Bigger No Longer Better?

Wednesday, February 13th, 2008
By Inya Ivkovic, MA for Profit Confidential

The month of February used to be a time to feast for asset management firms. It was a time when most Canadians alleviated their tax burdens from the previous year, or the last leg of the RRSP season. It was also the time when mutual fund companies, both large and small (but mostly large), experienced a surge in buy orders. But that is no more.

In fact, it turns out that large mutual fund companies are hurting the most from not only the lack of buy orders, but also from a surge in redemption orders. For example, AIM Trimark took a redemption hit of eight-hundred and eighteen million dollars in non-money market funds. CI Funds hemorrhaged more than half a billion dollars, while Mackenzie Financial, Fidelity and Franklin Templeton lost somewhere in the vicinity of three hundred million dollars each.

True, these redemptions are positively correlated to the current market conditions. But that is hardly all. Upon closer inspection, it appears that even as the global markets trended up last year, mutual fund companies’ assets under management kept on shrinking. There are examples of companies that used to be worth billions of dollars that are now worth less than half a billion, such as AIC Mutual Funds. The market cannot be the sole culprit, now can it?

What is going on? Industry analysts are looking at these developments from a different point of view — that of an ordinary investor. Somehow, along the way, mutual fund companies have shifted their main focus from investors to gathering more and more assets under management. One of the ways to haul in more money was, and still is, to focus on financial advisers selling their products. In the process, the interests of those who ultimately bought units of mutual funds ended up on the way-at-the-back burner. And now, mutual fund companies are paying the price for that philosophy.

What evidence supports this thesis? According to globefund.com, the mutual fund industry has grown too big for its own good. There are now approximately 2,200 mutual funds worldwide that manage on average at the very least twenty-five million dollars in assets. At first glance, both numbers may not appear too big. However, the fact that there are so many funds to choose from may be a consequence of faulty reasoning.

It seems that regardless of how “niche” a segment or how short- term a profit potential might be, a mutual fund marketing machine is likely to jump on any bandwagon that might add a billion or so in new assets under management. Is there really a need for hundreds of “different” precious metals funds? Is there a need for just as many emerging markets funds? Worst yet, most of these funds have been designed, marketed and sold well after all the hoopla was over, resulting in disappointing performances often below a chosen benchmark.

Why and how could things have progressed so irrationally, as it seems? Simply, most mutual fund companies have marketing people and salespeople at their helms. Salespeople are driven and will do anything and everything to sell their product, whether it is an acne cream or a mutual fund.

What the mutual fund industry really needs at this point, and what investors obviously want, are good old money managers. As evidenced by high redemption rates, investors are tired of CEOs that have managed consumer product companies, or accountants, or former bank executives. The market has played its role in this somewhat sad story, but that is what markets do. Now it may be time to think of another key variable when it comes to mutual funds’ performances — a different kind of leadership!

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Tags: mutual funds, precious metals