|
Home / Finance / Stock Market Investing / Mutual Funds
Reasons to Fire Your Mutual Fund Company - Short Term Speculation
By:Mark Brandon
For most of the history of the Mutual Fund Industry average annual turnover hovered around 15 to 20 percent. This means that 15-20 percent of the funds portfolio changed each year. Put another way, the average holding period for a stock in a mutual fund portfolio was 8 years. Starting in the late 1970's and accelerating in the mid-1990's, average annual turnover is now 100 percent. Put another way, the average holding period is now less than one year. So, while preaching that a steady, long term approach was appropriate for their customers, the industry has itself moved from a stock-ownership mentality to stock-rental mentality.
I am going to save for another day the discussion about how this makes it more difficult to achieve results commensurate with the enormous fees levied. Be aware that this is aspect is the biggest problem with a short-term mentality. However, there are quantifiable reasons to avoid high turnover.
How High Turnover Hurts You
I keep returning to this point. High fees and expenses are the primary reason that mutual fund performance lags their benchmarks. Some are more transparent than others:
1) Trading Commissions. This is not disclosed in the fund's expense ratio, making it harder to compare the true costs among funds. You would think that a sizable mutual fund would be able to get competitive commissions, but in actuality, many of them pay far more than any individual can get, thanks to soft dollar arrangements.
2) Taxes. If a fund manager sells a position for more than was paid, the fund is obligated to pass that through to investors. If the holding period was less than one year, the gain goes into the "short term capital gains" basket. This is taxed as ordinary income. If the holding period was more than one year, the gain goes into the "long term capital gains" basket, which has a lower rate. So, if your fund has an abundance of short term capital gains, you are paying up to 250 percent more in taxes for short term gains than long term gains.
3) Spreads. Almost all stocks have a spread. When you see a price quoted with a bid (the price at which you can sell), and the ask (the price at which you can buy). The difference is the spread. On the most liquid stock, this amounts to pennies per share. On the lower-volume and international stocks, the spreads are wider. This can amount to a serious drag.
4) Slippage. This refers to the difference between the price that was received for a buy or sell order, and the price at the time the order was given. For funds with sizable positions, you can bet that heavy buying will raise the price, and heavy selling will lower the price. Even relatively small lots of 1,000 shares will move the market in the less liquid stocks, so imagine how this affects a multi-billion dollar fund.
None of these factors are figured into the expense ratio that was quoted in the prospectus or other marketing material.
How We Got Here
Many factors contributed to the rise of speculation among the stewards of your nest egg, some understandable, some nefarious.
1) The deregulation of commissions. The 1974 rule-change dropped the bottom out of the cost of executing a trade. This made short term trading more feasible, but it also created a need for Wall Street to substitute the lost revenue. They found it. In 1970, the average daily volume was 15 million shares. In 1990, it was 300 million. In 2000, it was 3 billion.
2) The rise of IT. Computer technology enables quants (the wall street term for a manager who makes trading decisions based on computer algorithm) to plug in a vast array of data points into their systems. The result is a whole lot more buy and sell signals.
3) Captive mutual funds trading through parent-company brokerage operations. This allows fund companies to pass some vigorish on to their corporate parent without disclosing it.
4) Soft dollar arrangements. Managers are showered with perks in order to direct more volume the way of brokerage houses.
What To Do
The body of academic studies makes one thing painfully clear. There is an inverse relationship between average annual turnover and fund performance. You would have to think that otherwise bright fund companies would know this, and adjust their fund management styles accordingly. Unfortunately, I think the evidence tell us that they do know about it, but that changing their style means less in their pocket.
Digg
del.icio.us
Blink
Stumble
Spurl
Reddit
Netscape
Furl
Article keywords: mutual fund, finance, investing, socially responsible, speculation
Article Source: http://www.articles2k.com
Mark Brandon is the managing partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. First Sustainable does not accept payment from sponsors of financial products.
|
|
| Top Mutual Funds Articles |
|
|
|
|
- 3). Mutual funds: protect yourself with segregated funds By : Tony Reed
Segregated funds were initially developed by the insurance industry to compete against mutual funds. Today, many mutual fund companies are in partnership with insurance companies to offer segregated funds to investors. Segregated funds offer some unique benefits not available to mutual fund investors.
Segregated funds offer the following major benefits that are not offered by the traditional mutual fund.
|
- 4). How to select a mutual fund By : Tony Reed
One of the most common ways of selecting a mutual fund is to invest with the crowd in today's hot funds. Unfortunately, jumping from one winning fund to another is a recipe for disaster. The mutual funds that the crowd follows typically have had a hot recent performance and tend to gather all the new mutual fund sales.
Investors as a whole are primarily allocating their new investments to a small number of mutual funds and to a smaller number of mutual fund companies.
|
- 5). Is It True That Regular Index Investing Performs Good Result With Low Risk? By : Alexander Korablev
There are many mutual funds and ETF on the market. But only a few performs results as good as s&p 500 or better. Well known that s&p 500 performs good results in long terms. But how can we convert these good results into money? We can buy index fund shares.
Index Funds seek investment results that correspond with the total return of the some market index (for example s&p 500).
|
- 6). What are mutual funds loads? By : Michael Saville
Copyright 2006 Michael Saville
Loads are the most talked about fees that mutual funds charge. A "load" on a mutual fund is just another way of saying that the fund charges a sales commission for purchase, sale, or both. There are funds that charge loads and there are funds that do not charge loads (known as "load funds" and "no load funds" respectively).
|
- 7). Operating Mutual Funds - how these profit exploding money makers actually work By : Duncan Roberts
Although investing in mutual funds isn't the type of subject associated with wild parties and celebrations - it is something the serious investor should consider as a way of increasing their total worth.
"But what EXACTLY is a mutual fund" I hear you ask - "how does it work, who does what and how much do they cost?"
Hang on, slow down - one question at a time please.
|
- 8). Retirement Income Planning: Mutual Funds By : Verticalag
When willing to invest in mutual funds for Supplemental Retirement Income Planning, you have millions of alternatives. It is always important to analyze the plan, its limitations and the risks you will be running, and thus, it would be easier for you to narrow your alternatives. For this matter, it could be helpful to get in contact with a Retirement Income Planning financial professional.
|
- 9). Mutual Funds Expenses By : Michael Saville
Copyright 2006 Michael Saville
Sometimes investors think of mutual funds as a straight choice between no-load funds or load funds, because that is what they read about in the financial or popular press. But, there are a host of mutual fund expenses that can be charged to a no-load mutual fund as well as a load mutual fund.
About 99% of mutual funds charged fees.
|
|
|
| New Mutual Funds Articles |
- 1). What are mutual funds loads? By : Michael Saville
Copyright 2006 Michael Saville
Loads are the most talked about fees that mutual funds charge. A "load" on a mutual fund is just another way of saying that the fund charges a sales commission for purchase, sale, or both. There are funds that charge loads and there are funds that do not charge loads (known as "load funds" and "no load funds" respectively).
|
- 2). Is An Index Mutual Fund The Best Choice For Long-Term Investing? By : Alexander Korablev
Do you believe that the world economy will grow? Do you believe that US economy will grow? I do. The major stock indexes are indicators of economy grow. You can make money use this opportunity buying index funds. Investing into index mutual funds is easy, interesting, and profitable. It takes 5 minutes every month! If you are long-term investor, index funds is for you!
It doesn’t matter what index you choose.
|
- 3). What are no-load mutual funds? By : Michael Saville
Copyright 2006 Michael Saville
No load mutual funds are mutual funds whose shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party. This is the opposite of a load fund, which charges a commission upon the initial purchase at the time of sale.
|
- 4). Mutual Fund Expenses By : Sachin A
An informed investor knows where his money is going. For an investor in mutual funds, it is essential to understand the expenses of mutual funds. These expenses directly influence the returns and cannot be neglected.
The expenses of mutual funds are met from the capital invested in them. The ratio of the expenses associated with the operation of the mutual fund to the total assets of the fund is known as the “expense ratio.
|
- 5). Why You Should Buy No-Load Funds! By : Sachin A
Load is defined as the fee or the commission that an investor pays to a mutual fund at the time of purchasing or redeeming the shares of the mutual fund.
If the commission is charged when the investor buys the shares, it is known as a front-end load. On the other hand if the commission is charged when the investors redeems his shares, it is known as a back-end load.
|
- 6). Secure Your Retirement with a Rollover IRA By : AlphaProfit
Switching your job? Retiring? Congratulations! A window of opportunity opens for you with the Rollover Individual Retirement Account or Rollover IRA.
In an era of corporate restructuring and outsourcing, Rollover IRA is among the most powerful means available for securing one’s retirement. Yet, its potential to enlarge one’s assets for the sunset years commonly remains under-appreciated.
|
- 7). Exchange Traded Funds: Why You Should Never Buy a Mutual Fund Again By : John M. McClure
Copyright 2006 Equitrend, Inc.
Many investors still don't know about Exchange Traded Funds (or ETFs) and their advantages over traditional mutual funds. In this article, we'll examine Exchange Traded Funds, their history, performance and advantages and why you should never buy a mutual fund again.
ETF 101
Exchange Traded Funds can most accurately be described as the happy marriage of a stock with a mutual fund.
|
- 8). Why you should avoid load Mutual Funds (part 2) By : Michael Saville
Copyright 2006 Michael Saville
Paying a load is akin to throwing away most or all of the supposed advantage you get from having a salesman choose a fund for you. If it's true that asset allocation accounts for 95 percent of investment results over long periods of time, then only 5 percent is left over as a reward for having the "right" fund and the "right" manager.
|
- 9). Operating Mutual Funds - how these profit exploding money makers actually work By : Duncan Roberts
Although investing in mutual funds isn't the type of subject associated with wild parties and celebrations - it is something the serious investor should consider as a way of increasing their total worth.
"But what EXACTLY is a mutual fund" I hear you ask - "how does it work, who does what and how much do they cost?"
Hang on, slow down - one question at a time please.
|
- 10). Investors Are Finding Opportunities Beyond Their U.S. Borders By : Stan Kingstone
Experts say global and international mutual funds can represent a world of opportunity for investors.
Foreign-based companies now comprise fully half of the world's equity market capitalization, up from about one-third in 1970, and many key industries such as oil and gas, wireless telecommunications and building construction are dominated by foreign companies.
|
|
|
