Wealth Destroyers

MarketWatch had this to say in “Wealth creators vs. wealth destroyers:”

To learn that your mutual-fund firm’s lineup posted negative returns over a decade is one thing; to realize that almost $60 billion of investors’ wealth was wiped out is another matter entirely.

That’s what happened at Janus Capital Group Inc. from 2000 through 2009. The fund giant’s offerings collectively saw 10-year asset weighted total return of minus 1% a year, which translates into $58.4 billion of investment losses.

Janus was the worst “wealth destroyer” in a study released this week from investment researcher Morningstar Inc. Results were not much better at Putnam Investments, which shredded $46.4 billion of shareholder wealth in the period, while mutual funds at AllianceBernstein Holdings and Invesco Aim, a unit of Invesco Ltd. lost shareholders $11.4 billion and $10.1 billion, respectively.

The figures show that fund investors risk not only picking the wrong type of investment, but also choosing the wrong firm for the job. All five of these fund families were heavily invested in technology and growth stocks — the decade’s biggest wealth-destroying fund categories. Large-cap growth funds lost $107.6 billion for investors while tech funds erased $62.8 billion of their money in the period.

“Results were really influenced by what happened at the start of the decade, when investors rushed to tech and growth and then they crashed,” said Sonya Morris, editorial director at Morningstar.

I continue to be amazed that, even with the benefit of hindsight, the blame is being put on mutual fund companies and not where it really belongs. While I am not a friend of some of the companies mentioned in this article, fund firms are simply following the rules their charter, which dictates that they are to be invested in their area of expertise (large growth, mid-cap, etc.) at all times, so that the public has the opportunity to buy and sell their funds.

In other words, all offered equity funds will always be long in the market, no matter what. While this works well during bullish periods, it will turn into disaster whenever a bear market strikes, especially if it happens twice in a decade. Sure, depending on their stated objectives, some equity funds lost less than others, but they still lost.

Given this known set up, mutual funds are not the wealth destroyer as they were made out to be in this story. The real culprit and destroyer of wealth was the investment approach, if you can call it that, of mindless buying and holding.

All of the above mentioned funds did well in the past decade during times of bullishness. It’s a matter of fact, I owned many of them but only as long as they were trending upwards.

The bottom line is that it’s not always the investment that should be blamed for poor performance; it’s what you do with it that matters.

The lesson learned from the past decade should be that the blame lies with the investment approach and not necessarily with the investment as I pointed out in “Saving A “Good” Mutual Fund From A Bad Ride.”

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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