baer & gensler - the great mutual fund trap; an investment recovery plan (2002)

[...]... bought at the bottom, and cleaned up on the recovery The actual results for September 2001 refute that idea The average active manager did not profit As a group, actively managed stock funds lost more than the market, underperforming the S&P 500 Index by two percentage points (-1 1.0 percent for the funds and -9 .0 percent for the Wilshire 5000 Index, the broadest measure of the U.S equity market) The largest... costs, and sales loads All of these costs weigh heavily on actively managed funds The failure of almost all money managers to earn back their costs does not make them crooked or stupid The problem is that their direct and indirect costs severely handicap their performance Nonetheless, each year some money managers will outperform the average fund, and even the market as a whole The question is, can you... companies in greater proportion than they appear in the overall market, it is the index that most actively managed mutual funds consider their benchmark 16 Investors in Wonderland funds, prior to any direct or indirect costs, generally will equal the performance of the market as a whole With around $3 trillion in stock holdings, these funds basically represent the market But then along come management... already priced the company’s past performance and managerial talent into the price of the stock And of course investors have to pay Wall Street to execute the trade or manage their money That means that over time most investors underperform the market (The fund managers and brokers, like the bookies, make money whether you win or lose.) Introduction 5 Here’s a wonderfully self-serving explanation of how sports... of the U.S stock market) by 1.9 percentage points per year (8.8 percent for the funds, and 10.7 percent for the index).1 Money Management in a Nutshell 15 There were 623 actively managed stock funds with a ten-year record Their average annualized performance trailed the S&P 500 by 1.7 percentage points per year (11.2 percent for the funds and 12.9 percent for the index).* • These figures include the. .. invested in actively managed stock mutual funds—that is, funds whose managers pick stocks in an attempt to beat the stock market’s overall performance They have another $800 million invested in actively managed bond funds These mutual funds are held by investors directly or in brokerage accounts, 401(k)s, IRAs, or variable annuities Experience clearly shows that fund managers’ stock and bond picking abilities... even a wedding planner to advise us on how and where to get married We take for granted that for almost any decision, major or minor, we can obtain and benefit from expert advice 1 2 Introduction Therefore, as individuals decide how to invest, they naturally look to the experts Investors cede control of their investments to mutual fund managers, brokers, or financial planners They pick their own stocks... compare the performance of stock mutual funds to the stock market as a whole We will use two measures of the market The first is the Wilshire 5000 index, which includes over 6,500 stocks and covers 99 percent of the assets of the U.S stock market The second is the S&P 500, which consists of 500 stocks chosen to represent the broad market and represents 77 percent of the market’s total assets While the S&P... money manager beating the market are small Evidence suggests that the average actively managed mutual fund underperforms the market three years out of five According to data at Morningstar (which maintains a comprehensive database on fund performance): • Through the end of 2001, there were 1,226 actively managed stock funds with a five-year record Their average annualized performance trailed the S&P 500... column about the trauma of the 2000–01 bear market My friend Tom, who has all of his money in mutual funds, panicked when somebody on the Today show said: “Your mutual fund is only as good as the manager investing the money If your fund changes money managers, you need to check out the new manager.” Tom pointed out, “If I was smart enough to check out my money manager, I wouldn’t need a money manager.”2 . Cataloging-in-Publication Data Baer, Gregory Arthur, 1962– The great mutual fund trap : an investment recovery plan / Gregory Baer and Gary Gensler. p. cm. Includes bibliographical references and index. eISBN. Trap AN INVESTMENT RECOVERY PLAN the great mutual fund trap. Copyright © 2002 by Gregory Baer and Gary Gensler. All rights reserved. No part of this book may be reproduced or transmitted in any. to write The Great Mutual Fund Trap with the assistance of many other people. In particular, we have one institution, two companies, and a lot of people to thank. The institution is the U.S.