a client account easier and more profitably (to the broker) with more fee obscuring than with load-bearing mutual funds.
4) Fund Performance - everybody whines about how crummy fund performance is, but if you could easily compare fund performance to individual accounts at say E*Trade or even many broker managed accounts in stocks, the fund industry wouldn't look to shabby.
Other criticisms of funds noted in this article barely hold water. One source notes that funds get paid to gather assets, not perform well - and people are wising up to this fact. While nobody complains about the evils of giant funds more than we do, the reality is funds don't get big or stay big without decent performance. And what's the alternative? Performance based fees, like those most hedge funds levy, have their own drawbacks: a 20% cut of profits can be an incentive for hedge fund managers to take big risks with investors' money.
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