Fisher Investments on Mutual Funds

Fisher Investments believes mutual funds generally don't make sense for larger investors for a variety of reasons, including overall performance and costs associated with most funds.

Why Mutual Funds Don't Make Sense for Larger Investors

Fisher Investments' research discovered that many high net worth individuals who invest in mutual funds own between 5 and 10 funds. The mutual fund industry has been growing rapidly for over a decade, and that growth has meant high turnover in fund professionals. Funds may be managed by people who've hopped from one firm to another or by inexperienced managers. According to Morningstar, many have been managing their respective funds for an average of only five years.

Over-diversification

We've found the average mutual fund owns about 120 stocks1—and with many investors holding multiple mutual funds in an effort to diversify, they could own thousands of individual securities! This is no longer diversification—it is over-diversification. 1Source: Morningstar 4/22/2014

High Fees

Fees charged are generally a percentage of assets managed. But the fees do not include the brokerage commissions charged when the fund buys or sells securities. Both fees and commissions reduce the overall return to the mutual fund investor. One fund manager may be buying a stock at the same time another is selling it, which means an investor would be paying double commission fees. Commissions can be amplified because many funds turn over their investments quickly.

If a fund charges an upfront sales load, the damage can be even worse. Many funds require a sales charge or "load" from new or departing investors. These fees can give an investor's funds quite a haircut before seeing any net positive return.

Tax Planning Inflexibility

Most mutual fund managers pay little or no attention to after-tax returns. An investor who loses control over investment timing may not be able to offset business losses against gains made in the market year if stocks were sold before year end. Other than selling out a portion of the fund, an investor can't do anything to get the gains needed.

→ Learn more about Fisher Investments and the Investments Policy Committee

 1Source: Morningstar 1/6/2012

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