Shed The Security Blanket?

Since 1940, when Congress passed the Investment Company Act, the mutual fund industry has grown from 68 funds to more than 8,000 funds and increased its assets from $448 million to $4.5 trillion.

Such massive growth is a result of several factors, such as a rise in the number of young families, greater knowledge and awareness of investments, the promotional efforts of the fund industry and, very importantly, providing a service to buyers.

That service coincides with evidence that newer investors prefer what they perceive to be the security provided by professionals, such as mutual fund managers, to constructing their own portfolios. Self-managed portfolios become rarer by the year.

Increasingly, however, questions arise about perception vs. reality. Are mutual funds successful because of expertise, or is their sometimes mediocre performance shrouded from view by a strong economy and consequently a strong marketplace?

The questioning grows. Most mutual funds fail to beat the popular market averages. Some seem not to be as professionally managed as claimed. In an economic downturn, will mutual funds be a steady base beneath the market or a disruptive force?

Among the critics is Tony Sagami of ProFutures of Austin, Texas, a money manager referral service that examines mutual fund managers and recommends only a handful to customers: “How often have you heard portfolio managers and mutual fund executives say that you should ignore short-term gyrations and focus on the long term?”

One reason, says Sagami, is “the only way they get paid is if you leave your money in their funds.”

Sagami says he would not object “to this self-serving cheerleading as much if the fund industry practiced what it preached. The reality is that while they brainwash us into investment complacency, they furiously trade stocks like a Wild West gunslinger.”

As evidence, he cites the Strong Discovery fund, which he states has a 792 percent turnover rate. And Janus Olympus at 313 percent, Fidelity Disciplined Equity at 297 percent, and Brandywine, INVESCO Growth and others with at least 200 percent turnover.