Got this list from a friend in an email, an interesting list about why not to buy mutual funds. I am just passing this list along some interesting points in it that I agree and disagree with, my comments are in (brackets at the end of the point).
some good reading,
thanks
selkirk
Why I refuse to be sold mutual funds:
1. I choose not to deal with an outfit which deducts an annual fee but does not have the gumption to show subtraction of the fee on statements. Seven out of ten people who own funds do not even realize they are paying hundreds of dollars a year in recurring annual MER fees. (more people are learing what MER fees are and why high MER funds ussually underperform the market.)
2. With so many funds, it's easier to pick a good stock than a mutual fund. (disagree there are many sites in which you can look at past performance and management style and top holdings).
3. Managers of funds do not really care about taxes because the burden to pay falls on unitholders, not upon them. Mutual fund managers buy and sell. In contrast, holding good stocks with increasing dividends defers income taxes on the gains. (agree, most managers do not care or consider the taxes the unitholders will pay)
4. If you do find a fund that has beaten the averages for a few years, this does not guarantee that the fund will outperform again. (that is true but I will take a well run fund that beats the averages over the years over a dog fund that always produces bad results)
5. By their very nature, funds can't profit from stock selectivity: they overdiversify often by owning hundreds of different companies. (true many funds grow to such a size that they become closet index funds, except for a higher MER)
6. The short-term focus of money managers and pressure from unit holders for immediate performance are obstacles to long term growth. (yes but when I invest I would like my stock to do good in the next 1-2 years, some managers try to get the best pop every quarter, can get killed this way)
7. "Most mutual fund managers are so young they have no historical reference on which to base their asset allocation decisions." Geraldine Weiss, I Q Trends First-September, 1997
8. Most funds lack the cash reserves to pay off the massive redemptions which will follow a market panic. ( I find most mutual fund investors do not panic during a downturn, I find that the professional pundits panic before the "average investor" in most cases)
9. When the shakeout comes and fund owners clamour for redemption, mutual fund shares will go down faster and farther than stocks which are supported by their dividends. (most stocks have low yields and will not be supported by their divs, also the shares would go down, the managers have to sell shares for the redemptions, everyone gets killed. most equity funds hold less than 10% in cash, so they would have to sell stocks to fund massive distributions)
10. I have no control over when capital gains are realized. (true)
11. Most mutual funds have a high turnover rate: this means higher taxes for investors.
(agree)
12. Funds results are sometimes overstated because market lagging mutual funds are shut down. (Forbes, Feb 23, 1998)
13. Mutual funds can result in you paying income taxes on other peoples' capital gains. (agree)
14. Eventually the performance of all funds will regress to the mean. (have to look into this statement)
15. The mutual fund ratings are mostly backward-looking.
16. Fund marketing is often misleading. Sometimes, for instance, they imply that no-load means no fees. ( if you ask a company No-Load about fees they will tell you about MERs and how much they are when asked. this is up to the investor)
17. A mutual fund could be liquidated, without notice, when the unit value is low.
18. Money in funds is not covered by Canada Deposit Insurance Corporation. (yes, but you are also not covered when you own, trade shares, options, futures. Most Money market, Tbill account funds have double AA or triple AAA holdings so though the fund is not guaranteed everything it holds is, same thing really.)
19. Fund managers can change without notice.
(true, but you should follow your fund closely enough to know who is actually running it, and watch more closely the performance when there is a change)
20. I do not wish to make a financial planner rich. ( if the financial planner is good and makes you money (better than the market average then who cares) the dumb financial planners making money off of your underperforming assets, that is painful)
21. Loads reduce the return on funds. (true, do not pay them, just buy a fund without a load, also many brokers will sell you load funds with no load.
22.Mutual funds are not noted for generating income.
23.The long term effect of mutual fund fees is devastating. According to William M. Merser Ltd. $1,000 invested in a fund earning 8% annually over 25 years would give you$6,850 before the annual fee. With a MER of 2% a year, you end up with only $4,290. You lose $2,560 or 37% of your end capital. They abscond with one third of your money...2% a year adds up.
(Globe and Mail - Report on Business - May 8, 1999)
24. Mutual fund transaction costs are a dead weight that inevitably will lead funds to trail the market. Actively managed funds can turn over 150% of their portfolio each year. (Barron's May 10, 1999)
25. "The art of persuasion has crowded out the art of performance." Common Sense on Mutual Funds by John Bogle, founder of the Vanguard Group, (Wiley, $38.95)
26. It's more profitable to own shares of fund managers like Mackenzie, Trimark or Investors Syndicate than to hold the funds they manage, (agree, a well run mutual fund company will ussually beat out what you could have made by investing in their funds, note: I own some mutual fund companies for this reason)
27. Control of funds is effectively in the hands of the management company because fund investor are so numerous and spread out. There is a profound conflict of interest between fund managers and investors. (disagree; if the fund does bad investors will pull their money out and the fund will get less money in MERs and the fund company and managers will get less $$$$$. the better they do the more the fund grows and the more money is generated $$$$.
28. Mutual funds are just an entry-level, mass-marketed way to invest. (true, so you have to start somewhere, a good base to begin investing)
29. Unit holders have to pay the management fees even if the managers underperform.
30. Deferred sales charge (DSC) penalties effectively mean you have made a six year commitment. (again do not buy load funds with a load, bad idea)
31. "Many fund companies are reluctant-or flatly refuse-to publish the names of their investment personnel." Financial Post June 19, 1999 pE1
32. "...many fund managers would be more accurately described as traders rather than investors." Financial Post Aug28, 1999 p.C4
33. Fund managers almost invariably buy at market tops. They never have money to buy when stock prices are really down. Timing the Stock Market by Colin Alexander (McGraw Hill, 1999)
34. I can't get a tax receipt for the fees charged against my account.
35. Fund managers come and go with alarming frequency and the funds try to hide this fact.
36. I'd much rather select my own dividend-paying stocks then get a grab-bag with risker stocks I might not want to own. Some funds, for instance, held Bre-X. (most Canadian Equity funds had Bre-X, however many funds made money on it, that stock fooled a lot of fund families. just scary,)
37. When a fund is forced to sell stock to meet redemption demands, trading costs are borne not by the departing unitholders but by the unsuspecting souls who remain in the fund.
38. "The supply of stars [to run funds] has all but dried up" Gordon Powers Oct 30, 1999 Report on Business
39. "Desperate to do well in quarterly and monthly rankings, [mutual fund] managers take risks."
Kelly Rodgers, CFA, MoneySense Nov. 99 p.23
40. "Mutual fund managers have no apparent superiority in skill or performance over other institutional money managers." Kelly Rodgers, CFA, MoneySense Nov. 99 p.23
41. Toward year end, many fund managers window dress: they buy winning stocks at too high a price so their portfolios will look good in the annual printed report and sell losing stocks at low prices for the same reason. Do you really want these managers working for you?
42. Most funds are condemned to ho-hum performance because they are constrained by industry representation guidelines. "Some portfolio managers whose portfolios are underweighted in a hot sector chase high prices, just to secure sufficient representation. As I see it, these money managers bought stock they should have been selling." John Neff on Investing p102
43. Most fund managers receive greater inflows of money in a rising market and are pressured to buy stocks rather quickly...at high prices...lest they underperform their competition and lose their jobs..
44. Some funds have had their prospectuses altered so they can use the futures market to create synthetic cash. Barron's Jan 24th 2000
45. Regulators block funds from having more than a certain percent of the fund in any one company. Report on Business Feb 7, 2000
46."risk control has come to mean not controlling the client's principal risk, but controlling the managers' career risk." John Bogle - Risk in an Era of Confidence - April 2000
47. I'm concerned about "style drift". For instance, growth managers not being able to buy value stocks.
48. Most funds are no longer balanced: many don't hold bonds, for instance. (who cares, I do not want my equity fund to hold bonds, I can do that, just buy equities. up to the investor to have balance in the portfolio.)
49. "In the last year alone, all-industry costs absorbed an estimated $120 billion of the returns earned by mutual fund shareholders-an astonishing figure." John Bogle, April 6, 2000
50. "With its 90% portfolio turnover, the fund industry has chosen short [term speculation]." rather than long term investing. John Bogle - Risk in an Era of Confidence - April 6, 2000
51. "studies of mutual fund performance have found that although there is some tendency for mutual funds that have done well to continue to do so, the tendency is weak and short-lived."
Robert J. Shiller, Irrational Exuberance p.198
52. "You might wonder if those lofty management fees suggest a better-managed fund that will ultimately earn you more. It really seems to be unrelated." Fortune May 15, 2000 Fund Fees p.462
53. Like John Bogle, I'm skeptical: I just don't believe "any [bond] fund manager could consistently forecast interest rates with accuracy, and thus significantly outpace the famously efficient bond market over the long run." bogle_site/ march092000 (I do not care for bond funds many have to high of an MER, if you want bonds buy them yourself)
54. Funds have failed to share the economies of scale with the investors they are responsible for serving. (the MERs should go down on bigger funds, ussually does not work that way, though)
55. "mutual funds, ever searching for the market's sweet spots, turnover their portfolios at an astonishing rate of 90% per year-clearly short-term speculation, not long-term investing. The cost of executing these transactions came to an estimated 0.7% per year. (Funds don't disclose this hidden cost.)" John Bogle Jan 5, 2000 vanguard.com/bogle_site/
56. "...very few equity funds have provided their shareholders with anything like the generous returns offered by the market." John Bogle Jan 5, 2000 vanguard.com/bogle_site
57. I like to invest for the long term. "This year, for the first time in memory, more funds are being liquidated or merged out of existence than created. That trend is likely to accelerate."
The Economist May 20, 2000 p.95
58. Return figures are only independently audited once a year.
59. Few funds have incentives for exceptional performance by managers nor penalties governing dismal returns.
60. I don't want to get caught by this bear market: "...we'll see absolute slaughter in that dinosaur industry, mutual funds." Richard Russell Barron's June 12, 2000 (I disaggree with the whole statement, I have yet to see a massive panic in fund redemptions, most investors actually think about buying more when the market falls and they also hate to take a loss.)
61. "High closing" may be a common industry practice to gee up returns. "Many [funds] routinely post strong gains on the final day of the year" Report on Business July 5, 2000
62. Fund performance is susceptible to the movement of hot money - investment dollars that move from place to place seeking short term gains.
63. "The most compelling reason not to buy a fund is when its investment policies and objective are incompatible with or not suited to your own." Investment Guide, August 31, 2000 (yes)
64. Some managers have too much leeway in controlling fund assets. They can suddenly change gears and you might not know about it.
(that is an idea of a fund, you give money to a fund manager to manage it, there are ussual rough guidelines, ie:smallcap, large cap. etc.)
65. When you invest in mutual funds, you surrender control. By control, we mean the ability to plan with certainty when you'll get your money back" Peter Brewster, Investor's Digest March 17, 2000 (track the fund if it underperforms then sell it.)
66. Some funds have misleading names - names which suggest they hold certain types of investments when, in fact, a large percent of assets are in other types of securities.
(true in some cases)
67. "...spin and hype mask the true performance of a mutual fund" Arthur Levitt, chairman, SEC
68. "the mutual fund industry is an expensive home for the long term investor" Bogle's example: the final value of $1,000 invested in S&P in 1950 should be $514,00 but is only $193,000 after fees. John Bogle, Toronto, December 2000
69. "Advertising expenses (usually pumping high-and unsustainable-returns) are paid by fund shareholders. John Bogle, Toronto December 4, 2000
70 "there's simply no evidence that funds have been successful at market timing" John Bogle (agree)
71."Style drift" leaves many funds larded with stocks I'd rather not own.
72.The fund I own could be shut down and the liquidation could cost a bundle. In 1998, 222 funds went out of business in the States.
73.The mutual fund industry argues that, " by pooling money, funds offer investors an efficient way to venture into the markets." However, many* "funds have committed the cardinal sin of padding their profits by raising their fees at a time when their asset base is growing." Barron's Feb 26, 2001 *According to Morningstar, 260 funds in the past three years.
some good reading,
thanks
selkirk
Why I refuse to be sold mutual funds:
1. I choose not to deal with an outfit which deducts an annual fee but does not have the gumption to show subtraction of the fee on statements. Seven out of ten people who own funds do not even realize they are paying hundreds of dollars a year in recurring annual MER fees. (more people are learing what MER fees are and why high MER funds ussually underperform the market.)
2. With so many funds, it's easier to pick a good stock than a mutual fund. (disagree there are many sites in which you can look at past performance and management style and top holdings).
3. Managers of funds do not really care about taxes because the burden to pay falls on unitholders, not upon them. Mutual fund managers buy and sell. In contrast, holding good stocks with increasing dividends defers income taxes on the gains. (agree, most managers do not care or consider the taxes the unitholders will pay)
4. If you do find a fund that has beaten the averages for a few years, this does not guarantee that the fund will outperform again. (that is true but I will take a well run fund that beats the averages over the years over a dog fund that always produces bad results)
5. By their very nature, funds can't profit from stock selectivity: they overdiversify often by owning hundreds of different companies. (true many funds grow to such a size that they become closet index funds, except for a higher MER)
6. The short-term focus of money managers and pressure from unit holders for immediate performance are obstacles to long term growth. (yes but when I invest I would like my stock to do good in the next 1-2 years, some managers try to get the best pop every quarter, can get killed this way)
7. "Most mutual fund managers are so young they have no historical reference on which to base their asset allocation decisions." Geraldine Weiss, I Q Trends First-September, 1997
8. Most funds lack the cash reserves to pay off the massive redemptions which will follow a market panic. ( I find most mutual fund investors do not panic during a downturn, I find that the professional pundits panic before the "average investor" in most cases)
9. When the shakeout comes and fund owners clamour for redemption, mutual fund shares will go down faster and farther than stocks which are supported by their dividends. (most stocks have low yields and will not be supported by their divs, also the shares would go down, the managers have to sell shares for the redemptions, everyone gets killed. most equity funds hold less than 10% in cash, so they would have to sell stocks to fund massive distributions)
10. I have no control over when capital gains are realized. (true)
11. Most mutual funds have a high turnover rate: this means higher taxes for investors.
(agree)
12. Funds results are sometimes overstated because market lagging mutual funds are shut down. (Forbes, Feb 23, 1998)
13. Mutual funds can result in you paying income taxes on other peoples' capital gains. (agree)
14. Eventually the performance of all funds will regress to the mean. (have to look into this statement)
15. The mutual fund ratings are mostly backward-looking.
16. Fund marketing is often misleading. Sometimes, for instance, they imply that no-load means no fees. ( if you ask a company No-Load about fees they will tell you about MERs and how much they are when asked. this is up to the investor)
17. A mutual fund could be liquidated, without notice, when the unit value is low.
18. Money in funds is not covered by Canada Deposit Insurance Corporation. (yes, but you are also not covered when you own, trade shares, options, futures. Most Money market, Tbill account funds have double AA or triple AAA holdings so though the fund is not guaranteed everything it holds is, same thing really.)
19. Fund managers can change without notice.
(true, but you should follow your fund closely enough to know who is actually running it, and watch more closely the performance when there is a change)
20. I do not wish to make a financial planner rich. ( if the financial planner is good and makes you money (better than the market average then who cares) the dumb financial planners making money off of your underperforming assets, that is painful)
21. Loads reduce the return on funds. (true, do not pay them, just buy a fund without a load, also many brokers will sell you load funds with no load.
22.Mutual funds are not noted for generating income.
23.The long term effect of mutual fund fees is devastating. According to William M. Merser Ltd. $1,000 invested in a fund earning 8% annually over 25 years would give you$6,850 before the annual fee. With a MER of 2% a year, you end up with only $4,290. You lose $2,560 or 37% of your end capital. They abscond with one third of your money...2% a year adds up.
(Globe and Mail - Report on Business - May 8, 1999)
24. Mutual fund transaction costs are a dead weight that inevitably will lead funds to trail the market. Actively managed funds can turn over 150% of their portfolio each year. (Barron's May 10, 1999)
25. "The art of persuasion has crowded out the art of performance." Common Sense on Mutual Funds by John Bogle, founder of the Vanguard Group, (Wiley, $38.95)
26. It's more profitable to own shares of fund managers like Mackenzie, Trimark or Investors Syndicate than to hold the funds they manage, (agree, a well run mutual fund company will ussually beat out what you could have made by investing in their funds, note: I own some mutual fund companies for this reason)
27. Control of funds is effectively in the hands of the management company because fund investor are so numerous and spread out. There is a profound conflict of interest between fund managers and investors. (disagree; if the fund does bad investors will pull their money out and the fund will get less money in MERs and the fund company and managers will get less $$$$$. the better they do the more the fund grows and the more money is generated $$$$.
28. Mutual funds are just an entry-level, mass-marketed way to invest. (true, so you have to start somewhere, a good base to begin investing)
29. Unit holders have to pay the management fees even if the managers underperform.
30. Deferred sales charge (DSC) penalties effectively mean you have made a six year commitment. (again do not buy load funds with a load, bad idea)
31. "Many fund companies are reluctant-or flatly refuse-to publish the names of their investment personnel." Financial Post June 19, 1999 pE1
32. "...many fund managers would be more accurately described as traders rather than investors." Financial Post Aug28, 1999 p.C4
33. Fund managers almost invariably buy at market tops. They never have money to buy when stock prices are really down. Timing the Stock Market by Colin Alexander (McGraw Hill, 1999)
34. I can't get a tax receipt for the fees charged against my account.
35. Fund managers come and go with alarming frequency and the funds try to hide this fact.
36. I'd much rather select my own dividend-paying stocks then get a grab-bag with risker stocks I might not want to own. Some funds, for instance, held Bre-X. (most Canadian Equity funds had Bre-X, however many funds made money on it, that stock fooled a lot of fund families. just scary,)
37. When a fund is forced to sell stock to meet redemption demands, trading costs are borne not by the departing unitholders but by the unsuspecting souls who remain in the fund.
38. "The supply of stars [to run funds] has all but dried up" Gordon Powers Oct 30, 1999 Report on Business
39. "Desperate to do well in quarterly and monthly rankings, [mutual fund] managers take risks."
Kelly Rodgers, CFA, MoneySense Nov. 99 p.23
40. "Mutual fund managers have no apparent superiority in skill or performance over other institutional money managers." Kelly Rodgers, CFA, MoneySense Nov. 99 p.23
41. Toward year end, many fund managers window dress: they buy winning stocks at too high a price so their portfolios will look good in the annual printed report and sell losing stocks at low prices for the same reason. Do you really want these managers working for you?
42. Most funds are condemned to ho-hum performance because they are constrained by industry representation guidelines. "Some portfolio managers whose portfolios are underweighted in a hot sector chase high prices, just to secure sufficient representation. As I see it, these money managers bought stock they should have been selling." John Neff on Investing p102
43. Most fund managers receive greater inflows of money in a rising market and are pressured to buy stocks rather quickly...at high prices...lest they underperform their competition and lose their jobs..
44. Some funds have had their prospectuses altered so they can use the futures market to create synthetic cash. Barron's Jan 24th 2000
45. Regulators block funds from having more than a certain percent of the fund in any one company. Report on Business Feb 7, 2000
46."risk control has come to mean not controlling the client's principal risk, but controlling the managers' career risk." John Bogle - Risk in an Era of Confidence - April 2000
47. I'm concerned about "style drift". For instance, growth managers not being able to buy value stocks.
48. Most funds are no longer balanced: many don't hold bonds, for instance. (who cares, I do not want my equity fund to hold bonds, I can do that, just buy equities. up to the investor to have balance in the portfolio.)
49. "In the last year alone, all-industry costs absorbed an estimated $120 billion of the returns earned by mutual fund shareholders-an astonishing figure." John Bogle, April 6, 2000
50. "With its 90% portfolio turnover, the fund industry has chosen short [term speculation]." rather than long term investing. John Bogle - Risk in an Era of Confidence - April 6, 2000
51. "studies of mutual fund performance have found that although there is some tendency for mutual funds that have done well to continue to do so, the tendency is weak and short-lived."
Robert J. Shiller, Irrational Exuberance p.198
52. "You might wonder if those lofty management fees suggest a better-managed fund that will ultimately earn you more. It really seems to be unrelated." Fortune May 15, 2000 Fund Fees p.462
53. Like John Bogle, I'm skeptical: I just don't believe "any [bond] fund manager could consistently forecast interest rates with accuracy, and thus significantly outpace the famously efficient bond market over the long run." bogle_site/ march092000 (I do not care for bond funds many have to high of an MER, if you want bonds buy them yourself)
54. Funds have failed to share the economies of scale with the investors they are responsible for serving. (the MERs should go down on bigger funds, ussually does not work that way, though)
55. "mutual funds, ever searching for the market's sweet spots, turnover their portfolios at an astonishing rate of 90% per year-clearly short-term speculation, not long-term investing. The cost of executing these transactions came to an estimated 0.7% per year. (Funds don't disclose this hidden cost.)" John Bogle Jan 5, 2000 vanguard.com/bogle_site/
56. "...very few equity funds have provided their shareholders with anything like the generous returns offered by the market." John Bogle Jan 5, 2000 vanguard.com/bogle_site
57. I like to invest for the long term. "This year, for the first time in memory, more funds are being liquidated or merged out of existence than created. That trend is likely to accelerate."
The Economist May 20, 2000 p.95
58. Return figures are only independently audited once a year.
59. Few funds have incentives for exceptional performance by managers nor penalties governing dismal returns.
60. I don't want to get caught by this bear market: "...we'll see absolute slaughter in that dinosaur industry, mutual funds." Richard Russell Barron's June 12, 2000 (I disaggree with the whole statement, I have yet to see a massive panic in fund redemptions, most investors actually think about buying more when the market falls and they also hate to take a loss.)
61. "High closing" may be a common industry practice to gee up returns. "Many [funds] routinely post strong gains on the final day of the year" Report on Business July 5, 2000
62. Fund performance is susceptible to the movement of hot money - investment dollars that move from place to place seeking short term gains.
63. "The most compelling reason not to buy a fund is when its investment policies and objective are incompatible with or not suited to your own." Investment Guide, August 31, 2000 (yes)
64. Some managers have too much leeway in controlling fund assets. They can suddenly change gears and you might not know about it.
(that is an idea of a fund, you give money to a fund manager to manage it, there are ussual rough guidelines, ie:smallcap, large cap. etc.)
65. When you invest in mutual funds, you surrender control. By control, we mean the ability to plan with certainty when you'll get your money back" Peter Brewster, Investor's Digest March 17, 2000 (track the fund if it underperforms then sell it.)
66. Some funds have misleading names - names which suggest they hold certain types of investments when, in fact, a large percent of assets are in other types of securities.
(true in some cases)
67. "...spin and hype mask the true performance of a mutual fund" Arthur Levitt, chairman, SEC
68. "the mutual fund industry is an expensive home for the long term investor" Bogle's example: the final value of $1,000 invested in S&P in 1950 should be $514,00 but is only $193,000 after fees. John Bogle, Toronto, December 2000
69. "Advertising expenses (usually pumping high-and unsustainable-returns) are paid by fund shareholders. John Bogle, Toronto December 4, 2000
70 "there's simply no evidence that funds have been successful at market timing" John Bogle (agree)
71."Style drift" leaves many funds larded with stocks I'd rather not own.
72.The fund I own could be shut down and the liquidation could cost a bundle. In 1998, 222 funds went out of business in the States.
73.The mutual fund industry argues that, " by pooling money, funds offer investors an efficient way to venture into the markets." However, many* "funds have committed the cardinal sin of padding their profits by raising their fees at a time when their asset base is growing." Barron's Feb 26, 2001 *According to Morningstar, 260 funds in the past three years.
