Friday, February 23, 2001
Top Funds 2001: Building Your Mutual Fund Portfolio for the 21st Century
This is a better than average guide to buying mutual funds by one-time phys. ed. coach Riley Moynes, financial analyst Nick Fallon and financial advisor Chris Moynes. Behind this book is a belief that investors can benefit from owning mutual funds. That belief leads to a section that justifies paying management fees that may average 2.5% of total assets in a fund, even when that fee is, say, half the return on cash held in treasury bills. The authors say that half of mutual funds beat their indices each year, which is variously true or untrue depending on the asset category. Over time, however, low fee index funds tend to outperform managed funds in their asset classes as time and competition push returns up or down to their class averages and what investor tends to be left with is a benchmark return, the index, less those management fees. Proponents of index investing ask why one should pay fees double or more what index funds cost for performance likely to be less than what index funds return. The authors say the reader has a fair chance of picking managed funds that beat their indices. Data say the odds are quite poor that the reader can find managed funds that persistently outperform their indices. This is not a quibble over statistics. It's quite vital to making money through those one hires to manage one's money.
The technical information is this book is valuable and should be known by investors. There are useful studies of fund returns. But there are gaps too, such as assertions that had one invested $10,000 in Templeton Growth Fund in 1954, one would have had $5.5 million by April 30, 2000. That's an average annual gain of 15%, the authors say. Take away an inflation adjustment of, say, 3% per year in the period and the average return drops to 12%. Take away several more per cent for distributions in the hands of taxable investors and the return is still less. Templeton Growth turns out to have returned less than some low turnover index funds that charged lower management fees.
This is a useful book of insights into how mutual funds are run and how they can benefit investors. The reader should be aware of the authors' assertion that managed mutual funds are a fundamentally sound investment. If the reader can be a little skeptical, then Top Funds 2001 can be a useful shelf reference and even a quite readable guide to buying funds.