Becoming Surprisingly Successful: Notes To The Mutual Fund Community (Part One)

Fund managers are seen, dear friends, as “the walking dead.”


CBS News declared you “a losing bet.” declared that you’re dead. Joseph Duran asked, curiously, “are you a dinosaur?” Schwab declared that “a great question!” Ric Edelman, a major financial advisor, both widely quoted and widely respected, declares, “The retail mutual fund industry is a dinosaur and won’t exist in 10 or 15 more years, as investors are realizing the incredible opportunity to lower their cost, lower their risks and improve their disclosure through low-cost passive products.” When asked what their parents do for a living, your kids desperately wish they could say “my dad writes apps and mom’s a paid assassin.” Instead they mumble “stuff.” In short, you are no longer welcome at the cool kids’ table.


Serious data underlies those declarations. Only one-third of new investment money flows to active funds, one third to ETFs and one third to index funds. Drop target-date funds out of the equation and the amount of net inflows to funds is reduced by a quarter. Many quarters see net outflows. The number of Google searches for the term “mutual funds” is down 80% over the past decade. Funds liquidate or merge at the rate of 400-500 per year. Of the funds that existed 15 years ago, 46% have been liquidated or merged. The most painful stroke might have been delivered by Morningstar, a firm whose fortunes were built on covering the mutual fund industry. Not long ago John Rekenthaler, vice president and resident curmudgeon, asked the question “do active funds have a future?” He answered his own question with “to cut to the chase: apparently not much.”


Despair would be understandable.


It’s also unwarranted.


You need to wrap your head around two simple truths:


  1. If you market yourself based on your ability to beat the market, you’re going to lose. You’re not going to consistently beat the market. Beating it inconsistently is almost as bad as not beating it at all; beating it at the price of high volatility is no better. More to the point, competing on raw returns means that you’re competing with ETFs on the one thing they’re best at. It’s a losing move. Almost everyone who plays it goes from “walking dead” to simply “dead.”

  2. You do not need to beat the market. For reasons dealing with the changing nature of the investor community and the actual behavior of actual investors (not the rational automaton idiotically assumed by the strong version of the efficient market hypothesis), there are strategies that simultaneously serve your investors well and serve you well which aren’t dependent on Morningstar ratings or market-topping numbers.


Our plan is to walk through the argument, piece by piece. In all likelihood, this essay will never be seen in its full form on the main MFO site – its audience is simply too limited to warrant sharing the details with all 26,000 of our readers. If it coalesces and you folks think it makes sense, we’ll share either a précis of it or, possibly, a downloadable version.


Here’s how the work might progress:


  • Part Two: The view from an outstanding small college that’s getting ground on as badly as you.
  • Part Three: The demographic transition that’s challenging us both.
  • Part Four: The mythical opportunities and manageable threats posed by high-tech competitors.
  • Part Five: What we can learn from the abundant research in the field of health communication, where another industry facing many of the same pressures is making much more progress than we are.
  • Part Six: Crystallizing the argument and understanding the challenge of addressing a fundamentally changed audience.
  • Parts Seven through Sixteen: Ten strategies, maybe tactics, which might make a measurable difference.


At each step along the way, you’ll have a chance to respond directly if you’d like. Those responses will certainly affect our thinking and might well affect the essay as it emerges.