![]() While this benefits the existing holders, it is limiting the aggregate profitability of the fund's management company. In their stewardship function some funds become closed to new accounts and/or new money. ![]() Often timely redemptions can be more productive than good buying in terms of investment dollars earned.įrom the remaining fund holders’ point of view, any new money that comes into the fund during periods of market stress helps them through the reduction of forced sales at stressed prices to meet waves of redemptions. Perhaps the most valuable service from the distribution channel, including investment advisors is hand holding during periods of personal or market stress. To the extent that the fund buyer uses an investment advisor or a broker in that role, the cost of education is shifted from the fund to holder directly. Much of this effort has to do with the time spent on the process of changing thinking from saving to investing.Īs most households in the US hold at least four or more funds, putting together the fund portfolio takes time and effort. Many retail investors in funds need a lot of time which translates into distribution costs before they make a decision as to their investments. Further one should understand the continuing cost of marketing support being paid by the fund and whether that benefits the fund holders. While expenses are important both as a deduction from gross performance and as an example of the stewardship attitude of the fund's management to its shareholders, it is only a component to proper decision making.Įven a maximum expense ratio of 2% will rarely change a bad investment into a good one by total elimination of a low fee fund to become a good investment. This is exactly why those who are serious about investing in mutual funds and many other securities need constant advice as to selection, weighting, and sale of investments.Ĭompounding the utility of "ratings" is the extreme focus on expenses. ![]() I learned quickly that mere extrapolation of past trends led to unfortunate results in terms of future performance.Īt times highly ranked funds in various short-term periods repeated their high rankings in future periods. One of the reasons I so resisted the rating term was I was an investor in mutual funds for myself and a limited number of advisory clients. Rates are predictors, ranks are ordinal listers. Their function, which they do quite well, but not perfectly, is to predict the chances that interest and principal will be paid as promised. As long as I was the CEO of the publisher we resisted the use of the term "ratings." To this day I believe the term ratings is an attempt to predict the future as the various commercial credit ratings firm do. Ranking is an ordinal listing of past performance. The service as it evolved delivered rankings of their fund compared with what we felt was the list of competitive funds in various time periods. I convinced them that an independent source of fund data protected them in case they were sued by regulators and/or shareholders. They had a specific task to decide whether to renew the investment advisory contract for their funds. When I started to develop the market for our Lipper Mutual Fund Performance Analysis, first for my brother's firm and then my own, the critical target markets were the mutual funds' independent directors and their counsel. They do not know the critical difference between ratings and rankings. Media sound bites, sales people and regulators seem to think that fund investors have limits to their investment intelligence.
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