One of my favorite books on investing is The Prudent Investor’s
Guide to Beating Wall Street at It’s Own Game. Our firm has
distributed many copies and perhaps you have received one as well.
What exactly is Wall Street’s "game"? There are many, but one
I find particularly interesting is the marketing of mutual funds.
Jonathan Clements described this process in a Wall Street Journal
article published earlier this year. He mentioned a scenario I call the
"incubator fund" strategy. A fund company opens up several new incubator
funds, each with a risky, off-the-wall strategy. For example, they may
rely heavily on market timing or bet heavily on options. After this
process runs its course, odds are one or two funds have hit a hot streak
and show impressive one-year returns. These survivors can now be
marketed and promoted for their high performance. The money then starts
flowing in, and after large amounts have been gathered, the high-risk
issues are dropped, creating a closet index fund that maintains
reasonable performance. Sound a bit fishy? In addition, these incubator
funds present investors with higher internal fund expenses, due to high
advertising costs and frequent trading in an effort to find the supposed
winners.
This "game" ends up running roughshod over investors and is one more
reason to employ an Institutional Asset Class mutual fund strategy. This
methodology is a straightforward approach that seeks to harness the
returns of the market. There is no incubation period where excessive
risks are taken with the primary goal being to produce a short-term
winner to tout. Instead, a long-term view of the markets is held, more
appropriate in that mutual funds are designed to be long-term investment
vehicles. As no-load, buy and hold investments, the Asset Class Funds
naturally have lower expenses (since over-advertising is not necessary)
and lower turnover, thus enhancing the tax management capabilities. In
addition, these funds are not available to the public directly, which
helps reduce the panic-selling mode that could potentially rear its ugly
head in a precipitous market downturn. We believe this strategy provides
the most efficient method of creating pure market returns.
Contact our office if you have questions or would like more
information about Asset Class Funds.
