Buyer beware of mutual fund mania
The Advocate, Wednesday May 4, 1994
I was reviewing some funds on my mutual fund source disk the other day and came up with some very interesting facts. I currently list 833 funds up to December 31, 1993. When I started in the business in 1983 I was sure there was no more than 200.
I decided to find out how many were around 10 years ago. There were only 208.
So I guess I remembered correctly. Eleven and a half years ago when I started there were probably less than 200.
But, just think about it a minute. That means there are now four times as many mutual funds available today than just ten years ago.
I then wanted to find out how many were around five years ago. There were 472.
They doubled. Three years ago, 576. Two years, 630. One year 722. In 1993 alone there were over 100 new mutual funds added.
I started to wonder, who are buying all these new funds? What about the people who run them? What kind of track record do these fund managers have? I can't help but recall what it was like in 1973 and 1974 when the mutual fund business got a very bad name.
I was working for London Life at the time and remember the fallout. There was an explosion of new mutual funds run by fund managers with little or no track record.
What kind of track record do fund managers have?
A lot of people were lured into them because of the previous year or two performance numbers. When the severe recession hit in 1974 these people were scared out and lost a lot of money.
Am I seeing a similar situation today?
In the past six months of 1993, 68 new mutual funds were added. Who are advising people to invest in them? Are they doing their homework or are the numbers luring them in?
So far this year I know people are starting to worry because of the decline. If the mass exodus takes place are those who came in late and bought high going to be scared out?
I fear a lot of very inexperienced people who I like to call GIC refugees are going to be among those who will end up losing.
They probably never sat down with someone who knew how to explain the risks about investments they have.
I have an article written by Diane Francis, the editor of the Financial Post, March 19, 1994 where she says, "... what I consider a looming problem based on the fact that in the minds of many unsophisticated investors who've switched from bank deposits to bank mutual funds feel CDIC protects the funds too.
Such misunderstanding - combined with a calamitous drop in values - could open the banks to lawsuits over losses by the unsophisticated."
As I wrote in my article on March 2, 1994, Long-Term Investing, "Many go-go funds are sold on short term numbers. Buyer beware!"
I hate to lose money and I hate to see people lose.
It doesn't have to be that way if they really understood the risks and sat down to talk to someone who also understood.
I have an excellent article, "Fund Shopping More Than Comparing Interest Rates."
Call me for one.
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