Last year I shot a video after reading an article confirming what we have known for years about the excessive buying and selling of stocks within mutual funds, aka “fund turnover.”
This activity adds huge cost to the portfolio and on the average detracts from the funds’ value in the process. The article – written in October last year – reported that the larger mutual fund companies (the ones who own the posts on Wall Street and who “make markets” by handling trades) were hiring more stock brokers as they approached the very turbulent end of 2008.
Why hire more employees at a time when the company is losing investments and losing money? Well, you hire the right people at the right time!
The article went on to confirm that these end of year hires were made because these high-value employees are able to make more money for the firm even when stocks prices decline (and they were declining!).
They do this by making a high volume of trades near the end of the year, each netting a little commission for the firm in the form of a Bid / Ask spread. The bid-ask spread is the difference in price to buy a stock and the price to sell one. This “cost” to you the investor has always existed. What has not always existed is the mutual funds’ propensity to siphon value from you, their valued client, by effecting an excessive number of unnecessary trades on your behalf (without your permission or knowledge).
Why bring this up? Well, the numbers are in for 2008.
In 1951 when investing was still investing and not speculating, the average turnover rate in a fund was around 25%. A little higher than it needed to be, but then “mutual funds” were only 19 years old, and they didn’t have the research we now have.
Starting in the mid 1970’s, this turnover rate began a slow (almost imperceptible) annual increase.
In 1998 the number reached 100% for the first time. That is the number of trades in a mutual fund during a year equalled the number of stocks owned in that fund.
Do I hear 200?
Just one decade later in 2008, having spent some time in the 120% range, the turnover rate in the average mutual fund surged to 215%, and even to as high as 284% if you add the high levels of speculation found in ETF’s (exchange traded funds).
When I tell my clients that they are paying too much in fees in their “actively managed” mutual funds, it has never been more true than it is today.
Active managers tend to under-perform the “market” on average. On top of that under performance, they reward themselves with what some estimate to be over 4% per year in annual fee income to the firm. It is no wonder why DALBAR still calculates that the average investor makes little over a 4% return per year (not including inflation) in their investments.
Every true story (even the sad ones) has a moral, so here’s mine:
Invest like an investor. Don’t gamble with the speculators. The returns are better and the cost is FAR less.
On the beach turning over is good – it keeps you from getting burned. But in today’s mutual fund “rotisery”, the high cost of turnover is burning your return and keeping inferior mutual funds in business and your return underperforming.