Mutual Funds: And then there is the Costs
From where we left off:
Then, there is the cost of doing business. Mutual funds might also wish they could keep the fees and charges they collect from investors for their professional services as close to the vest as possible but once again, it is generally public knowledge how much it will cost.
And then, to further complicate matters, mutual funds are beholden to more than you and me and the thousands of other investors in the fund. The fund family is often part of a publicly traded company! Stock exchange listed equity can own a mutual fund that in turn invests in stocks! That, in my opinion adds the final touches to this tarnished investment.
Once again, I love mutual funds. Despite all of the seedy underbelly-like dealings and clandestine deceptions, mutual funds, which play a roll in 95 million investor’s lives, have a certain quixotic appeal. Even as we need them, we are, at the same time welcome to loathe them.
We will, if we are like most people, use them in our retirement planning, perhaps to park cash for short-term safe keeping, or even to help finance our children’s higher education. Some of us even invest in them – as an investment! And most of us do not have a clue about what they are, how they operate, or how to use them to our best advantage.
They can be, once they are dragged into the light of day, a very good investment for everyone and an important part of every portfolio.
But first, let’s consider Mr. Farrell’s scathing description of the industry we are about to talk about at length. Mr. Farrell observes mutual funds with a certain disdain suggesting that the person(s) at helm of these investments is only there for the money.
I can go along with that. If you think about it, we all are in one thing or another for the money. It’s called work. But do fund managers hauling down around $400,000 a year on average merit more scrutiny than the $40,000 a year butcher cutting your meat? Oddly, I think we wonder about the guy tying your roast more than we consider the people investing our money.
Still, you might say that anyone earning about ten times the average annual paycheck of the average American should be worth looking into if only for that reason. We distrust all high paid brushes with professionals (doctors, lawyers, politicians), limiting our trust to place somewhere between acquiescence and blind.
Fortunately, we have better measures than the simple use of paychecks. Money, as they sometimes say has legs and investors seldom hang around with a manager that isn’t earning his/her/their/its compensation.
The pay does seem a bit out of whack for what we perceive the job to be, but it is not the only reason Mr. Farrell thinks that we could not only do better without mutual funds. He believes we should all consider opening a fund of our own. Sort of a “I am a Mutual Fund Manager (and so can you)”.
If only beginning a mutual fund was as easy as Mr. Farrell suggests. His description of a fund as an organization is headed by a person who needs to be finely dressed, able and ready to market both herself or himself to the public as not only a talented investor with enviable skills and insight but some one gifted enough to possess the ability to discern the markets direction.
They will need to be polished enough to appear on television, speaking about this piece of news or that, and hope that high-definition will be kind to them. To Mr. Farrell it is a mutual fund as a runway reality show.
To prove those skills he/she/them/it then needs to be able to beat whatever index they choose to target and at the same time, gather unto their folds, similar investors with the same ilk.
Naiveté is a generally preferred trait among mutual fund investors but is not necessary. Even fund managers know that the most experienced investor is prone to flights of fancy, investing where he or she ought not, ignoring what they know for what they feel.
(Benjamin Graham suggested that these two investors are in each of us. The naïve can also be the experienced and vice versa. And by his own advice, he suggested that these investors who were tempted to commit money to folly should keep a separate account for “mad money.)
Mutual funds also need to have a very good idea of who you, the potential or current investor, are. They count on a certain level of inexperience when to comes to the investing public. They know that if they advertise with great skill, they can brand themselves without the need to include too much technical information to muck up the pitch.
A Retired couple lounging on their beachfront porch or a kid packing the last remnants of her bedroom in the back of your car as she heads off to college are all images the untapped investor class needs to tug on the their emotional heartstrings, which mutual funds hope, lead to a quick pull of the purse strings. If half the people in the United States are not invested and the 95 million who are invested in mutual funds do so because it is all that is available, it pays from them to advertise. Portraying a hypothetical you with your grandkids or as someone who just doesn’t have time to do the investment work yourself while you are several beers into a football game or turning the page of your favorite periodical, mutual funds hope to get you to remember who they are and more importantly, what they can do for your future.
Mutual funds know stuff about us that we might not be so proud of as well. Higher expenses Farrell writes and I paraphrase, often lure some investors in because they perceive the additional cost as indicative of better performance. As much as we pride ourselves in looking for ways to be frugal with groceries or clothes, mutual funds know that we do see ourselves as smart when the perception of spending more than you need to seems to provide the outward appearance of savvy. On that point, they are laughing all the way to the bank.
Then, Mr. Farrell suggests that to succeed at their game, you, the manager, with all of that information about what makes us the most vulnerable to your fund’s purpose, all you will need to do is find the right name. Perhaps something patriotic sounding to stir the inner investor to do the right thing for not only them but also the country and you will have a mutual fund of investor-worthy merit.
In their defense, mutual funds are run on mutual participation. They need to attract new investors and convince old ones to recommend the products they use to friends and family. And to do that, they are often forced to promote the people who run them, often like Wall Street rock stars.
The fund’s publicity department often sees managers, who have excelled at the helm of their fund, as being ad-worthy. Its like hearing about a local restaurant featured on a national food network show. You may have never been there but if you had, you would have felt good about your choice of cuisine and because it was recognized, you by default felt better. Their success makes you fell smarter. Same goes for mutual funds. Nothing would be better than having a fund manager’s name pop during a conversation, maybe, perhaps while they are fencing.
As the first gentleman offers the feint, then they parry as the aggressor offers the suggestion that his current financial success is because of - then a disengage, followed by a counterattack - a certain fund manager. Try it sometime when you are getting the best of your opponent in a game of one on one basketball. Start talking finance during your jump shot or perhaps as you administer a wicked backhand during tennis. Hey, doesn’t everyone talk about the state of his or her investments during the heat of the moment? Everyone does it, right?
The next post will continue with publicity.
