Racing To Win

Some money management firms view investing the same way they would a horse race. You read and hear their advertisements and they brag that their mutual funds outperformed their indexed averages over one, three and ten years, as if it were something that would make their product more attractive to investors. Yet, those same ads contain the warning that past history is no guarantee of future results. Confused? Me, too.

Matching fund to index is not an apples to apples comparison even though some would have you believe. Results are slightly different when comparing the S&P 500 index against mutual funds that invest in the same stocks for that index. A few of the indices have performed so poorly over the past one, three and ten years that a grade school investment club could beat them so let's not get giddy about beating indices.

Then there is the 'star' rating. Ever since independent analytical investment firm Morningstar emerged with its star rating system for mutual funds, stocks and now exchange traded funds investors buy only those four and five star rated investments. Morningstar has consistently written that the star rating is not something that an investor should base their entire due diligence on. Management, risk, history, total return and expenses are the other basics that investors should concentrate on.

Still fund companies advertise that many of their mutual funds have achieved star quality, much like a well-earned Michelin award. The problem is that the star is fleeting like the Michelin, and can be downgraded or upgraded by Morningstar at any time. But, many investors believe it is a star etched in stone like a Hollywood Walk of Fame hand print.

Do your fund company managers eat their own cooking? Nothing is more disconcerting to sit down at your local family restaurant, look out the window and see your chef enjoying his lunch at a competitor across the street. The same is true with investments. It has been proven that money managers who have their own savings and retirement assets invested in the funds they manage have a better investment track record than those that don't.

So maybe the fund companies would be better off advertising that more of their money managers have more of their money invested in their funds than any other fund company. Now that would impress me.