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Click Here: Learn About The Advantages Of A Customized Stock Portfolio!
What You Should Know!
One of the big advantages of mutual funds is that they allow the small investor to have professional management and diversification for a small fee. The problem that we face nowadays is that the fund industry has grown and proliferated by merchandising to all and sundry. Most people who have sufficient capital, would be much better off with a professionally managed personal account. When an individual has a thousand dollars or less, it is difficult to think of a better place to invest his or her money, than in a mutual fund.
However, when a person has several thousand dollars and considers a mutual fund, these are the disadvantages:
• Management fees on average, are more than 1 1/2%. This compares to most managed account fees of 1% or 2%. Accounts do not have to be too large to come under the 1% figure.
• Many mutual funds charge a 12b-1 fee in addition to the regular management fee. In some cases, it can be as much as 1%. This fee is used by fund management to advertise for new clients.
• Because of the size of most mutual funds, the small investor has very limited participation in his companies. The $25,000 investor in a mutual fund holding 200 companies would have only $125 invested in each company.
• Because of size, small investors are at a severe disadvantage. At any moment, most professional investment managers could name 10 or 12 stocks that they deem to be outstanding. Even the small investor would have enough cash to spread around the 10 or 12 best and let the other 190 go by.
• Many funds have an entry fee. This is in addition to the regular management fee and is like paying to go to an amusement park where all the rides cost money.
• Many funds have an exit fee. This is an extra levy on one's profits, as it is computed on the amount of money taken out.
• Some funds have a penalty if an investor does not hold the fund for a specified period of time.
• In the past, most fund management companies had one person in charge of managing each fund. With so many funds in existence today, it is difficult to find the kind of talent this job calls for. Some management companies are doubling up and have one manager for two funds. Naturally, such a large task is difficult.
• There are more mutual funds today than there are securities on the New York Stock Exchange. This makes selection more difficult.
• Sometimes a mutual fund is so large, that it might be priced out of some purchases. Management can only watch so many securities and this means that a large fund may not be able to invest in a company, simply because that company has a small capitalization. A small company has more growth potential.
• The fund manager is managing for thousands of people and these people might have differing thoughts on areas of investment. The personal money manager is handling each account for one individual and the investments are scaled to comply with this client's wishes.
• In reality, a mutual fund investor is purchasing proportionately, every stock in the fund's portfolio. The investor may buy a fund today, only to find that management has sold one or more of the stocks at a profit. Although the manager may have done a good job, this does not work to the new investor's advantage. He may have purchased the fund when US Surgical was selling at 140, only to find that it was sold when the stock started downhill and got out at 120. This investor has actually taken a loss, but the firm may have bought it years ago at 20, showing a 100 point profit. The new investor must pay taxes on a profit even though he has taken a loss.
• In difficult periods, a fund may not wish to redeem the investor's shares in cash. In the prospectus, one will find that the investor may be paid off in kind. This would mean that the fund could trade fund shares for some of the stocks it was holding. In the crash of 1929, this did happen.
• Some pundits are fearful of a meltdown due to large scale buying of mutual funds. Although I do not see this to be likely, it is possible. It may not be possible to contact your fund by telephone. To a lesser degree, this would also hold true in the stock market.
• In December of 1996, a survey found that the average age of today's mutual fund managers is 28. Their average tenure in the investment field is three and a half years. Only one in seven had ever seen a bear market and during the crash of 1987, more than 80% of them had not yet graduated from high school.
• Forbes Magazine printed an article that pointed out that 24% of the net asset value of the Vanguard S&P 500 Index Fund was comprised of unrealized gains. In their article, it was calculated that the investor buying into the fund at $75 assumes capital gains tax liability of $18.75.
• Although it does not happen often, every now and then a fund manager will get profit happy and take chances with other people's money not protected by the "Prudent Man" rule. Two of the Mapes funds went bankrupt a few years ago in this manner. Today a large number of managers are placing their reserves into S&P futures contracts instead of Treasury bills. The danger is huge. One famous fund manager owned up to having placed 30% of the fund's capital in this manner. Because of the terrific leverage in these instruments, a mutual fund with 30% of it's capital thus invested, could conceivably be wiped out in a single day. This is fact.
In reviewing the portfolios of our clients, we find that approximately 50% of their holdings were concentrated in 20 stocks. These are the companies that we consider to have the best outlook over the coming period. Compare that with the situation of a mutual fund holder. His money is spread over one or two hundred stocks. I would not expect the last twenty stocks in the fund to perform as well as the first twenty.
With an individualized management account, the management fee is deducted and the amount made plain to the investor. In this manner, he may apply this cost against his income tax. In mutual funds, this is not done. The fee is deducted, but the investor never knows the dollar amount.
DISCLAIMER:
Information has been obtained from sources deemed to be reliable, Pearson Capital, Inc. makes no guarantee as to the accuracy or completeness of this data. Information is provided for informational purposes only, and Pearson Capital, Inc. shall not be liable for any errors or omissions, or for any actions taken in reliance thereon.
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