When you have been dealing with No Load Mutual funds as long as I have, there is bound to be a run-in with a fund manager regarding investment philosophy.
This happened a couple of times over the past 2 years with the end result that my advisory firm was banned from placing trades with that particular fund family — forever, I suppose. Not that I was all broken up over it, but the reasoning left a bad taste in my mouth.
Here’s about how the phone conversation with the fund company (FC) went:
FC: “We noticed that you bought one of our mutual funds and sold it again within 60 days.”
Me: “That’s correct.”
FC: “We don’t allow that. We want advisors to invest with us for the long term. Don’t you do asset allocation?”
Me: “Yes I do. I generally invest for the long term, but the markets pulled back sharply and, to protect my clients’ portfolios from further damage, I moved to cash.”
FC: “We don’t allow that, you’re not supposed to time the market.”
Me: “Let me ask you, what is this fund’s Annual Holdings Turnover?”
FC: “Let’s see, this fund has an annual turnover of 140%.”
Me: “So, that means you pick your stocks and, if they don’t perform, or economic circumstances change, you sell them and buy others. By the end of the year, you have a turnover of some 140%. Is that correct?”
FC: “Yes, that’s right.”
Me: “Then, why don’t you pick the appropriate stocks in the first place? I am sure, that type of frequent in-and-out trading increases costs for your shareholders?”
FC: “Ah…well…you know, that’s not how it works. Things may change, or a stock heads south, and we need to adjust to increase our performance.”
Me: “That makes sense. Then why am I not allowed to do the same thing? If the markets change, I should have the right to liquidate positions, just like you do, to protect my clients’ assets or increase performance. I noticed that, during the last bear market, this fund went down some 40%. If we head in this direction again, shouldn’t my clients’ interests be priority?”
FC: “Hmm, no…yes, but our policy doesn’t allow that. We need to ban you from further trading with our firm.”
Me: “That’s your loss and not mine. Go ahead — ban away.”
That’s the prevailing attitude among most fund families. Their interests rule and yours don’t really matter.
If this type of thinking continues, more and more investors will eventually realize this and move their accounts. Guess where the assets will go?
Into ETFs, of course!
Contact Ulli
Comments 5
And if they don’t ban you, they charge an early redemption fee.
The only kind of mutual fund I would buy would be a bond fund and even those can be bad. I once had an EF Hutton bond fund with a very high yield. Yields began to drop, which normally makes bond prices rise. But this fund NAV dropped and the yield also dropped. I asked the broker to explain and he gave me some double talk.
An early redemption fee is a given anyway. The custodian of your assets will make sure that it gets paid.
I am sure many other investors must have had similar experiences.
Most all fund cos. have now imposed rear end loads or short term trading fees for any funds with overseas holdings. The “trading overseas follow through” game is over.
Within the fund industry, the trend is clearly toward more restrictive minimum holding periods. But ETFs are not the only solution.
Rydex and Profunds offer many no-load index based funds which are great trading or asset allocation type vehicles, and can be traded each and every day without restriction.
I look at the ability to trade in and out of these funds as a HUGE edge, and wanted to find an approach which focused on very next day only. There was only one I was able to identify:
http://www.stockmarket.com
Most all other timing services or approaches advocate some version of trend following or asset allocation. In my opinion, if one has the proper tools to focus on the very short term (i.e. next day only) the funds avaialable for short term trading (Rydex and Profunds) make alot of sense.
Absolutely! Rydex and Profunds are great fund families. If you are a trader, as oppsed to an investor, this is the way to go in addition to using ETFs.
For my long-term trend tracking approach, I use Rydex and Profunds as well, if the momentum figures of their funds meet my criteria.
It is sad, but this pervasive and arrogant attitude permeates the company 401K Mutual Fund Offerings.
Those participating in many 401K company plans HAVE very little choice. Either they stay in Cash or if they move in and out of the fund choices available to them, they limit your movement to 90 days regardless of market conditions.
Hal